Access of local investors and entrepreneurs to international financial markets is a recent phenomenon. Since 2008, when limited access was granted to overseas funds, foreign loans worth $5.5 billion have been approved by the government.
Initially, local investors were hesitant to borrow much from the international financial market. That phase apparently is over as more and more local business houses are showing interest in foreign borrowing.
But how do researchers and local banks look at the issue of foreign borrowing by the country's private sector?
A leading local private think tank, the Policy Research Institute (PRI), on the basis of a study, has pleaded for greater access of local investors to international financial markets since foreign borrowing at lower rates of interest beefs up their competitiveness in the global trade.
However, the PRI study, presented at a policy-brief session held in Dhaka late last week, did not suggest any blanket approval of proposals for foreign borrowing. Rather, it wanted the government to follow a two track-approach, as it has been the case with neighbouring India, for approval of foreign loans. In India, local entrepreneurs do not need any approval for borrowing up to a certain limit and beyond that they are required to procure permission.
The PRI study also said the present state of the country's balance of payments (BoP) offers an opportunity to liberalise the capital account, in terms of both inflows and, in selected areas, outflows.
However, local bankers are, apparently, not that much willing to allow an unhindered access of local businesses to foreign financial markets.
Present at the policy-brief programme, a leading banker said local banks are not worried when the level of borrowing remains low. But when the size is relatively big, they have reasons to be worried.
The foreign borrowing to the tune of $5.5 billion (Tk 43,000 crore) over a period of five years is too small compared to the fund borrowed by the local entrepreneurs from the local banks annually. Domestic banks until now have no reasons to be worried by the scale of foreign borrowing by the local entrepreneurs. Â
There is no denying that the local banks are providing employments to thousands of educated people and paying a sizeable volume of tax to the national exchequer in addition to offering funds to small, medium and big businesses.
But the fact remains that as far as the lending rates are concerned, they are not at all competitive since the interest charged by their foreign counterparts on lending. It is unlikely that they would be able to offer such low interest rate anytime soon because of their higher cost of fund and strong appetite for greater volume of profit. Despite recent cuts, the lending rates of local banks now hovers between 12 per cent and 15 per cent while foreign borrowing remains much cheaper--- 3.0 to 4.0 per cent plus LIBOR (London Inter-bank Offered Rate). The one-year LIBOR rate is now 0.61 per cent. Â
Had the government been more liberal in the case of foreign borrowing, there would have been a beeline for the same. But, fortunately for the local banks, that will be an unlikely event in the near future because of the country's reserve situation. The reserve, though, comfortable is not enough for that kind of adventurism.
However, an allegation made by the chief of local private bank deserves a proper investigation by the authorities concerned. The managing director of a newly-floated bank told the policy-briefing that at least two local investors have serviced their domestic bank debts with funds procured from outside. If the allegation is found true, it would amount to diversion of funds, an offence that deserves punishment.
Moreover, there could be some 'innovative' borrowers who might have deposited funds, borrowed from outside, with the local banks to earn some easy profit. The interest rates offered by local banks on term deposits are much higher than that of the funds borrowed from external sources.
Any large-scale borrowing from foreign sources by the local private sector would surely hurt the interests of the local banks, in terms of their business and profitability. Besides, such borrowing could also affect the local capital market as the entrepreneurs would be more interested in procuring low-cost funds involving least hassles.
The fact remains that the government does not have any responsibility as far as the repayments of commercial foreign loans are concerned. Borrowers and lenders negotiate deals on such borrowing. Yet when a borrower defaults on repayment to a foreign lending institution, the country's image one way or other is dented. Thus, the committee that is responsible for approving foreign loan proposals does need to evaluate the track records of the private businesses concerned.
However, the external lenders usually make their homework well before extending loans to private firms, particularly those coming from the poor Third World countries.  Â
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Should there be a cap on private foreign borrowing?
Shamsul Huq Zahid | Published: January 26, 2015 00:00:00 | Updated: November 30, 2024 06:01:00
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