Published in The Financial Express on Sunday, 10 January 2016
Cheap fund flow forces local bankers to lower interest
Government authorities allowed 131 private enterprises to draw foreign loans worth US$ 1.88 billion during last calendar year, amid an upturn in the cheaper offshore borrowing, officials said.
Local bankers are feeling the pinch of the growing borrowing that registered a 32.26 per cent rise over the amount approved in the previous year (2014), sources in banking circles said.
The borrowing from external sources is approved by the Board of Investment (BoI). According BoI statistics, about 108 private enterprises got approval for US$1.421-billion loans from external sources in 2014. The amount was $ 1.135 billion in 2013.
With the latest approvals in 2015, the government investment-promotion agency has allowed private firms to borrow about $8.6 billion from foreign sources at interest rates of around 4.0-5.5 per cent in the last seven years.
According to sources, the highest amount of offshore borrowings has been approved in case of the telecommunications sector, followed by power, readymade garments and related products. Together the telecommunications and power sectors constituted over 60 per cent of the total approvals.
Although updated statistics of the amount of loans drawn by the private sector from external sources are not available, the amount is much lower than what was approved. Still, the borrowing by the private sector from external sources has been on a gradual increase.
According to Bangladesh Bank statistics, the private-sector entrepreneurs received US$ 1.351 billion in 2014, $843.71 million in 2013 and $ 533.26 million in 2012. They also received $ 387.26 million during the first two quarters of last year (2015).
Experts and economists attributed the increased borrowing from foreign sources mainly to lower interest rates compared to that of domestic sources and non-availability of funds for big projects. Most local banks cannot finance large projects due to their limited capital base.
The entrepreneurs have to pay 3-4.5 per cent more interest in addition to Libor rate. Libor is the average rate of interest of inter-bank transaction among top 15 banks located in London during last one year, which usually remains less than 1.0 per cent. So, the rates of interest a private company has to pay in borrowing from offshore sources are around 5.0-6.0 per cent.
Meanwhile, pressure is building up on domestic commercial banks to bring down their rates if interest which are very high.
Some of the banks have already lowered their interest rates. According to the central bank, average lending rate had declined steadily from a steep 13.73 per cent in January 2013 to 11.35 per cent in October 2015.
The interest rates offered by the banks to depositors also came down to 4.77 per cent in October from 5.06 per cent in January 2015.
“Borrowing from foreign sources at lower interest rates will also help in bringing down the banks’ interest rates further as the competition will increase and that will result in higher efficiency,” said CPD’s additional Research Director Dr Khondaker Golam Moazzem.
He, however, said the government should be careful about proper utilisation of the foreign loans.
According to experts, firms which have availed this new channel could reduce their financial expenses, since interest rates charged by foreign lenders are 6-7 per cent lower than by domestic lenders.
Additionally, this new channel is a promising option for projects which require big investments.
“But these benefits come with several risks which need to be carefully evaluated so that appropriate mitigating strategies can be implemented in a timely manner,” said the economist.
However, firms which earn in Taka (non-exporters) may face some currency risk if the Taka depreciates. Depreciation will create additional costs in local currency terms in repayment of the foreign loans.
Some of the experts, however, ruled out any currency mismatch since the size of total borrowings of the private sector from external sources is still small relative to country’s foreign-exchange reserves.
But, they said, government has to remain vigilant to foresee any formidable pressure on the foreign-exchange reserves before it is too late to avoid.
A study conducted by Bangladesh Bank (BB) in 2014 showed that the highest receiver of foreign-currency loans was the telecommunications sector, which is dominated by multinationals.
Despite not being export-oriented, this sector faces lower risks since most companies are part of international parent organisations.
But the power sector, which is the second-highest recipient (18 per cent of total approved foreign loans), is mostly domestically owned and is not export-oriented either.
Until 2008, the local businesses, bar some special cases, had not been allowed to borrow from foreign sources that offer loans at lower lending rates than those charged by the domestic banks and other financial institutions.
After substantial improvement in the foreign-exchange-reserve position, the government decided to allow such borrowing in the year 2008 only for the import of capital goods for new projects and modernisation, and other sectors defined in the country’s industrial policy.
Due to a robust reserve position, outside lenders and others started making available a considerable volume of funds to Bangladeshi entrepreneurs. The Board of Investment processes the applications for such loans. A high-level committee, led by the central bank governor, gives the go for offshore borrowing.