The Bangladesh Bank (BB) should take cautious steps about an increasing trend in short-term foreign currency financing following its extra liability on the country's foreign exchange reserves, a study has suggested.
"The importers prefer such credit in foreign currency due to lower interest rate," said the study conducted by Bangladesh Institute of Bank Management (BIBM). The findings were presented at a research workshop held at the BIBM on Thursday.
The study also recommended collection of detailed data on the short-term foreign currency financing as there was no segregated data on private sector credit and banking sector credit in any public source.
The research workshop paper was presented on 'Prospects and challenges of short-term foreign currency financing of banks'.
The research was conducted by BIBM professor and director Dr Shah Md Ahsan Habib, assistant professor Antara Zareen, lecturer Tofayel Ahmed, Bangladesh Bank joint director Pradip Paul, vice president of Mutual Trust Bank ATM Nesarul Hoque and first assistant vice president of Bank Asia Limited Mohammad Rafiqul Islam.
The survey was conducted on 20 banks. A good number of central bankers, and commercial bank executives also contributed input into the study.
The available data showed that short-term credit grew around 700 per cent at the end of 2013 following the permission of buyers' credit activities or Usance Pay at Sight (UPAS) letters of credit (LCs) by the central bank.
The growth of short-term credit in foreign currency was 31 per cent at the end of 2016, it said.
The short-term foreign currency financing was US$ 230 million in 2012 whereas it stood $ 6,157 million in 2016.
According to study, the country's private sector debts as percentage of total debts was 6.56 per cent in 2012, it became 12.64 per cent in 2013, 18.61 per cent in 2014, 21.03 per cent in 2015 and 22.51 per cent in 2016.
And the percentage of short-term private sector debt to total debt was 0.85 per cent in 2012 whereas it became 5.9 per cent in 2013, 10.08 per cent in 2014, 12.27 per cent in 2015, and 14.9 per cent in 2016.
It said sudden growth of private sector credit was clearly visible following the year 2013; and there were adequate evidences that point towards sudden growth of banking sector's foreign currency liabilities following the initiation of buyers' credit or UPAS activities in the country.
"It is crucial now to continuously monitor the trends and growths of the short-term foreign currency liabilities of banks. And for that the first step should be to gather or summarise short-term private credits of the banking sector."
The study suggested that offshore banking units (OBUs) should come under BB's scanner for effective monitoring of the foreign currency financing including that of UPAS activities.
It said traders were cashing in on lack of precise definitions of raw materials and capital machinery.
"Moreover, there are now growing tendencies amongst importers to shift from sight to usance LCs to take advantage of the low interest rate of UPAS. The changing trend is causing pressure on banks to undertake greater foreign currency liabilities."
It urged practitioners and policymakers to think about as to how these malpractices and undue developments can be handled to ensure due and productive use of UPAS in the country.
It said the sources of fund of OBUs for such activities should come under monitoring for the greater interest of keeping eye on banking sectors' foreign currency liabilities.
"The permission of export bill discounting was given mainly with the intension of using domestic foreign currency funds to support exporters, the current sources of funds used for such activities are not very clear, and there are no summarized data to identify the sources."
The study urged the central bank to introduce a set of rules to guide asset liability management practices of OBUs for the greater interest of the banking industry. There must some of reporting of such financing.
While speaking at the workshop, Bangladesh Bank deputy governor Abu Hena Mohd Razee Hassan said the central bank will not allow unlimited private sector foreign credit as some of East Asian countries' international trade collapsed due to high volume of private sector foreign lending.  
He said there is a huge demand for foreign currency financing due to low interest rate. Though financing in foreign currency creates loan burden on other countries, yet if foreign currency is not paid regularly, it creates reputational problem not only to borrowers but also to Bangladesh.
"In Bangladesh, foreign currency financing facilities are permitted to support investment involving lower cost, but at the same time, we should keep in mind that foreign liability is exposed to exchange rate risk. Considering the risk and importance of short-term foreign currency financing, Bangladesh Bank has introduced a number of measures."
He said though BB is very cautious on foreign currency transaction and especially on foreign book liability, yet the opportunities for using short-term foreign currency financing are not overlooked.
"Bangladesh Bank formulated a policy note titled 'An Analysis of Private Commercial Borrowings from Foreign Sources in Bangladesh' which identified different inputs behind the trends and uses of private sector commercial borrowing from external sources in Bangladesh."
He said there are some grey areas in the industry in addressing proper needs and challenges of short-term foreign currency financing. The misuse of facilities makes the short-term transaction more vulnerable for the country to some extent.
BIBM DG Dr Toufic Ahmad Choudhury presided over the workshop while supernumerary professor of BIBM Md Yasin Ali, additional managing director of Islami Bank Md Mahbub-ul-Alam, BIBM faculty member Syed M Bariqullah and Eastern Bank deputy managing director Ahmed Shaheen also spoke at the programme.
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Source: The Financial Express