The foreign loans approved by the central bank are significantly cost-effective for entrepreneurs, but lending by local banks is getting squeezed by the move.

A panel approved $1.19 billion in foreign loans in 2013, which was $1.49 billion in the previous year and $819 million in 2011, according to data from Bangladesh Bank.

“We are losing good clients who are now borrowing foreign currencies and paying back local loans with the funds,” a chief executive of a private bank said, asking not to be named.

The trend of allowing foreign loans also continues this year with the BB's approval for $106.6 million for 13 projects in the private sector yesterday.

Taking foreign loans by Bangladeshi companies started on a small scale in 2010. Now local enterprises, be it apparel, telecoms, power plant, pharmaceutical or cement, have been borrowing from foreign markets.

For foreign loans, borrowers have to pay London Interbank Offered Rate (LIBOR) plus a 4.5 percent interest, meaning the total cost would be around 5 percent, which is almost a third of local borrowing costs.

Bankers said the local banking industry is now sitting idle on surplus liquidity—more than Tk 80,000 crore—because of non-utilisation of funds. In this backdrop, some local companies took loans from foreign sources and paid back their loans in the local market.

Private sector credit growth came down to a 13 years' low at 11 percent at the end of November last year and banks' loan-deposit ratio reached around 71 percent in December, which means a bank can lend a maximum of Tk 71 against a deposit of Tk 100.

“A rise in foreign loans is a reason behind the sluggish demand for private credit,” said Nurul Amin, managing director of NCC Bank.

If the local firms had not borrowed $1.19 billion from foreign sources last year, local banks could have lent the equivalent amount, Amin said.

Helal Ahmed Chowdhury, managing director of Pubali Bank, said taking low-cost foreign loans is nothing bad, but there is a risk when these loans will be matured and payment pressure is huge.

Bankers, however, said foreign loans would not significantly impact the banking business if the economic activities are boosted and communications, particularly road network, remain uninterrupted.