Bangladesh Bank (BB) has recently deregulated some sections of its Foreign Exchange Rules allowing the members of the country's business community to directly borrow from foreign banks. This is a praiseworthy initiative from the regulatory point of view. This kind of decision should have been taken much earlier when the country's business community had been combating a difficult situation in managing their foreign currency.
Meanwhile, the country's foreign currency (forex) reserves have reached a new milestone at over $22 billion. This has paved the way for creating the country's own forex fund to lend among its business community either through direct means or through the commercial banking channel. Moreover, tremendous prospects have now opened up for the expatriate Bangladeshis to introduce a special type of foreign currency (FC) fund for lending out the same among the business community at home. This kind of fund has a very close proximity to private hedge fund which is very popular in the developed countries and many emerging economies as well.
Such funds play a pivotal role in channeling investible money from surplus units to deficit ones. If appropriate measures are taken, some private or institutional hedge funds may easily be created for mobilising FCs from the expatriate Bangladesh community. Such funds may ensure steady supply of FC loans at a comparatively cheaper lending rate without the hassles of complex documentation procedures.
Since this is a very new concept and the country's policy-makers may need time to understand its implication, this will, of course, take a longer time to implement if they decide to proceed with this idea at all. So the recent measures about allowing direct foreign borrowing will immensely help the business community at home to breathe a sigh of relief while manoeuvring their requirements for foreign funds.
It is not justifiable and financially viable to borrow local currency and convert the same to purchase foreign currency to meet the business obligations. Similarly it is not logical to earn foreign currency through exports and convert the same into local currency to repay the loans borrowed from domestic banks. This kind of adverse fund management not only exposes our business community to forex risk but also leaves them in an awkward position that may arise out of any mismatch between inflow and outflow of funds.
The opportunity of direct borrowing from foreign banks may remove this kind of impediment and may thereby provide the country's business community with an option to manage funds efficiently, specially to optimise the utilisation of both foreign and local currencies.
However, direct borrowings from foreign banks have some limitations and concerns which need to be addressed appropriately; otherwise, it may result in a very negative impact not only on the borrowers but also the business community as a whole and, above all, the country.
LOW LENDING RATE VERSUS ALL IN RATE: The proponents of direct borrowings from foreign banks always refer to the lower lending rate being applied by such banks, especially in the developed world, in favour of their justification for allowing the country's business community to borrow FCs from the overseas lending companies. This statement is partly true because pure lending rate is low in the international money market but not fully true because overall loan price is not as less as expected.
In international borrowings, interest that is charged at London inter-bank offered rate (Libor) is relatively cheap and therefore, the related borrowings are popular all over the world. However, the access to this borrowing at Libor rate is very limited and typically confined to the financial institutions. This rate does not apply to the private borrowings from commercial banks which usually charge all-in-rate (AIR).
AIR is commonly known as loan pricing which includes prevailing Libor rate, commitment fee, utilisation fee, non-utilisation fee, Libor breakage if any, upfront fee etc. Experience shows that average AIR varies between seven to nine per cent when Libor rate is within 150 to 200 bps (basis points). It may, however, be noted that pricing grid (various range) of applicable fees and charges widely varies, depending upon the internal rating as well as external rating of the borrowers; there is inverse relationship between the borrowers' rating and loan pricing. Higher the rating, the lower the AIR or vice versa.
The business community in Bangladesh should understand well the lenders' loan pricing policy or strategy, before entering into any borrowing contact. Even their AIR must be compared with the combined impact of interest rate and forex rate, if substituted from the indigenous banks.
TYPES OF BORROWING, REPAYMENT PRACTICE AND IMPACT OF COUNTRY'S RATING: Usually two types of loans are approved in favour of the corporate borrowers; these are commonly known as term loans and revolving term loans. The feature of the term loan is almost similar to the one practised by the country's banks. However, revolving term loan is quite different from that of Bangladesh.
Term loan has a fixed expiry period and a specific repayment schedule. This must be meticulously followed while making repayments. Once disbursed, repayment schedule will commence after the elapse of the moratorium period. In international borrowings, there is no practice of rescheduling of outstanding term loans. So the failure to repay on due dates will make the borrower a default-loanee. The consequence of it is very bad.
