Cash margin mandatory for issuance of bank guarantee for external loans

FE REPORT | Tuesday, 22 June 2021

The central bank has tightened its policy by imposing a minimum 5.0 per cent cash margin for issuance of bank guarantees against term loans from overseas sources to mitigate the risks involved, officials said.

As per the revised policy, authorised dealer (AD) banks have been asked to retain at least 5.0 per cent of the commitment-amount instead of collateral as per 'bank-customer' relationship in cash margin from local borrowers of the foreign currency loans, according to a notification issued by the Bangladesh Bank (BB) on Monday.

The AD banks will also have to meet four requirements, including documentation with proper credit assessment, before applying to the central bank for approval of issuance of repayment commitments, the officials said.

"We've imposed the cash margin ceiling to help the banks mitigate the banks' foreign exchange risk," a senior official of the Bangladesh Bank (BB) told the FE while replying to a query.

He also said the bank's applications to issue bank guarantee/standby letters of credit (LCs) on behalf of their customers will be documented with proper credit assessments along with conditional approval from the board of directors of local banks or approval from the management authority of foreign banks operating in Bangladesh.

"Influential borrowers get bank guarantees issued by banks, particularly the state-owned commercial ones, with insignificant collateral, which intensifies the risks of the banks," the central banker explained.

Issuance of repayment commitments leads the AD banks to take external exposure on behalf of resident borrowers for which they need to honour payments against the commitments in case of payment default by resident borrowers, according to the notification.

It also said the situation to make payments by the AD banks against the repayment commitments leads the loan status to be converted to local loans from external loans and loan risk arises if non-funded liability is incurred without adequate collateral coverage.

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