The surge in foreign borrowing by private entities the net inflow of which stood at around US$4.6 billion until last March has dampened the domestic credit market.
Business circles say the foreign loans of local private firms have been on the rise in recent years--and only in last one year, they borrowed more than $2.5 billion from the overseas sources. Overseas lenders charge 3.0 to 6.0 percent interest-far cheaper than cost of funds offered by the local banks.
The private sector operators willing to borrow from foreign sources are required to take approval from an official committee.
A recent study conducted by the Bangladesh Bank (BB) said inflow of such an increased volume of overseas funds has affected badly the domestic lending operations.
But, senior bankers expressed their mixed opinion on the impact of substantial foreign borrowing by the private sector. Some said it is hitting the domestic credit market while others argue that it has some positive impacts, too, on the economy.
Mohammed Nurul Amin, managing director and chief executive officer of Meghna Bank, said there should be a limit to taking foreign loans by a company or client.
The foreign loan is causing slow credit growth in the country and increasing excess liquidity in the banking sector, the former Association of Bankers, Bangladesh (ABB) chief added.
As of March, the idle money (excess reserves) in the country's banking system stood at Tk 275 billion.
Ali Reza Iftekhar, managing director of the Eastern Bank Ltd., however, said: "I don't see any problem with such type of borrowing by the local firms."
He said mainly the export-oriented firms are availing such type of cheap foreign loans.
He said they receive the funds in dollar and pay in dollar.
"I don't see any problem at all," Mr Iftekhar said.
It is helping lower the lending rates on the domestic credit market.
"In my view, it has helped lower the lending rates by more than 2.0 per cent," he said about the countervailing impact of outsourcing loans.
But Mr Iftekhar suggested that the central bank should take steps to stop misuse of foreign funds.
"Bangladesh Bank might take stringent measures if there is any forgery on the funds," Mr Iftekhar, who is also chief of the ABB (Association of Bankers, Bangladesh), told the FE.
Mr Amin, a former chief of the ABB, posed a question: how much of this foreign loan is being utilised to set up new ventures and in the real productive and manufacturing sector, or being used to repay previous loans and reduce the interest burden.
In the meantime, the BB study said the cheaper foreign money is seen as one of the key reasons behind slow-going economic activities in the country.
It has been suggested in the paper that the central bank could take regulatory measures for faster move of credit flow in line with business cycle and economic growth.
The financial experts have suggested imposing certain restrictions on the foreign debt inflow.
The BB paper says encouraging cheaper foreign funds may leave two-pronged risks. Foreign lenders might withdraw their funds if there is any bad situation in the economy, leaving the local firms high and dry.
Also, long-term foreign borrowing might pose threat for exchange rates.
In addition, the central bankers foresee a sharp increase in net foreign asset and declining domestic portion can overvalue the local currency. And it may create another problem in trade and foreign-exchange risk.
Despite that situation, two foreign-exchange policy decisions such as export development fund [EDF] and introduction of buyer's credit have yielded "significant results in minimising then worse", the paper noted.
The paper on policy guidelines was presented by one of the BB's joint directors, Bayazid Sarker at a function recently.
Net foreign borrowing by pvt sector $4.6b until March last
Jasim Uddin Haroon | Published: July 14, 2014 00:00:00 | Updated: November 30, 2026 06:01:00
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