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Foreign loans not as risky as thought: BB

Rejaul Karim Byron
Private companies eventually draw a small portion of the foreign loans approved for them, a recent study by Bangladesh Bank found.
External lenders disbursed 35 percent of the approved loans in 2012 and only 25.3 percent last year, according to the study by the Chief Economist's Unit of the central bank, carried out in the backdrop of a debate over private sector commercial borrowing from external sources.
The major advantages of foreign loans are lower borrowing costs than those available at the prevailing domestic market and a longer maturity period of the loans.
The interest rate for external borrowing is LIBOR + 3 to 4.5 percent, whereas the interest rate is 14 to 18 percent in case of domestic sources.
But private commercial borrowing has some risks as well. For instance, if a series of firms fail to repay loans in time, it may have a negative impact on the country's overall international credit ratings.
Between 2009 and March this year, the scrutiny committee of the Board of Investment approved $5.53 billion of foreign loans for 203 local private companies from over 13 sectors that include power, telecoms, shipping and garment.
The total outstanding private sector foreign loans as of December last year stood at $1.74 billion. The companies paid around $300 million in 2012 and $108 million in 2013 for debt servicing against the loans, according to the BB study.
The report said the private external debt
stock of Bangladesh at the end of 2012 was less than 1 percent of that of India.
The neighbouring country's external debt stock is 42.26 percent of its total external debt and 8.62 percent of its GDP at the end of 2012. For Bangladesh, it was 5.05 percent and 1.13 percent respectively.
The International Monetary Fund has recently analysed Bangladesh's debt sustainability and said the country is highly unlikely to face any major debt-related stress within the next 20 years.
Meanwhile, the central bank research team interviewed 13 companies that made foreign borrowing of $1 billion cumulatively from 2007 to 2013.
Other than the lower interest rate, the companies said they went for foreign borrowing as most local banks could not finance large projects due to their limited capital base.
In terms of the loan use, most of the companies use the borrowed funds mainly to import capital machineries, either to start new projects or expand their existing operations.
Foreign loans not as risky as thought: BB
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Some of the external loans have been used to pay off local loans as well, and one company used its foreign loan to make LC payments.
The study, however, recommended that further work needs to be done to find out whether the companies are facing any difficulty in getting loans after getting the approval, or whether the disbursement data recorded in the statistics department of BB is incomplete.
The report advocated further encouragement of such loans, as they appear to contribute to growth.
One way would be significantly simplify the approval process by introducing online submission of applications and through clear communication over procedures.
It also called for a report every six months from the borrowing companies on how they are using the funds.