Loan interest rates higher

Local banks face business challenge

01 August 2014 Kazi Zahidul Hasan

 Borrowing from foreign sources by private firms, corporate houses and big companies have increased manifold in the recent times, posing a threat to the business of local commercial banks, sources said on Thursday.
Insiders said, local companies are now heavily relying on foreign banks, financial institutions and development agencies for funds mainly due to lower interest rates charged by them.
According to Bangladesh Bank (BB), local companies borrowed $2.6 billion term credit, mostly by having a maturity of five years plus, during the fiscal year 2013-14 while it was $2.4 billion in fiscal year 2012-13 compared and $1.8 billion in fiscal year 2011-12. In addition, local firms have availed $3.2 billion short-term foreign currency (FC) loans from foreign sources in the form of 'buyers credit' up to April 2014 compared with $600 million in April 2013.
"Fund collection from foreign sources by private companies has increased sharply in the recent years apparently risking business of the local banks," Farid Uddin, Managing Director of Rupali Bank, told The New Nation Thursday.
He attributed such an abrupt rise in foreign borrowings to the higher lending rates charged by local banks and other financial institutions.
"Among the foreign credits, the FC loans have become very beneficial for local companies due to their marginal interest rates," he said, adding, "The cost of FC loan is usually LIBOR  (London Interbank Offered Rate) plus 4 per cent or 5 per cent, whereas the average rates of local currency loans has been calculated at 13.35 during January to April of the previous fiscal.
Farid Uddin observed that apart from squeezing business of the local banks, the glut in foreign loans also helped pile up a huge amount of excess liquidity in the country's banking system that stood at Tk 136201.24 crore at the end of March 2014.
"If such a trend continues in the days to come, it will further help enlarge the liquid funds in the banks, making business more vulnerable for local banks" he said.  
Considering the fact, he urged the authorities of the central bank to become more careful in approving foreign loans for local companies. "Whatever the advantages that go with foreign loans, it (BB) should take a conservative stance in this regard to save the interest of our country," he added.
When asked, he said, local banks are compelled to charge higher interest rates to their lending as they have to mobilize deposit at higher interest rates. Besides, an increased operating cost of the local banks has also pushed up the lending rates, he added.     
The Rupali Bank high official, however, said that big clients of his bank are yet to go for foreign loans as his bank was maintaining a good relation with such clients, compromising some areas of their business.
"We see risk for local banks in the wake of rising trend of taking foreign currency loans by local companies," said another high official of a private commercial bank.
He said: Now big companies having large capital base are availing such loans. But once the loans is available for the mid-level and small companies, then it might eat up a good share of local bank's business.
"The spree in foreign loan approval by BB has also put an additional pressure on the local banks to slush their lending rates when they (banks) are burdened by idle funds in the wake of sluggish investment climate," he said.
He said that the in foreign loan approval is ultimately paving the way of foreign banks to expand their lending business in Bangladesh when they are not getting expected returns in investment in developed countries.
"They have now targeted the developing countries like Bangladesh to get a higher returns on their capital investment and it is we, who are making the way ignoring interest of the local banks," he commented.

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