Cash reserve ratio for offshore banking units relaxed to boost foreign trade

The Bangladesh Bank has relaxed conditions for maintaining the cash reserve ratio (CRR) of offshore banking units to facilitate foreign trade. 

To further facilitate the offshore banking operations, the central bank yesterday said that banks now will not require to maintain any CRR with the Bangladesh Bank for offshore banking operations.

CRR is a specified minimum fraction of the total deposits of customers, which commercial banks have to hold as reserves either in cash or as deposits with the central bank.

The offshore banking units are now allowed to place funds to their domestic banking units without limiting the import payment of capital machinery, industrial raw materials, imports by the government, and other permissible payment obligations as per prevailing foreign exchange rules and regulations.

A senior official of Bangladesh Bank told TBS that earlier offshore banking units had to maintain a 2% CRR. "But now it won't be necessary. Besides, any bank can transfer unlimited funds from the offshore banking unit to the domestic banking unit. Earlier there was a cap of 40%," he said.

The head of the treasury department of a private bank told TBS that as a result of the central bank decision, the scope of trade finance of banks will increase.

"Moreover, the Bangladesh Bank has given the opportunity of unlimited fund transfer from offshore banking units to domestic banking units. Foreign dollars will enter the country's economy. This will benefit the economy," he said.

According to Bangladesh Bank data, there are currently 34 offshore banking units of various banks in the country. From these units, loans in foreign currency equivalent to Tk83,826 crore were disbursed as of September 2023. Among them, the amount of default loans is Tk1,755 crore.

The cabinet on Wednesday approved the draft of the Offshore Banking Act 2024, which exempts tax on interest earned by depositors.

According to the draft of the Offshore Banking Act, no income tax or any direct or indirect charges will be imposed on the interest or profit earned by the offshore banking business through the offshore banking units. 

No income tax or direct or indirect charges will be levied on the interest or profit given by banks to depositors or foreign lenders. No fees or levies will be imposed on the accounts of depositors or foreign lenders.

Offshore banking units can take deposits from 100% foreign-owned companies located in EPZs, PEPZs, economic zones and hi-tech parks. Besides, these institutions can provide short-term loans, opening letters of credit, guarantees, bill discounting, bill negotiating and other foreign trade-related outsourcing services.

In providing medium and long-term financing facilities, the instructions issued by Bangladesh Bank from time to time should be followed. According to directives of the Bangladesh Bank, it can give funded and non-funded loans to other institutions apart from 100% foreign-owned institutions.

In case of resident Bangladeshis, such units can provide deferred export bill discounting facilities on imports, and direct and indirect exports. Subject to approval from Bangladesh Bank, they can also provide medium and long-term loans to local industrial enterprises.

In addition, banks need to obtain a licence from the Bangladesh Bank to engage in offshore banking. Banks currently operating offshore banking units will not require to re-apply. Offshore banking operations must commence within six months of obtaining the licence, or else the authorisation will be revoked. 

Transfers from domestic units to offshore banking units can be made with the special approval of the Bangladesh Bank. The central bank can inspect all information on offshore banking units periodically.