International financial companies like banks, capital markets, multilateral financial institutions (e.g., IFC, WB, ADB, OPEC Fund etc) invest foreign currencies through financial loans, bank loans and buyer's credit as well as supplier's credit to procure capital goods for new as well as existing projects in Bangladesh and their BMRE (Balancing, Modernisation, Renovation and Expansion). It has been observed that in recent years, private sector commercial borrowing from external sources in Bangladesh is on an increasing trend as it is significantly cost-effective. Most of the industrial enterprises, including SME and infrastructural development sector, registered with the Board of Investment (BOI), have been availing this type of external foreign currency loans.
The main reasons behind borrowing from external sources are lower rates of interest compared with those of local market, longer maturity period of financing and inability of local banks for large-scale financing due to their limited capital base. Presently, borrowers of foreign currency loans have to pay LIBOR plus a 3.00 to 4.50 per cent interest which is almost a third of local borrowing costs.
Increase in external foreign currency loans causes sluggish demand for domestic credit and consequently creates surplus liquidity in the financial markets in Bangladesh. As such, most of the local BFIs (banking financial institutions) and NBFIs (non-banking financial institutions) are holding a huge surplus deposit due to non-availability of investment opportunities. In some cases, local companies are taking loans from external sources and paying off their loans availed from the local market. As a result, interest rates on deposit fall significantly and subsequently lending rates also go down.
In the year 2013, an amount of $1,555.33 million was approved by the BOI as foreign commercial borrowing by private enterprises, which was $1,579.57 million in the previous year and $936.30 million in 2011, according to Bangladesh Bank data. Moreover, the trend for availing external loans by local companies has been increasing gradually.
On the other hand, credit growth of local financial institutions is on a decreasing trend and banks' advance-deposit ratio reached around 70.5 per cent in March, 2014. This means, presently a bank's outstanding loan is Tk. 70.50 against a deposit of Tk. 100 instead of maximum allowable utilisation of Tk.80.
There are some risk factors in case of private commercial borrowing from external sources e.g., if some enterprises fail to repay the foreign currency loans in time, they may have a negative impact on the country's overall international credit ratings. Such a problem may arise because of a mismatch of maturity (borrowing short and investing long) and currency mismatch (servicing debt in foreign currency assuming a fixed exchange rate while earning in local currency and exchange rate fluctuation). The companies, which are not export-oriented, face losses in local currency since they need to pay in dollar. They may face difficulties in smooth repayment of foreign currency loans.
Local companies other than export-oriented ones have to buy foreign currencies from forex reserve of the Bangladesh Bank to pay off their borrowings from external sources as they do not earn foreign currencies. On the other hand, an export-oriented company can repay its loans taken from external sources with its export earnings. If total borrowing from external sources is dominated by 100 per cent export-oriented industries, pressure on forex reserve can be controlled with the growth of borrowing from external sources.
However, until now, the size of total foreign currency borrowings from external sources is not very large relative to the forex reserve of the Bangladesh Bank. But regulators should be more cautious regarding any pressure on forex reserve before it is too late.
The writer is SEO, Bank Asia Limited MCB Dilkusha Branch.
arshed_69@yahoo.com