Under the revolving term loan, the maximum amount of loan is approved in favour of the corporate borrower for a certain period. This is preferably of three years' or five years' period. Under this term loan, the borrower is eligible to borrow Libor loans with different maturity matching with their funding requirements. There is, to mention, a clear distinction between the terminology of expiry and maturity. Expiry means the terminal date of the revolving term loan while maturity is the due date of Libor loan borrowed under it.
Under the revolving term, each loan is commonly borrowed usually at one month's Libor, three months' Libor and six months' Libor. However, overnight Libor, weekly and fortnightly Libor loans can be borrowed but this practice is very rare.
The special feature of Libor borrowing is that borrower has to repay the interest and the principal amount of money on due date i.e. when Libor loans mature. No practice of interest accumulation and roll-over of the loan is allowed under revolving term loan. Libor loan may be rolled over; however, interest accrued thereon will have to be paid in cash and three days' prior notice is required to roll over the Libor loan. So far as this writer knows, this kind of repayment practice is hardly followed among the country's business community.
Instead, interest accumulation and rescheduling of outstanding debt are rampant in the borrowing culture in Bangladesh. It is worthwhile to mention here that failure to repay the installment as per schedule and make true payment of accrued interest on due date of each Libor loan will result in the default status of the borrower. This will not only adversely impact the borrower himself/herself but also may cause the deterioration of the country's rating. Therefore, the repayment issues with managing fund in pursuant to strictly adhering to the payment of installment and accrued interest thereon, must have to be addressed properly before entering into any contact with the foreign banks for direct borrowing.
DOCUMENTATION & CREDIT AGREEMENT: Loans approved by the foreign banks are made effective through execution of a comprehensive credit agreement. This is considered the only document that needs to be signed by all the parties concerned. In practice, the assigned officers of the lending banks, their nominated lawyer, the borrower and the borrowers' nominated lawyer execute this credit agreement. This is a very comprehensive and detailed document. This usually consists of two hundred to three hundred pages. This document is prepared by the reputed international lawyers who have vast experience in practising commercial law in the courts of developed countries.
Not only the language of the document but also the subjects and issues covered therein are very difficult and complex in nature; legal expertise is required to understand each aspect of this document. This credit agreement is considered the prime document which all the parties concerned strictly abide by and the loan operation is governed by the section of this document.
Any dispute or disagreement that may arise over the operation of the loan is resolved on the basis of this credit agreement. This document includes all the necessary measures that are required for addressing the concern that are likely to arise over the operation of approved loans. From the definition of the terminology used in loan operation, interest rate, enforcement, jurisdiction, loan pricing and repayment to every other aspect may deem to be appropriate while operating a loan. These are elaborated in the credit agreement.
Although it is generally said that both lenders' and borrowers' interests are equitably protected under this kind of credit agreement, yet the reality is that the lenders do always have the edge over the borrowers in protecting the interest.
Therefore, the members of the country's business community who intend to directly borrow from foreign banks must be well familiar with the standard practices in international borrowings. In order to address the documentation procedure professionally, well-conversant lawyers will need to be appointed, if and when necessary. Otherwise, there may be every possibility of being circumvented with this extremely complicated legal document, in spite of having the honest intention of being good borrowers.
Direct borrowings from foreign banks are envisaged as the convenient means of availing this facility at a relatively cheaper rate but such loans do also carry some cross-border risks and as such call for efficient proper funding analyses and management thereof. If we recall the Asian financial debacle that the then emerging tigers in the region were confronted with during the mid-nineties, borrowing cheap money from foreign banks indiscriminately and spending it for development are largely held responsible for it. This opportunity can be used only when the requirements for foreign fund arise for spending in FCs. This source of fund is in no way conducive to project financing with local currency.
It is needless to mention that borrowings in FCs currency for spending in the local currency may boomerang on the country's business community. Where spending in FC is inevitably required, the source of direct borrowings from foreign banks can play an effective role for the business community.
In the present-day world, many modem trade finance products have emerged in the international banking arena. Among them, reimbursement facility under term LC, refinance facility under Sight LC, Trade Advance etc., are very common. Such sophisticated means of trade finance may easily substitute the requirements for direct borrowings from foreign banks. Nevertheless, if the limitations and concerns associated with direct borrowings from foreign banks are addressed properly and if utmost care is taken in availing such funds, this opportunity may be considered an easy source of obtaining FCs for the business community.
This writer, a CPA and CMA, is a banker, based in Toronto,Ontario, Canada.
