December 4, 2023


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5{de3fc13d4eb210e6ea91a63b91641ad51ecf4a1f1306988bf846a537e7024eeb} cash collateral on foreign loan guarantee to mitigate forex risk

File photo: US dollars are counted out by a banker counting currency at a bank in Westminster, Colorado November 3, 2009 Reuters

Multiple banks have commended this move stating it to be a form of insurance

A minimum of 5{de3fc13d4eb210e6ea91a63b91641ad51ecf4a1f1306988bf846a537e7024eeb} cash collateral has to be kept by guarantee-providing banks on associated foreign loans by private sector borrowers to mitigate foreign exchange risks, the Bangladesh Bank said in a notice on Monday.

Multiple banks have commended this move stating it to be a form of insurance.

“Since we earn in taka and have to pay back in foreign currency, there are some foreign exchange risks associated with foreign loans. Especially since foreign exchange frequently fluctuates in a dynamic market,” said Arfan Ali, the managing director of Bank Asia. 

Additionally, foreign lenders depend on the guarantees of local banks as information on local banks is not available to them. 

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“Therefore, if a borrower defaults on a loan, the bank faces the liability for paying foreign lenders, leading to a negative impact on financial institutions,” Ali added.

Ferdous Kajal, a deputy managing director of United Commercial Bank (UCB) also commended the central bank’s move of partially insuring credit risks for banks in forex.

Another loan officer of a private bank told Dhaka Tribune that banks often guarantee loans to influential people with very little collateral without assessing defaulting risks, adding that this move would definitely help reduce defaults. 

According to the central bank notice, the Authorized Dealer (AD) banks will also have to meet four requirements, including documentation with proper credit assessment, before applying to the central bank for approval of issuance of repayment commitments.

Banks have to ensure all applicable credit norms and prudential parameters, including the single borrower exposure limit set by the Bangladesh Bank, while providing guarantees to borrowers.

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Applications to issue bank guarantees or standby letters of credit (LCs) on behalf of their customers will be documented with proper credit assessments along with conditional approval from the board of directors of local banks or approval from the management authority of foreign banks operating in Bangladesh, the notice further reads.

Lenders will have to take prior approval from the central bank and the Bangladesh Investment Development Authority to provide the guarantees.