Foreign loans turn sour for private borrowers

Highlights:

• Interest rate for foreign borrowing hits 8.30%
• Rate for local loans at 9%
• Accounting for inflation, risk premium, real interest on local loans negative
• Borrowers turning to local banks which are already in liquidity crisis
• Depreciation fears another factor in foreign currency loans

Once considered a much cheaper source, foreign commercial loans are now costlier than even local currency loans, driving private sector borrowers to turn to local banks and ramping up the ongoing liquidity crisis.

At a time of rising interest rates in advance and emerging markets during a period of tight global financial conditions, the effective interest rate for foreign borrowing now stands at 8.30%, while the maximum rate for local loans is 9%.

Infographic: TBS

Accounting for inflation and risk premium, the real interest rate of local loans is negative.

Previously, borrowers would get a 3% to 4% interest rate gap between foreign and local loans, according to industry insiders. This gap has almost disappeared due to the changing interest rates.

In this situation, private sector borrowers are unwilling to borrow from foreign sources, considering the risk of further depreciation of the taka along with high-interest rates.  

Association of Bankers Bangladesh (ABB) Chairman and Brac Bank Managing Director and CEO Selim RF Hussain said, "When foreign currency loans were being taken, the interest rate was quite low. Those who did not have foreign currency earning, they had also opted for these loans as the interest rate was comparatively much low."

But due to the increase in the dollar price, the ones who took the loans are now in trouble, he said, adding it was because they now had to pay much more.

"Secondly, as the interest rate has also risen, this has again increased the pressure," he said.  

Private sector external debt slowed down in September, breaking the continuous rise over the past few years.

The latest data from the Bangladesh Bank shows that private sector external borrowing declined by 2% to $25.4 billion in September last year from $25.95 billion in June that year.

The private sector external borrowing grew by 4% in June from March last year.

Presently, the interest rate for foreign loans is three months USD SOFR plus 3.5%. The Secured Overnight Financing Rate (SOFR) rate is nearly 5% now, causing the cost of foreign borrowing to be above 8%.

Until 2020, the loan was charged at a six-month LIBOR rate plus 1%-2% interest rate.

The LIBOR – the London Interbank Offer Rate – is the global reference rate for unsecured short-term borrowing in the interbank market.

The effective interest rate for borrowers was less than 3% to 4%, while LIBOR was less than 2%. The lending rate of local loans was above 10% at that time.

However, the LIBOR rate, which was shifted to USD SOFR, started to rise globally after the Russian-Ukraine conflict as the Fed hiked rates owing to a tightening monetary policy to tame inflation.

Consequence of high foreign borrowing cost

The significant fall in borrowing for offshore banking units and reduction of outstanding deferred payments slowed down overall private sector external debt in September, according to data from the central bank.

Borrowing by banks for offshore units, which allowed lenders to lend to local borrowers in foreign currency, declined by 19% to $1.28 billion in September last year from $1.59 billion in June that year.

According to industry insiders, many foreign lenders are now unwilling to lend to Bangladeshi banks due to payment delays and the fast erosion of the country's reserve amid a dollar crisis.

Under the condition of anonymity, some bankers said they even experienced fund withdrawals by foreign lenders who feared vulnerability in the country's forex market.

Moreover, deferred payment outstanding was reduced by 20% to $815 million in September from $1 billion in June last year as foreign lenders are unwilling to give deferral facilities now, said bankers.

Syed Mahbubur Rahman, managing director of the Mutual Trust Bank, said the cost of foreign borrowing is now higher than local loans as borrowers enjoy negative borrowing rates due to high inflation.

In this situation, he said that borrowers now prefer to take local loans instead of foreign loans when banks are under a liquidity crunch.

Moreover, he said there are fears of further depreciation as the dollar market is still under protective measures.

Rahman said foreign lenders are also conservative in lending in Bangladesh due to payment delays amid the dollar crisis.

He added that banks are under liquidity pressure but could not charge high due to the lending rate cap.

High depreciation led to lending costs rising significantly for foreign borrowers, said a senior executive of the Bangladesh Bank.

He said the borrowers who borrowed a year back now saw a 24% rise in lending cost due to taka depreciation, creating enormous repayment pressure.

The dollar price was Tk85 at the beginning of the last year, rising to Tk105. He said the considerable repayment cost increased outflow more than the inflow of foreign loans.

Borrowers who borrowed at 4% to 5% in the last year now saw the rate go above 15% due to depreciation cost fueling the debt burden for the country, he added.

He said that foreign loan proposals from private enterprises declined significantly in recent months as the frequency of meetings between Bangladesh Bank and Bangladesh Investment Development Authority (BIDA) over reviewing proposals reduced considerably.

Meanwhile, though foreign loan costs increased significantly, the central bank had no plans to raise the lending rate for local loans before the election.

Bangladesh Bank Governor Abdur Rouf Talukder, at a meeting with senior economists, bankers, and business leaders over the upcoming monetary policy held on Saturday, hinted at the continuation of the interest-rate caps on term and working-capital loans, at least, for the next six months.

However, a severe liquidity crisis forced the central bank to go for printing money to support the government for budgetary expenditure. The central bank printed around Tk50,000 crore from July to December to support the budget, according to the central bank.