Bangladesh: Businesses diving into foreign currency loans

DHAKA (The Daily Star/ANN) - They face higher interest at home

The high interest rates on lending have rerouted corporate borrowers
to the doors of the offshore banking units for loans in foreign
currency, which comes at much lower rates.

Loans from OBU come with 6 percent interest rate, way less than the minimum double digit rates on local currency loans.

Between September last year and March this year, OBU lending
increased about 12 percent to Tk 54,113 crore, according to data from
the central bank.

In contrast, onshore lending increased 9.22 percent to Tk 822,137 crore during the period.

Banks give foreign currency loan through their OBUs by sourcing funds
from foreign banks, whereas for onshore lending they use their own
deposit source. 

The expanding OBU portfolio has now prompted the Bangladesh Bank to
formulate a guideline for foreign currency lending for the banks' sake.

The recent hike in lending rates has sent the demand for OBU loans
soaring, said MA Halim Chowdhury, managing director of Pubali Bank.

For loans in foreign currency, banks cannot charge interest of more than 6 percent due to restrictions from the central bank.

“As things stand, OBU loans are cost-effective for businesspeople.”

The default loan in OBUs declined to 0.72 percent, or Tk 388 crore,
in March from 0.87 percent, or Tk 419 crore, in September last year, led
by AB Bank and Prime Bank, central bank data shows.

The default rate in OBUs is low as the banks collect funds from foreign source at their own guarantee, Chowdhury said.

“So if any borrower defaults the respective bank will be liable. As a result, banks lend cautiously to avert the risk.”

Still, a guideline for OBU lending is necessary because some banks
are lending beyond their capacity, which is putting pressure on the
dollar market.


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