Banks allowed to use offshore deposits as collateral

Domestic banks can now use foreign currency deposits held in offshore banking units as collateral for lending to resident companies, firms, and individuals.

In a notice issued Thursday, Bangladesh Bank said that offshore banking units, or OBUs, may accept foreign currency deposits from non-resident Bangladeshi nationals, persons of Bangladeshi origin, foreign nationals, overseas companies and institutions, and foreign investors.

From now on, banks can offer loans in local currency against these deposits.

In doing so, commercial lenders must verify a legitimate link between the account holder and the borrower.

This could include, for example, non-resident Bangladeshis and their relatives or beneficiaries, or foreign investors and their Bangladeshi ventures.

According to the circular, non-resident Bangladeshis may also get loans by pledging their foreign currency deposits.

Banks may use these deposits to provide short-term working capital loans in local currency Taka and will not be allowed to charge any fees for the use of such collateral.

However, they may maintain a margin, if required, to cover potential exchange rate risks.

In the event of a default, banks may liquidate the collateral, provided they follow due procedure, according to the notification.

The central bank also said that balances held in private foreign currency accounts and non-resident foreign currency deposit accounts are eligible for use as collateral. However, funds kept in international banking accounts maintained with OBUs cannot be used for this purpose.

Industry insiders said foreign-owned firms often struggle to secure collateral locally when seeking credit from Bangladeshi banks.

The new policy will support these companies to avail Taka loans against the collateral of foreign currency deposits maintained in Bangladesh by their shareholders or parent companies.

They said this will encourage foreign investment in Bangladesh.