Lengthy project process eats up grace periods on Indian LoC

Bangladesh has long been losing out on the grace period benefits on around 75% of loans under three Indian lines of credit (LoCs) amounting to $7.36 billion on account of loopholes in the deals.

The count of the five-year grace period offered for an entire LoC starts with the disbursement of a portion of the loan for a single project.

Bangladesh has three LoC deals with India, with each LoC having at least 15 projects. A project needs to go through several stages from getting approval to formation of its proposal by the Bangladesh side while it also needs consent from India for finalising the tender documents and hiring of a contractor.

The approval process often takes such a long time that the grace period for the loan expires even before the project reaches the implementation stage.

A grace period is the time when a borrower does not need to make principal payments on their loans.

Bangladesh usually takes loans from foreign development lenders such as the World Bank, the Asian Development Bank, China and others, with grace periods. And, it pays them back upon project completion.

But, this process has not been followed for the Indian LoC projects. As a result, Bangladesh is already repaying India for some projects that are being implemented now because the grace period of the loans has exhausted.

Under such circumstances, Bangladesh has demanded that a project-specific grace period be given under the second and third LoC-funded projects in particular.

The government has also sought an amendment to the LoC Framework Agreement that was signed 10 years ago.

On 29 March 2012, the first LoC fund was released for a project to procure buses for the BRTC from India. The grace period facility was available until 29 March in 2017, according to the Flow of External Resources into Bangladesh publication of the Economic Relations Division (ERD).

In another LoC project, work on the rehabilitation of the Kulaura-Shahbazpur railway tracks could not start even after five years – by when the five-year grace period for the loan given for its implementation expired. The project is now under implementation but is going at a slow pace.

According to the finance ministry, Bangladesh could not enjoy the grace period facilities on 60% of its first Indian Line of credit.

The first LoC deal involving $862 million was signed on 7 August 2010. As of March this year, the disbursements stood at $637, which was 74% of the total loan. Work on three out of 15 projects under the first LoC has not finished yet.

The country will also not get grace period facilities on 80% of loans under the $2 billion second LoC and the $4.5 billion third one, the finance ministry fears.

Eight out of the 15 projects under the first LoC were related to procurements of buses and locomotives and others, while the projects under the second and third ones are about infrastructure construction.

It takes comparatively less time in disbursing funds for the projects to purchase products and their implementations when compared to the infrastructure ones, according to an analysis of the first LoC.

The formulation of the Development Project Proposal, approval process and implementation are taking a lot of time.

The first fund for the project titled "Establishment of IT/Hi-Tech Park at District Level" under the second LoC was released on 10 October 2018. So, its grace period will remain available until 10 October 2023.  Only $94.59 million has so far been disbursed under it, which is 4.72% of the total loan. There will be less than three years in the grace period if the implementation of a selected project now starts under the second LoC.

Some 15 projects are now being implemented under the second LoC, which was signed on 9 March 2016. Two projects relating to purchasing goods have been completed. The two others are under implementation and the rest have got stuck either in the approval process or in the tender process.   

In the third LoC, $9.79 million was released on 21 May 2019. So, the grace period will end on 21 May 2024.

The approval process for 16 projects under the third LoC has not finished yet.

Therefore, project officials now fear that the grace period might end before the projects go into the implementation stage.  

Sources said as per LoC agreements, Bangladesh has an obligation to import 75% of construction materials required for a project from India. The country also pays 1% interest on loans and a 0.5% commitment fee.  

Seeking anonymity, an official, who was engaged in preparing the LoC Framework Agreement in 2010, told The Business Standard that they had assumed that after completing the approval process in one year or two, all LoC-funded projects would go into the implementation phase. But that did not happen for the first LoC because of the official process on both Bangladesh and Indian sides in securing approval. The issues could have been resolved in the second and third LoC, had a lesson taken from the first one's experience.

But the ERD took so much to understand. There is now an opportunity to resolve all the problems regarding approval to LoC-funded projects through discussions between the two countries, he added.

Bangladesh should also urge India to give a project-specific grace period for LoC loans, he said.

When contacted, ERD Secretary Fatima Yasmin and its Joint Secretary and Wing Chief (Asia) Md Shahriar Kader Siddiky declined to make any comments.

However, a finance ministry source said Bangladesh presented the grace period issue before India in a high-level monitoring meeting in January this year.

The country requested the Indian side to consider the project-specific agreement under the second and third LoC.   

In reply, the Indian authorities said it was not possible to sign separate loan deals under the ongoing three lines of credit, but they would consider it while signing future LoC agreements.  

Ahsan H Mansur, executive director of the Policy Research Institute, said there needs to be a separate agreement for Indian loan projects. Otherwise, Bangladesh will not be able to realise grace period benefits from such projects.

The economist suggested resolving the issue through talks at the political level of the two countries.