At a time when the Bangladesh Bank is trying to save foreign exchange reserves by limiting foreign currency expenditure amid a dollar crisis in the country, the misuse of reserve money by some exporters has raised concern among the authorities.
Loans given from the foreign exchange reserve have been found to be misused by some exporters, turning those into huge forced loans due to failure in payment to the lenders on the due date.
Borrowers are given foreign currency loans at a minimum cost from the Export Development Fund (EDF), a refinancing fund created from the foreign exchange reserve for bringing export proceeds.
In the case of many of these loans, no export earnings were generated with buyers failing to pay back the money, resulting in the piling up of forced loans against the EDF in banks, according to findings by the Bangladesh Bank.
Forced loans are created when clients fail to make their letter of credit (LC) payments on maturity dates, and yet banks have to meet their obligations to foreign banks. Delay in LC settlement can happen both in import and export.
For instance, the forced loan against the EDF of Janata bank surged by 410% in one year to Tk7,141 crore at the end of last year from Tk1,400 crore in the previous year, according to the annual report of the bank.
In a recent meeting with the top executives of four state-owned banks – Sonali, Janata, Agrani, and Rupali – the Bangladesh Bank addressed the issue of forced loans against the EDF.
In the meeting, Governor Fazle Kabir expressed disappointment over the unusual rise in forced loans and strongly criticised the managing director of a state-owned bank for issuing substantial loans from the reserve, according to a meeting source.
The governor said these forced loans are foreign exchange reserve money, said the source, quoting the governor.
Lenders continued to provide loans to borrowers from the foreign exchange reserve despite having non-payment against the EDF, according to the central bank findings.
For instance, Thermax Group has taken an EDF loan against its five companies, of which two could not repay the loan, creating a forced loan with the lender Sonali Bank as of December 2021.
The two companies that failed to repay loans against the EDF are Thermax Melange Spinning Mills, with a forced loan of Tk30.64 crore, and Thermax Knit Yarn with Tk216 crore.
Though borrowers are taking loans in foreign currency, the forced loans are being created in local currency.
According to the EDF rule, borrowers will get the highest 270 days to repay the EDF loan after getting export proceeds. If they fail to do so within this period, the Bangladesh Bank will deduct the foreign currency amount from the lender's account maintained with the central bank and the lender will create a forced loan against the borrower.
When a borrower fails to repay the loan, it indicates that the borrower did not repatriate export proceeds according to the EDF loan condition.
However, borrowers are getting loans even after failing to earn export proceeds as there is no provision about punishment if clients fail to repay the loan or do not repatriate export proceeds, said a senior executive of the Bangladesh Bank.
Among other state-owned banks, Sonali Bank has forced loans of Tk331 crore, Agrani Bank has Tk416 crore and Rupali Bank Tk60 crore as of December last year.
The status of these four state banks are just a partial picture of the forced loan issue, as the Bangladesh Bank has no statistics about the total forced loan in the industry against EDF loans.
The Bangladesh Bank has so far disbursed $7 billion EDF loans from its reserves but there is no statistics on how much export proceeds came into the country against those low-cost financing.
A senior executive of the Bangladesh Bank said they do not have such statistics as the recovering part is on the lenders. The Bangladesh Bank only provides the loan to lenders and deducts the amount from the lender's account if customers fail to repay on time.
Currently, borrowers are charged 2% for EDF loans of which Bangladesh Bank gets 1% and lenders get the rest 1% as commission.
During the pandemic from March 2020 to March 2022, borrowers enjoyed a reduced interest rate of 1.75% against EDF loans.
The number of EDF loan beneficiaries was 12,602 as of March this year, according to Bangladesh Bank data.
Exporters in all sectors can get EDF loans and a single exporter can get a maximum of $20 million loan subject to maintaining a single borrower exposure limit, according to the EDF policy.
Despite foreign exchange reserves under severe pressure amid high import expenditure and low earnings, in a recent meeting with the Bangladesh Bank, the Federation of Bangladesh Chambers of Commerce and Industry (FBCCI) demanded that the EDF be increased from $7.5 billion to $10 billion – to further expedite and expand their shipments.
On the other hand, the International Monetary Fund (IMF) in its safeguards assessment of the Bangladesh Bank for 2021 raised objections about showing the EDF in reserve.
The IMF claimed that the central bank is overstating foreign exchange reserves by showing the EDF with it, which may misguide the government in taking decisions about using the reserve money.