Big firms look overseas as local credit costs too much

Big firms look overseas as local credit costs too much As local borrowing costs hover high, some of the country’s largest conglomerates are turning to foreign lenders for financing, and Bangladesh Bank (BB) is moving on multiple fronts to make that path easier. Between April and June, at least three top business groups secured a combined $175 million from international lenders, including the International Finance Corporation (IFC), the private-sector arm of the World Bank Group. Several more, including City Group, are now in the pipeline. The loans come at 7-8 percent interest, compared to the 13-14 percent that local lenders currently charge, making overseas financing far more attractive. Economists and bankers warn that foreign borrowing carries risk for firms and the wider banking sector alike, particularly if the taka weakens against the dollar. Borrowers, however, say there are several advantages to raising capital overseas. “It typically carries lower interest rates than local loans in Bangladesh, reducing financing costs,” said Uzma Chowdhury, director (corporate finance) of PRAN-RFL Group. “Many foreign lenders, particularly development finance institutions (DFIs), also provide technical expertise and advisory support,” she added. The conglomerate recently secured approval from the Scrutiny Committee on Foreign Loans and Suppliers’ Credit for $65 million in loans from IFC and FMO, a Dutch development bank, for four of its companies: PRAN Dairy Ltd, PRAN Agro Limited, Banga Millers Limited, and Mymensingh Agro Limited. Uzma said foreign financing also enables firms to raise larger amounts of capital beyond local lending limits, providing greater flexibility for expansion. “For companies aspiring to become global multinationals, access to international capital markets is essential to finance cross-border growth and strengthen competitiveness,” she said. Firms are also taking foreign loans to repay their local lenders. In June, the BB approved a proposal by the Meghna Group of Industries (MGI) to secure an $80 million IFC loan, part of which will be used to repay local bank borrowings. At the time, Mostafa Kamal, chairman and managing director of MGI, said the company had to meet numerous conditions to qualify. “After fulfilling all of them, we received approval for an $80 million loan.” Uzma noted that compliance with international governance, environmental, and social standards enhances a company’s credibility and global reputation. Earlier in April, the Scrutiny Committee, headed by the BB governor, allowed Popular Pharmaceuticals to secure a $30 million IFC loan to repay working capital loans taken from domestic banks. The loan will be disbursed in taka, with interest calculation and repayment also made in local currency, which would allow the firm to avoid foreign exchange risk, according to a BB spokesperson. According to experts, a major concern with such loans is that any devaluation of the local currency could increase the repayment burden. BB Deputy Governor Md Kabir Ahmed had earlier told The Daily Star that the MGI loan proposal was initially rejected over concerns about the absence of hedging against exchange rate risk, and the potential impact on local banks if strong borrowers shifted to foreign lenders. The proposal was approved after further assessment, said another central bank official. MORE FIRMS LINING UP City Salt, a concern of City Group, has recently applied to the central bank for approval to obtain a foreign loan, a BB official has confirmed to The Daily Star on condition of anonymity. The company is seeking the loan to import raw materials for manufacturing chemicals. City Group already has loans from the Asian Development Bank (ADB) and the IFC, but is now seeking policy support from the central bank amid its financial difficulties. Industry insiders said several companies in the garments and pharmaceutical sectors, besides Abul Khair Group, TK Group, and BSRM, also have foreign loans. According to officials of the Bangladesh Investment Development Authority (Bida) and the BB, the two authorities responsible for approving foreign loans, these companies are also interested in securing new low-cost foreign loans. THE EXCHANGE RATE RISK Syed Mahbubur Rahman, managing director and CEO of Mutual Trust Bank, said the emergence of alternative financing sources is positive, but that growing reliance on foreign debt also carries risk. Foreign borrowing is increasing while exchange rate depreciation remains a concern, he said, adding that any external shock could put pressure on both borrowers and local banks. Rahman, also a former chairman of the Association of Bankers, Bangladesh (ABB), said high domestic interest rates are one reason behind weak private investment, but they are not the only factor. Mati Ul Hasan, managing director and CEO of Mercantile Bank, echoed a similar tone but cautioned that foreign loans must be repaid in foreign currency. “If there is a sharp fluctuation in the exchange rate, borrowers may incur significant losses. Although foreign loans offer several benefits, they also carry exchange rate risks.” PRAN’s Uzma, however, noted that companies with strong export portfolios have less to worry about as “export proceeds can directly repay foreign loans, reducing exchange rate risk and conversion costs”. M Masrur Reaz, chairman and CEO of Policy Exchange Bangladesh, sees the shift toward foreign loans as a natural feature of a growing economy. “As an economy expands and its private sector becomes more sophisticated, businesses increasingly rely on foreign borrowing, particularly when domestic interest rates are high or access to US dollars in the local market is constrained, as happened in Bangladesh during periods of restrictions on opening import letters of credit (LCs),” he said. But flagging exchange rate exposure as a big risk, he said foreign borrowing should primarily be limited to exporters or firms with dollar-denominated income, alongside stronger hedging instruments and stricter BB monitoring. “With these safeguards in place, foreign borrowing should not pose a major problem,” he said. THE WIDER PICTURE Bangladesh’s total outstanding external debt stood at $110.93 billion at the end of March, according to BB data. Of this, the private sector accounted for $20 billion, up slightly from $19.88 billion a year earlier. Private sector external debt comprises both short- and long-term borrowings. As of March, short-term external debt stood at $10.19 billion and long-term debt at $9.81 billion, according to BB. Short-term debt must be repaid within one year and includes buyer’s credit, deferred payment facilities and export bill discounting; long-term external debt, with a maturity of more than one year, includes loans taken by private enterprises and private commercial banks. BB EASING THE PATH ON MULTIPLE FRONTS BB, meanwhile, has been moving to lower the barriers to foreign borrowing. The central bank is preparing a comprehensive policy framework under which private firms would be allowed to obtain long-term foreign loans, up to a certain limit, without prior BB approval. At a recent press conference, Governor Md Mostaqur Rahman said the regulator intends to further simplify the process of obtaining foreign loans. “In particular, we are considering removing the requirement for companies to obtain prior approval before borrowing from their foreign parent companies.” BB has already acted on a related front. On July 15, it issued a circular, easing rules on external borrowing by fully foreign-owned industrial enterprises from their own parent companies, associates, or shareholders abroad. Such enterprises — operating both inside and outside specialised zones including EPZs, EZs and High-Tech Parks — no longer need prior BB approval for loans from their foreign parents within set limits: interest-free working capital loans face no cap, while cost-bearing loans are capped at an all-in cost of 3 percent a year, with medium-term borrowing (1-5 years) additionally capped at $50 million interest-free or $5 million cost-bearing. Applications beyond these thresholds still require case-by-case approval. Chowdhury of PRAN-RFL said a stable, long-term foreign framework could support the economy by reducing large firms’ reliance on domestic banks, helping businesses expand, boosting productivity, enhancing export competitiveness, and supporting economic growth.