Four local banks turn to IFC for $160m loans to meet urgent needs

Bangladesh's commercial banks are once again seeking foreign funds to bolster their offshore portfolios, aiming to provide customers with dollar-denominated loans.

The recent exemption of a 20% tax on the interest accrued from foreign loans has lowered borrowing costs prompting this renewed interest in foreign financing, industry insiders said.

Four local private commercial banks — City Bank, Prime Bank, Eastern Bank and Bank Asia — are now in negotiation with the International Finance Corporation (IFC) to borrow a total of $160 million to meet their immediate US dollar liquidity needs and to provide loans.

Dollar inflow expected

Foreign borrowings, which is one of the major components of the country's financial account, are expected to reduce the deficit in the account by increasing dollar inflows.

The IFC recently sent a letter to the Economic Relations Division of the Finance Ministry seeking their opinion over the investment proposals as the corporation shall not finance an enterprise in the territories of any member country if it objects to such financing.

The corporation is considering an investment into the four banks to support their working capital and trade-related dollar lending programme to enterprises in Bangladesh, according to the IFC letter.

The proceeds of the IFC investment will be used to meet the banks' immediate dollar liquidity needs and extend loans to eligible export/import-based sub-borrowers and enable the banks to continue to support key sectors of the Bangladeshi economy affected by the Covid-19 pandemic and the subsequent global economic headwinds, read the letter.

Doing away with tax helps banks

When contacted, Mashrur Arefin, managing director and chief executive officer of City Bank, said banks are interested in borrowing from foreign sources after withdrawing the 20% tax imposed on the interest of foreign loans.

He said City Bank paid off $30 million in loans with the IFC after a 20% tax was imposed (in the current budget) on the foreign loans as it increased the cost that was not viable for dollar lending operations.

Now, the bank is considering borrowing again as an exemption from tax will reduce borrowing costs, he said.

He said City Bank is now in pricing negotiations with the IFC for borrowing funds as it will avail the loans only if they get a business margin.

Such borrowings will help to improve dollar liquidity which will be used to lend in dollars to importers and exporters, he added.

He said that foreign borrowing is one of the components of a financial account, so such inflow will help to reduce the deficit.

FC loans would help LC opening

Ali Reza Iftekhar, managing director and CEO of Eastern Bank, confirmed the bank's interest in securing foreign currency loans from the IFC. He said the purpose is to address their clients' import bills and facilitate the smooth operation of businesses that have to rely on imported raw materials to run their factory activities.

"We are currently rationing the opening of Letters of Credit (LC) for imports due to a shortage of dollars. Obtaining this foreign currency loan would enable us to open LC for imports and provide essential support to our clients," Iftekhar told The Business Standard.

Banks can lend in dollars at a nearly 9% interest rate to local enterprises if they get funds from the IFC, said industry insiders. The interest rate in foreign currency loans picked up to 11% after imposing tax in the current budget.

In the current FY24 budget, the NBR (National Board of Revenue) had initially imposed a 20% tax on interest payments for foreign loans from July. The objective was to curb foreign loan borrowing by both banks and businesses.

Consequently, businesses became less inclined to take on new loans, leading to a decline in short-term foreign loans. Instead, businesses focused on repaying existing loans, contributing to a reduction in the country's forex reserves and turning the financial account into a huge deficit for the first time in the last decade from a surplus.

Deposit and foreign borrowing by banks turned to nearly negative $3 billion at the end of FY23 from a $1.1 billion surplus.

The negative balance in foreign deposit accounts of banks put pressure on financial accounts, also turning it into a deficit of $2 billion at the end of FY23 from a surplus of $16.6 billion in FY22, according to the central bank data.

As the banks squeezed their dollar lending activities from offshore units due to less dollar liquidity, local enterprises started to buy dollars from the local market for import settlement, intensifying the dollar rate volatility.

Banks have been buying remittance at above Tk120 per dollar ignoring the official rate of Tk110 as the inflow of dollars from foreign sources declined, said a head of treasury of a private bank wishing not to be named. 

Banks also cut down opening LC (letter of credit) heavily to avoid future payment burden stalling business activities in the country, he added.

Imports hit 37-month low in December last

The imports in December hit a 37-month low of $4.53 billion due to a decrease in imports for the last several months.

In this context, the revenue board in December exempted the tax till February which prompted banks to go for sourcing foreign finance again.

The foreign deposit account of banks is still negative but the situation has been improving slowly as banks started to borrow from foreign sources.

The balance in foreign deposit accounts of banks was $700 million in the negative during the July-November period which was nearly 900 million a month back in the July-October period of the current fiscal year, central bank data shows.