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Despite debt-equity ratio of some private companies already having crossed the permissible limits, they have been allowed to take foreign-currency loans from multilateral lenders while Bangladesh reels from depleting foreign-exchange reserves.
The companies sought the funds to open letters of credit (LCs) for importing capital machinery, equipment, and raw materials, officials said.
The high-powered scrutiny committee on foreign loan/supplier credit, headed by Bangladesh Bank Governor Abdur Rouf Talukder, approved the loan proposals at a recent meeting at the central bank.
However, the committee asked the companies to "maintain the debt-to-equity ratio at 70.30 throughout the project life".
The panel also asked the nominated banks to ensure that the companies maintain the threshold while opening LCs and biennially inform the director-general, foreign-investment promotion, of the Bangladesh Investment Development Authority (BIDA).
"The nominated banks will have to take the responsibility if any deviation is observed by the Bangladesh Bank," the committee said on a note of caution.
Yongtai Industries Bangladesh Ltd., a sweater-manufacturing company in Narayanganj, is one of the many companies already having crossed the debt-to-equity ratio.
According to the audited balance sheet until June 30, 2023, the debt-equity ratio of the export-oriented company, including a proposed US$1.754 million worth of deferred-payment facility, reached 80:20, which is much higher than the acceptable limit (70:30).
The proposal for deferred-payment facility of the company was endorsed by the committee and the company was asked to "undertake necessary measures to bring the ratio within the threshold in two years after the BIDA's approval".
In case of Sinha Knit Industries Ltd., the equation reached 73:27 as the company sought approval for a deferred-payment facility of $2.46 million for procurement of capital machinery.
The proposal in favour of the company was also approved and, at the same time, the company was asked to improve the ratio within two years after BIDA approval.
Labaid Cardiac & General Hospital Limited got the go-ahead for borrowing Bangladeshi Taka-denominated foreign loans up to US$8.10 million from the International Finance Corporation (IFC), the private-sector arm of the World Bank Group.
With the credit facility, the debt-equity ratio will reach 74.26. The committee asked the company to maintain the ratio within 70:30 throughout the project life.
Banglalink Digital Communications Ltd also sought deferred-payment facility, for up to $40 million, for procurement of capital machinery and equipment from Huawei International Ptd. Ltd., Singapore.
However, the committee found the company's debt-equity ratio at 84:16 as per audited balance sheet as on December 31, 2022, including the proposed deferred-payment facility.
Earlier in February 2023, a meeting of the scrutiny committee had instructed the company to maintain the ratio within 70:30 by December 2026 and raise capital by selling shares to the public equal to at least 10 per cent of its paid-up capital through initial public offerings by December 2024.
The meeting has, however, approved the $40 million deferred-payment facility for Banglalink and asked for following the instructions given to the company in a letter issued by Bangladesh Bank in April 2022.
Abul Khair Steel Melting Ltd has been allowed to borrow $55 million from the Islamic Corporation for the Development of the Private Sector (ICD), Jeddah, and other banks and financial institutions through the ICD.
The company's debt-equity ratio will then stand at 67:33 as approval given by the committee for the borrowing.
Bangladesh's overall foreign debt stood at around $96.54 billion in the third quarter of 2023, including the private sector's stake of $21.28 billion.
Country's gross foreign-currency reserves as per the International Monetary Fund (IMF) calculation method were now hovering around $21.44 billion.
The central bank governor did not respond to a request for comment on the justification for granting permission for loans to companies having crossed the acceptable limit of debt-equity ratio.
Contacted Wednesday, Dr Zahid Hussain, a former lead economist of the World Bank's Dhaka office, told the FE that the country's financial account was in the negative territory throughout 2023 mainly due to repayments of private-sector foreign loans and non-availability of new loans.
"As there is a dollar crisis and the private sector is failing to make necessary imports for full-capacity production at factories, arranging such foreign currency from abroad by the companies themselves will lessen pressure on the central bank reserves," he said.
He thinks granting permission to the private sector for foreign loans in this situation is necessary, "but at the same time, its downside is (that) if those who are taking loans have no adequate capital to make repayment, will create problems".
Those who have crossed the threshold significantly are already "highly indebted" and have no capacity to repay the loans. "And, if they fail to enhance earnings by utilising the new loan, they will fall into debt distress."
Mr Hussain fears that if they fail to make repayment, they may seek bailout from the government, which may further create pressure on the government.
"The government should be cautious in granting permissions to the highly-indebted companies for further foreign borrowing," he notes.