The scheme pertains exclusively to foreign banks with satisfactory credit ratings from well-known international rating agencies.
Commercial banks in Bangladesh can now secure guarantees from foreign banks without needing approval from the Bangladesh Bank when lending to foreign firms in the country. However, this opportunity is limited to foreign banks that hold favorable credit ratings.
A senior official from the central bank explained that the foreign banks must be rated by agencies like Moody’s and S&P Global to participate as guarantors. There’s also talk of offering some loan relief because many businesses in Bangladesh struggle with adequate collateral. When these businesses apply for loans, they often find themselves in a bind, lacking the necessary assets to back them up. This, in turn, leads them to seek guarantees from foreign banks.
The official clarified that while both foreign and local companies can utilize this facility, it’s primarily the foreign multinationals that reap the benefits, given the typical lack of collateral in Bangladesh. These multinationals often turn to well-known banks, including HSBC, JP Morgan Chase, and Standard Chartered, for guarantees.
Another central bank official mentioned that many companies in Bangladesh receive projects that require funding; for instance, if a project is worth Tk 2 billion, they might need a loan of Tk 200 million. When approaching banks, they face requests for collateral, which drives them to seek assistance from foreign banks for guarantees, especially since their own assets are limited. On the flip side, banks in Bangladesh seek more security to mitigate risks.
According to the new guidelines, any foreign Bank Guarantee (BG) or Standby Letter of Credit (SBLC) must be unconditional, irrevocable, and payable on first demand, sourced from banks or institutions with satisfactory credit ratings—ideally rated at least “BB Rating Grade 1-2” by recognized rating agencies.
These guarantees must align with the credit policies and risk assessments of the lending institutions. Importantly, resident borrowers won’t incur any fees or charges related to these overseas BGs or SBLCs, either directly or indirectly.
Before dispensing credit, lending banks and finance companies are required to ensure clarity regarding governing laws, dispute resolutions, and the enforceability of these foreign guarantees or credits. It’s also essential to notify the Bangladesh Bank promptly if any foreign BG or SBLC is activated due to a loan default.
The lending institution needs to be confident about the borrowing company’s financial health, repayment ability, and overall creditworthiness through an evaluation of their financial statements and cash flow. Additionally, any updated BG or SBLC related to a loan may be retained under lien.
Nevertheless, these institutions should also focus on the borrower’s performance improvement, such as increases in sales, profitability, cash flow, and ensuring smooth account operations as evaluated by the respective banks.
