December 4, 2023


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Keep 5pc cash collateral with guarantor of foreign loans

Private sector borrowers will have to keep at least 5 per cent in cash collateral against foreign loans with the associated guarantee-providing banks.

The Bangladesh Bank issued a notice yesterday, saying such banks had to repay the loans to foreign lenders if borrowers failed to repay on time.

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Borrowers require a guarantee from local banks in order to manage funds from foreign lenders.

Information regarding local businesses is usually not available with the foreign lenders, for which they seek guarantees from local banks before giving out loans to the businesses. This means local banks have to pay foreign lenders the entire loan if the borrowers become defaulters. In such a situation, local banks will end up facing an adverse impact due to the failure of borrowers.

Against this backdrop, the central bank said borrowers would have to keep at least 5 per cent of the guarantee amount as cash collateral with the banks providing the guarantee.

This will help banks lessen the risk of providing guarantees to businesses, a BB official said.

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

Lenders will have to take prior approval from the central bank and the Bangladesh Investment Development Authority to provide the guarantees. A total of 147 Bangladeshi companies borrowed $13.24 billion from external sources as of March last year, BB data showed.