Loans from forex made costlier but still cheapest

Summary:

• EDF loan rate hiked by 1 percentage point to 3%
• Does not include the LIBOR rate in calculation
• Misuse of EDF loan still rampant
• Banks paying the price of clients' delays in repaying loans
• Forced loan against EDF of Janata Bank alone surged by 410% in a year
• IMF raised objections about showing the EDF in reserve

As the country's foreign exchange reserve is under tremendous pressure, the Bangladesh Bank has raised interest on loans from the reserve by 1 percentage point from 3%.

The new effective interest rate of loan from the Export Development Fund (EDF) – comprising money from the reserve – will now be 4% for exporters, which is still cheaper than the six-month LIBOR rate of nearly 5%, according to a circular of the Bangladesh Bank issued on Tuesday.

The EDF loan was charged at a six-month LIBOR rate plus 1%-2% interest rate until April 2020.

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% when LIBOR was less than 1%.

However, when LIBOR rate started to rise globally, the Bangladesh Bank excluded it from setting the interest rate, making the EDF loan cheaper for exporters.

The Export Development Fund was also raised to $5 billion at the same time in April 2020 as the country's reserve was on the rise during Covid-19 amid stagnant business activities and inflow of remittance. 

However, the reserve started to fall sharply from the beginning of this year amid the rising dollar crisis after the Russia-Ukraine conflict had started in February this year.

More than $13 billion was shaved off from the country's reserve in just 14 months, taking its balance from the peak of $48 billion in August last year to $34.47 billion on 7 November.

Despite this, money from the reserve, more dearer than ever, is now available for the cheapest rate even after huge misuse of the fund.

At present, the EDF loan disbursement stands at $6.7 billion, down from $7 billion as the Bangladesh Bank intensified recovery when the reserve came under pressure. 

The Bangladesh Bank is adjusting EDF loans, which are already due to be settled, from the bank's account maintained with it.

A senior executive of Janata Bank said they have many influential clients who took EDF loans but did not settle those with their export proceeds as per the rule.

Since every bank maintains an account with the central bank, whenever a client – even those who had not defaulted on the EDF loan – deposits foreign currency in their account to make a Letter of Credit (LC) payment, the Bangladesh Bank deducts it to meet their earlier overdue EDF loan payment.

As a result, in many cases, LC payments to foreign banks were delayed.

Recently, the Bangladesh Bank deducted more than $1 million from Janata's foreign currency account for overdue EDF loans, he said.

However, the EDF loan rule says it will be settled on export proceeds of relative exports.

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Misuse continued unabated

This June, when reserve was diminishing sharply, the Bangladesh Bank found that loans given from the foreign exchange reserve are being 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 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 LC payments on maturity dates, and yet banks have to meet their obligations to foreign banks. Delay in LC settlement can happen both for 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.

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.

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, according to the Bangladesh Bank findings. 

Based on the findings of misusing EDF loan, the Bangladesh Bank in June issued a circular instructing banks that exporters failing to settle loans from the EDF with export proceeds within the deadline will no longer be eligible for the borrowing facility from the foreign exchange reserve.

"It is observed that EDF loans are settled, without repayment out of realised value in foreign currency, by extending funded facilities," said the circular. 

"The situation does not ensure export of goods for which EDF loans have been used. In view of the situation, you are advised to comply with the instructions in settlement of EDF loans and refrain from forwarding applications of EDF loans, irrespective of the nature of imports, for customers whose liabilities have been settled through funded facilities in the immediate past 180 days," it added.

According to the circular, repayment of EDF loans needs to be settled on receipt of proceeds of the relative exports. This instruction is exempted in case of loans for bulk imports by member mills of eligible associations; with facility to use proceeds of local delivery retained in foreign currency.

Despite foreign exchange reserves under severe pressure amid high import expenditure and low earnings, the Federation of Bangladesh Chambers of Commerce and Industry (FBCCI) in June this year demanded that the EDF be increased from $7.5 billion to $10 billion – to further expedite and expand their shipments.

Reserve recalculation in the offing

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 government decisions about using the reserve money.

The visiting IMF mission, as part of a discussion over the terms and conditions of a prospective $4.5 billion loan sought by the Bangladesh government, suggested the Bangladesh Bank to exclude EDF loan from reserve calculation. 

The Bangladesh Bank also agreed with the IMF to make the correction in reserve calculation, which will be disclosed soon. The reserve will come down to nearly $25 billion when the newly calculated reserve is disclosed, according to a source of the Bangladesh Bank.

Exporters say overhead cost to rise

Talking with The Business Standard, BGMEA Vice President Shahidullah Azim said this decision will increase overhead production cost.

"The central bank takes this move when we are in negotiation to extend policy support to exporters who are struggling for survival due to deferred payment and deferred shipment requests from global buyers. 

On the other hand, every factory is facing a lack of orders from buyers due to the global economic recession."

If the government takes the IMF suggestion for this move, it will worsen the situation for every exporter, he said, adding that it will result in a loss of competitiveness as competitor countries have interest rates which are half of Bangladesh's one. 

Shovon Islam, managing director at Sparrow Group, said they understood the government situation, but a six-month deferral would be helpful for exporters.

He also mentioned that this decision came at a moment when they are negotiating to extend the EDF loan time."Despite all the difficulties, we are trying to maintain the same export level to increase overall market share," he said.