It is compulsory for the private sector borrowers to keep a minimum 5 per cent in cash collateral against foreign loans with the associated guarantee-providing banks.
A notice was issued by the Bangladesh Bank on June 21, stating that such banks had to repay the loans to foreign lenders if borrowers cannot repay on time.
A guarantee is required by borrowers from local banks in order to manage funds from foreign lenders.
Local business information is normally unavailable with the foreign lenders, for which they seek guarantees from local banks before giving out loans to the businesses. This means local banks have to pay foreign lenders the entire loan if the borrowers become defaulters. During such a situation, local banks will end up facing a negative impact because of the failure of the borrowers.
With these settings, Bangladesh Bank stated that the borrowers would have to keep a minimum 5 per cent of the guarantee amount as cash collateral with the banks providing the guarantee.
An official from Bangladesh Bank stated that this will assist the banks to reduce the risk of providing guarantees to businesses.
Banks have to ensure all applicable credit norms and prudential parameters, including the single borrower exposure limit set by the central bank, while providing guarantees to borrowers.
Bangladesh Bank data has illustrated that the lenders will have to take prior approval from the Bangladesh Bank and the Bangladesh Investment Development Authority to provide the guarantees. A total of 147 Bangladeshi companies borrowed $13.24 billion from external sources as of March 2020.