Foreign firms' term loans in taka

Companies, whether local or foreign, require a sufficient and smooth inflow of working capital to continue their operations. Restrictions imposed by authorities to regulate capital flow and maintain financial balance can sometimes hinder the growth of business entities. Therefore, it is crucial to periodically review existing regulations and revise them as necessary to meet the needs of business entities and facilitate investments.  The government's move to relax the current rigidity of maintaining a 50:50 debt-equity ratio for foreign companies operating in Bangladesh, providing more room for accessing term loans in local currency, is a step in this direction.  A report in the FE, published this week, mentions that the Bangladesh Investment Development Authority (BIDA) is going to request the central bank formally to withdraw the obligation of the debt-equity ratio.

According to the current foreign exchange regulations, any foreign company is allowed to obtain term loans in local currency, specifically in Bangladeshi Taka, provided that it maintains a 50:50 debt-equity ratio. In other words, foreign entities in the manufacturing and services sectors can get loans from the local financial market as long as the entities' total debt does not exceed the 50:50 ratio. Other conditions, like being in operation for at least three years in the country and the use of term loans in local currency for capacity expansion, are also in place. Now, relaxing the debt-equity ratio rigidity by enhancing the ratio of debt or entirely abolishing the restriction will help firms obtain more local financing. At present, foreign-owned or controlled firms are, however, free to access local banks for working capital on the basis of normal bank-customer relationships.

Statistics available from Bangladesh Bank showed that the outstanding amount of industrial term loans in the country stood at Tk 3.74 trillion at the end of last year, whereas financing for working capital stood at Tk 3.30 trillion. The share of term loans and working capital financing in total private credit was recorded at 22.85 per cent and 20.20 per cent, respectively, at the end of December last year.  It means that these two types of industrial credits are the major drivers of overall advances to the private sector by the banks. Now, allowing foreign commercial entities to get more term loans in local currency is likely to increase the demand for the loan. It may also spark some competition among banks to attract foreign companies, and as a result, interest rates may decline modestly. Generally, foreign companies are considered more compliant compared to many local commercial entities. Therefore, banks may do more business with those companies to reduce the risk of loan defaults. Currently, the total amount of classified loans stands at Tk 4.20 trillion, equivalent to approximately one-fourth of the country's banking sector's total outstanding loans.  

Some cautions are, however, necessary for the potential risks of relaxing the debt-equity ratio for foreign firms. Taking advantage of the relaxation, some firms may abstain from injecting fresh equity in foreign currency, which will not help to enhance FDI. Again, if the debt-equity ratio requirement is fully abolished, analysing the credit risks may be difficult for the banks. Banks will also not take the risk of providing unsecured loans, regardless of how reputable a foreign company is. There are some other issues also. All these need to be taken into consideration before entirely abolishing the 50:50 debt-equity ratio requirement. Instead, it may be relaxed to some extent and observed for the market response in the meantime. The status of the terms of loans so far availed by the existing foreign companies also needs to be reviewed before taking any decision.