BB allows foreign currency in offshore banking units as collateral for taka loans

The Bangladesh Bank (BB) has issued a significant directive, allowing both individuals and companies in the country to obtain taka-denominated loans by using their foreign currency deposits held in Offshore Banking Units (OBUs) as collateral.

“To facilitate financing activities, it has been decided that OBUs may allow foreign currency deposits of non-resident account-holders for use by their domestic banking units (DBUs) as collateral against financing to resident companies or firms and individuals,” stated a BB circular issued today.

However, this new facility comes with several key conditions:

• Bona Fide Relationship: OBUs are required to verify and be satisfied with the bona fide relationship between the foreign currency account-holders and the borrowers in Bangladesh. This includes relationships such as non-resident Bangladeshis (NRBs) and their beneficiaries, or foreign shareholders/investors and their investee companies.
• Purpose of Loan: The collateral can only be utilized by Domestic Banking Units (DBUs) for extending short-term working capital loans in local currency (Taka).
• No Charges/Fees: There will be no charges or fees levied specifically for the use of the foreign currency deposit as collateral.
• Exchange Rate Risk Margin: The financing extended to borrowers must be subject to appropriate margin requirements deemed necessary by the DBUs to effectively absorb any potential exchange rate risks.

This move by the central bank aims to facilitate financial activities within the country, potentially attracting more foreign currency inflows and providing a new avenue for local businesses and individuals to access Taka financing. The new circular is expected to be particularly beneficial for foreign-owned companies operating in Bangladesh and for NRBs seeking local currency loans against their foreign currency holdings.