Home ›› 26 May 2022 ›› Front
The Bangladesh Bank is planning to impose restrictions against the issuance of bank guarantee to local companies seeking foreign loans, as part of measures aimed at countering the declining foreign exchange reserves.
When local companies seek loans from a foreign bank or financial institution, the foreign lender demands a bank’s commitment of payment so that it can recover the loans even if the client defaults. This guarantee is also known as a standby letter of credit (SBLC).
Central bank officials had a discussion on the issue at an inter-departmental meeting on May 19, held to formulate a policy on SBLCs and forced loans, insiders told The Business Post.
At the meeting, the regulator decided to request the Bangladesh Investment Development Authority (BIDA) to discourage the issuance of SBLCs against foreign loans considering the risks involved.
SBLCs are risky for banks as those become forced loans due to non-payment of borrowers. The regulator is also planning on strengthening its monitoring on SBLCs, senior central bank officials said.
At the meeting – presided over by Bangladesh Bank Executive Director Mohd Humayun Kabir – officials recommended a 25 per cent margin on SBSL considering the ongoing global economic situation, which is currently 5 per cent.
Representatives from Foreign Exchange Operation Department, Department of Offsite Supervision, Banking Regulation and Policy Department, Foreign Exchange Investment Department, Statistics Department, Credit Information Bureau and Information Systems Development and Support Department participated in that meeting.
'4 state-run banks already at risk""
Speaking to the Business Post, a senior official of the central bank’s Foreign Exchange Operation Department said, “Such SBLCs have increased the non-funded liabilities of banks. Four state-run banks are already at risk due to issuing a large volume of SBLCs.
“Considering the ongoing volatility in the global economy, the central bank should impose a 25 per cent margin on SBLCs to discourage borrowers and mitigate risks.”
In a note presented at the meeting, the central bank’s Foreign Exchange Policy Department mentioned that the SBLC is a recognised system for foreign payment. The Business Post has secured a copy on this note.
“If any borrower fails to repay a foreign loan that has a guarantee of repayment issued by a local bank, the liability falls on that particular bank. Regardless of a borrower’s repayment, foreign loans are automatically repaid by the respective local bank.
Any defaults by borrowers result in forced loans for banks, and this in turn causes their non-funded liabilities to rise.
Toufic Ahmed Choudhury, former director general of Bangladesh Institute of Bank Management (BIBM), said, “This type of bank guarantee is very risky, as the guarantor lenders have to repay such loans in foreign currency. Issuance of such guarantees should be restricted.”
Tk7,596cr in SBLCs issued to Orion Group
So far, four state-run banks – Sonali, Janata, Rupali and Agrani – issued SBLCs amounting to Tk 8,200 crore. Of the figure, three banks issued Tk 7,596 crore in the favor of the conglomerate Orion Group, says data from the Bangladesh Bank.
According to the note presented at the latest central bank meeting, the Orion Group’s SBLCs are concentrated in three state-run banks, and if those banks issue any more SBLCs, their financial indicators would decline further, and their capital shortfall will increase.
Last year, Janata bank issued SBLCs valued at $3.75 crore or Tk 318.56 crore to Dubai Islamic Bank on behalf of Digital power & Associates Ltd – a sister concern of Orion Group. The SBLCs of Orion group expired on 25 January this year, despite multiple extensions of the deadline.
The conglomerate has not yet repaid the forced loans against the SBLCs, which prompted the central bank to organise such an inter-departmental meeting, insiders say. Janata Bank recently rescheduled the forced loans of Orion Group by taking prior approval from the central bank.
