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Restrictions on offshore banking affect exports

M S Siddiqui | Published: April 12, 2019 21:43:08 | Updated: April 19, 2019 22:03:58


Bangladesh Bank declared its policy for setting up of offshore business unit (OBU) on December 17, 1985. The primary objective of offshore banking was to activate financing business and industrial activities at the new Export Processing Zones (EPZ).

OBU is a window of a scheduled bank that is engaged to arrange foreign currency by borrowing, depositing and placing such currency from the international foreign currency holders. Almost all the local banks have permission to operate OBU. But only 35 Banks are now operating OBU.

Offshore banking is increasingly getting popular among both overseas and local investors because of the low cost of funds. The interest rate is around six per cent while the interest rate in Bangladesh is in the double-digits. The low cost of the fund is driving the growth of offshore banking. Foreign currency loans are helping local producers, mostly garment manufacturers, with bill discounting immediately after shipment. The availability of foreign currency loan at lower interest rate has, in fact, helped bring down the overall interest rate in the banking sector.

In most of the jurisdictions, for OBU is preferred because (a) local capital requirement is either non-existent or extremely low, (b) taxes including withholding taxes on internal income and other forms of levies are practically non-existent, (c) easy entry of foreign banks/ local banks to conduct off-shore businesses, (d) licence fee for registration and operation is either nil or very low, (e) there is protection against lawsuit judgments, (f) double taxation can be avoided, (g) there are low operational costs and (h) there are unlimited market opportunities. Offshore Banking is banking at the international level within the country and can accept deposits and provide investment in freely convertible foreign currencies. The transactions/operations of OBU are free from set rules/regulations of the central bank and other local regulators. Bangladesh was following similar practices until recently.

There was no statutory capital and reserve or liquidity requirement for an OBU. The OBU was allowed to carry on transactions in freely convertible foreign currency. The overseas industrial units inside or outside the EPZs were permissible clients for OBU.  The system was allowed to render bill discounting services to the AD (authorised dealer) Branches in Bangladesh under Usance Payable At Sight (UPAS) system.

The OBU is a part of a bank whether incorporated in Bangladesh or outside, but it maintains its own separate accounts relating to offshore banking business. The OBU operating in Bangladesh will have to obtain licence from Bangladesh Bank and is subject to the relevant laws of the country. The OBU will be free to accept deposit and borrow from abroad, make advances/ investments abroad and also make permissible transactions with different categories of overseas investors at EPZ of Bangladesh. However, local enterprises may also enjoy foreign currency loan from the offshore banking units following approval from the Board of Investment (BOI).

UPAS arrangement has been the main function of the OBUs in the country. Practically, the major lending functions as a part of core banking activities are under the grasp of the OBUs of foreign banks due to availability of low cost fund and global network. They are basically concentrating on discounting business from different ADs import bills under UPAS credit arrangement.

This step was taken in order to meet the unique needs of some bulk volume importers when sellers demand immediate payment against a deferred Letter of Credit (L/C) by way of discounting, prepayment or negotiation, but the supplier's bank mat not be prepared to do so. As a solution, Letter of Credit is opened on deferred basis (180 days to 360 days depending on the nature of import). However, in the payment clause of the L/C, a provision is incorporated indicating that payment against the L/C will be made at sight basis by the L/C opening bank from its own source or through its offshore unit or its correspondents.

In recent times, OBUs started discounting services for the local export bills at the AD branches as well. Banks render UPAS credit facilities to its customers in the following two ways: either UPAS credit service through own offshore banking unit (OBU), or UPAS credit service through overseas Correspondent Bank.

The central bank believes that as a result of the OBU services, an imbalance in demand and supply situation in the domestic market has occurred creating additional pressure on the domestic foreign currency situation.

Bangladesh Bank stated that concurrent global and internal business dynamics necessitates the revision and up-gradation of the policy on offshore banking to streamline the operations. The central bank issued a new policy on February 25, 2019 to regulate offshore banking operation (OBO) of the banks in Bangladesh properly to mitigate their risks.

The offshore banking operation/transactions with fully foreign-owned enterprises now in EPZs, PEPZs, EZs and Hi-tech Parks shall include nothing more than accepting deposits, making short term loans/advances and investments, discounting bills, negotiating bills, issuing letter of credit and guarantee. Prior permission from the Foreign Exchange Investment Department of Bangladesh Bank is required in accordance with the instructions/circulars issued from time to time before making any medium and long term financing facility to the said enterprises.

All the local scheduled banks have been asked to comply with cash reserve requirement (CRR) and statutory liquidity ratio (SLR) rules for their OBOs. Under the new policy, three-fourths of total offshore operations' assets will have to be invested in Bangladesh.

The banks will have to maintain capital requirements under Basel-III framework along with the implementation of Asset Liability Management (ALM) guidelines for their offshore banking operations. The banks have been asked to renew the approval of OBUs in line with the new policy by applying to the central bank within three months.

Under the new policy, the banks are prohibited from some activities including the placement of fund with domestic banking unit (DBU) in offshore banking operations. Besides, at the close of business on any day, the value of offshore banking assets in Bangladesh will not be less than 75 per cent of the liabilities of offshore banking.

The policy imposed a limit on transferring foreign currency to offshore units from onshore units. OBU would be allowed to use funds mobilised from domestic banking operation with a limit not exceeding 20 per cent of its total regulatory capital for offshore units. The OBUs will not be allowed to collect any deposit from Bangladeshi nationals, except expatriate Bangladeshis. Banks will not be allowed to channel remittance using the OBUs.

The currency will be transferred by banks to offshore banking units for investment mainly in buyer's credit. Earlier there was no limit on transferring or mobilising fund in the offshore banking units from onshore banking units.

The regulations regarding maintenance of capital, leverage and liquidity ratios under Basel provisions shall be duly observed by all offshore banking operation.

For the maintenance of Cash Reserve Ratio (CRR), total demand and time liabilities of the bank shall include the liability of offshore banking operations. Statutory Liquidity Reserve (SLR) shall also be maintained accordingly. For the maintenance of CRR and SLR that entails to offshore banking, if required, banks may use funds from offshore banking operation and convert to BDT.

Strict regulations and limitation regarding the sources of funds for offshore banking have curtailed finance to UPAS of exports through discounting documents. As alternatives, exporters now have to borrow from local banks. These loans are available against mortgage of properties and higher interest rates. Exporters now have limited alternatives including trade finance and financing available from some overseas Non-Bank Financial Institutions (NBFI). The central bank could consider the withdrawal of these strict regulations on offshore financing as soon as the condition of the financial sector improves.

M S Siddiqui is a legal economist.

mssiddiqui2035@gmail.com

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