Borrowers, banks sweat over foreign loan payments

Although borrowers – with financial difficulty at this time of Covid-19 – have got deferment on loan repayments from local private banks, they are yet to have such a breather from foreign lenders, putting them under strain.

Bigger trouble looms for the banks that lent to them from their offshore banking units (OBU) by borrowing overseas funds – with no response from the foreign lenders over a pause on repayments.

The country's private sector either borrows directly from the foreign lenders or through the offshore banking units.

Many foreign loan recipients have already sought the deferred repayment facility from the local banks as they are going through cash flow constraints.

Some local banks have postponed loan repayments for their clients on a case-by-case basis, but the foreign lenders have not responded on this issue, putting both local banks and individual borrowers in a tight situation.

For instance, Eastern Bank offered the deferment to 50 percent of its borrowers on loans given from its offshore banking unit. But any such move has not come from the overseas lenders yet.

A similar situation prevails in most of the banks that gave foreign currency loans to the borrowers from their OBUs.

Offshore banking units make loans in the foreign market when they accept deposits from foreign banks and other OBUs.

While talking to The Business Standard, several banks said local banks held meetings with their foreign lenders about the ongoing crisis. They informed the lenders about the local borrowers' cash constraints, to whom they lent to from the OBUs.

Yet, the foreign lenders have given no hint about deferring loan payments for their borrowers, said bank insiders.

No foreign loan borrowers failed to make payments as they repay quarterly, said a senior executive at Eastern Bank.

In the first quarter of the current year, all payments were clear. The coronavirus pandemic has been impacting businesses since April. So the banks will be under pressure with the next quarter's foreign loan payments if the borrowers cannot continue payments.

A scrutiny committee of the Bangladesh Bank and Bangladesh Investment Development Authority (BIDA) approves foreign loans. But in case of payment deferral, they have nothing to do unless the foreign lenders offer this facility.

The central bank suspended installment payments for nine months from January to September to bring some relief to borrowers in the pandemic situation.

Standard Chartered Bangladesh that provided foreign loans to local banks, received a request from the borrowers to defer repayments.

"We are giving the loan deferment facility on a case-by-case basis. We could not offer it for all due to some limitations," said Naser Ezaz Bijoy, chief executive officer of Standard Chartered Bangladesh.

Indeed, borrowers are now facing a cash flow crisis but no clients of Standard Chartered Bangladesh have failed to make payments yet. In case of any failure, there will be a negative impression about the country as foreign lenders are involved with the loans.

However, it will not directly affect the country's rating because loans were given to the private sector. These are not government-guaranteed loans, he added.

When contacted, Md Sirazul Islam, executive chairman of BIDA, said the issue of payment deferral of foreign loans came to their attention from various platforms but no borrower has approached them formally yet.

Repayments for local loans got an extension and foreign loan recipients should get the same facility, he added.

"I asked my member to raise the issue in the scrutiny committee's meeting to find a way out," he said.

Situation of external debt

Bangladesh Bank data shows that external debt increased by 8.67 percent to $60.3 billion last year.

Approximately 84 percent of the total external debt or $50.6 billion was of long term, which was considered low risk. On the other hand, the short-term foreign loan stood at $9.7 billion in December 2019.

The external debt to GDP ratio of Bangladesh was 20 percent in December 2019 which seemed to be low both in comparison with major Saarc countries and in terms of the international standard.

The ratio was the highest for Sri Lanka with 67.6 percent, followed by Pakistan with 43.0 percent in 2019. Besides, the short-term external debt to GDP ratio of Bangladesh in 2019 was still 3.2 percent which was also quite moderate.

The Bangladesh Bank, in its financial stability report for 2019, said a major share of short-term external debt came to the private sector. This might require extra caution as the rapid growth of short-term foreign debt is an early warning indicator of potential vulnerability.

The private sector's external debt – that constituted 21.7 percent of total foreign debt of $13.1 billion – has the majority of its obligation in the short-term. Some 62.6 percent of the total private sector external debt is of this nature.

On the other hand, 78.3 percent of the total external debt is availed by the public sector which is considered to have low risk. Debts in the public sector are mostly of the longer-term in nature. About 97 percent of the public sector debts are long-term finance.

If short-term foreign debt gets above the short-term liquidity, as measured by holdings of foreign reserves, it is assumed to increase an economy's vulnerability.

In December 2019, short-term external debt to foreign exchange reserve position of Bangladesh stood at 29.8 percent, which was well below the standard threshold level of 100 percent.