Local entrepreneurs banking increasingly on foreign loans
By Ashraful Islam
As the demand for bank loans have been declining in recent times, so is the rate of interests – showing declining trend. And regardless of this, local investors prefer foreign bank loans, which are also being approved one after the other. Sources at Bangladesh Bank say that through buyers’ credit, the amount of foreign loans has equaled that of a month’s worth of import bill. If investment demands rise in future it will create pressure on the reserves. By then, buyers’ credit needs to be repaid alongside meeting expenses for imports. Sensing this, the central bank has already started to look for remedies, discouraging local entrepreneurs and investors from taking foreign loans.
Why foreign loans?
There was a liquidity crisis in 2009 and 2010, the year which was marked by the share market crash. The banks’ money, apart from that of investors, was stuck in the market as a result. According to Bangladesh Bank statistics, the banks had an accumulated investment of Tk 50,000 crore in the market, but as the share values plummeted, they could not sell their shares. There were instances when banks had opened letters of credit from their customers, but had no money to actually follow through and pay the import taxes. Bank interests shot up because of this. They tried to compensate it by posting lucrative advertisements and taking in deposits. Businessmen pressurised the central bank and brought approvals for bringing in foreign loans.
The managing director of a first generation bank explained that there were various crises going on in the banks. Firstly, some banks fell into fund shortage after making investments in the share market through merchant banks and such funds, which were though default loans, were e rescheduled and regularised. Secondly, they had several government bonds worth Tk 75,000 crore. After getting them rescheduled, an amount of Tk 22,000 crore was still available, but as the secondary bond market was not active as it should have been, the amount turned into paper money effectively. Thirdly, fund management capability of the banks was lackadaisical, in opening L/Cs without having proper funds. The inflation had also reduced the depositors’ savings capacity.
In order to tackle fund crisis, the banks had to collect deposits at high interest rates. Interest rates for investment at five sectors were fixed at 12.5%, but due to International Monetary Fund’s conditions for accessing loans, Bangladesh Bank had to take off the limit cap for interest rates. As a result the banks charged interest rates as high as 20%. Businessmen expressed serious concerns and, lobbied with the policymakers, requesting intervention from the central bank. Bangladesh Bank imposed a tax cap again, in contrast with the Association of Bankers Bangladesh (ABB), stating that deposit rates would not exceed 12.5% and loan interest rates would not be more than 15.5%. But due to banks’ fund crisis, they could not comply with ABB’s declaration, and so investors leaned on foreign loans.
Implications for the economy
According to experts, these foreign loans might in the long run affect foreign exchange reserves. According to sources at the central bank, the foreign loans, also known as suppliers’ credit, are fixed at market rates, making the rates high. The loans are taken and repaid in foreign currencies. In 2011, a total of $92 billion was approved in foreign loans, with the amount increasing to $149 billion in 2012 and $182 billion in 2013. Experts fear that these loans – although disbursed in foreign currencies, are used locally in taka – would be used to produce locally, but skeptic about sales to induce foreign currency.
Such loans are usually scheduled between 4 to 7 years. Currently LIBOR (London Inter Bank Offered Rates) is low, 0.46% for tri-monthly loans and 0.74% for half-yearly loans. If someone in Bangladesh takes a loan at 6% interest rate for $100 billion (with initial per USD to Taka rate at Tk. 79.1,) the rate might increase to Tk. 85 next year, reducing taka’s worth by 7%. So the dollars turned into taka increases investment rates to (6+7%) 13% from 6%. Long term investors and their long term loans are bound to suffer because of this.
Bankers explained that due to investment demands being low at the moment, the banks are not being able to utilise their export and remittance money. But when the dollar rates will go higher, it would affect the foreign loans, sharply increasing their loan interests, which would leave serious negative effects.
Restriction on repayment
Bangladesh Bank issued a circular on 30 May, imposing restriction on repaying foreign loans. From now on, investors cannot repay more than $500,000 in one installment – for loans which are more than 6 years scheduled. They have to repay them evenly every three months. This step is said to be aimed at bringing discipline in the sector
Another worrying factor is that loan recipients, as suppliers, have to match their invoices with the original bill of entry or customs certificates, in an effort to ensure transparency. Businessmen previously used to repay foreign loans in the same year, if possible. As this does not affect the currency market in any way, installment system has been introduced. A top official of Bangladesh Bank said that instant repayments gave way to high dollar rates in the open market, which is why they had to take this step.
Translated from Bangla by Wafiur Rahman
