BB to issue policy for monitoring OBUs closely

The amount of classified loans of offshore banking units (OBUs) of different  banks swelled more than four times or Tk 3.08 billion in the first quarter (Q1) of the current calendar year.

The volume of non-performing loans (NPLs) that were offered in terms of foreign currencies rose to Tk 4.10 billion during the January-March period of this year from Tk 1.01 billion in the preceding quarter, according to the central bank’s latest statistics.

In Q1 of this year, the figure of classified loans was earlier stated at Tk 11.90 billion as a leading private commercial bank (PCB) wrongly reported NPL of Tk 7.81 billion in their OBU operations.

Later on, the PCB had sought apology from the Bangladesh Bank (BB)'s department concerned and requested to drop the figure from the BB's report, according to a senior BB official.

"There is no scope to drop the figure right now because the report has already been sent to different departments of the central bank as well as the government," the central banker explained.

He also said it will be corrected in the next quarter report on classified loan and provisioning of the OBUs.

"The OBU's classified loans jumped during the period under review because a substantial amount foreign currency loan of a first generation PCB entered troubled credit territory," the BB official said while explaining the rising trend in NPLs with OBUs.

The share of classified loans on total outstanding also rose to 0.98 per cent during the period under review from 0.26 per cent three months ago.

The NPLs cover substandard, doubtful and bad/loss of total outstanding credits which reached Tk 419.72 billion as of March 31 from Tk 393.30 billion in the final quarter of last calendar year. It was Tk 311.77 billion as of September 30, 2016.

The OBUs are allowed to provide foreign currency loans to their customers.

It also allowed carrying on transactions in specified foreign currencies. The suggested currencies are US dollar, British pound, Canadian dollar, Deutsche mark, Japanese yen, Swiss franc, the Netherlands guilder, French franc, Swedish kroner and Singaporean dollar.

Talking to the FE, another BB official said the central bank is not empowered fully to monitor and supervise the OBU operations closely due to legal constraint.

As part of persuasion, the central bank now asks the banks which have OBU operations to keep provision on such loans and collects information on assets and liabilities of each OBU on weekly basis for assessing their financial risks, if any, especially with transactions in terms of foreign currencies.  

Currently, 35 commercial banks out of 57 are running their OBUs across the country as per a directive issued by the Banking Control Department of BB on December 17, 1985.

Under the directive, the OBUs have been allowed exemption from the purview of certain provisions of the Banking Companies Ordinance 1962 as per the government notification.

Besides, the OBUs will also be considered for exemption from Article 36(1) of the Bangladesh Bank Order 1972 on such terms and for such period as may be deemed fit by the government.

It means the OBUs are exempt from maintaining CRR (cash reserve requirement), SLR (statutory liquidity ratio) with the central bank of Bangladesh against their liabilities.   

The OBUs are free to accept deposits from outside Bangladesh and borrow from abroad. They are also free to make advances/investments abroad and also make permissible transactions with industries in the export processing zones (EPZs).

"There will not be any restriction on the physical location of the OBUs. These may be located both in the EPZs or any other convenient location outside-even existing branches of banks may be allowed to operate such units through a completely separate counter," the governing bank had said in the directive.

Meanwhile, the central bank had started preparations to bring the functions of OBUs under regular monitoring by amending the existing provisions on operation and establishment of the OBUs operations in Bangladesh.

The BB's latest moves-meant for averting any bubble-came against the backdrop of a rising trend in loans and advances provided by the OBUs in recent years.

As part of the moves, the central bank has already sought cancellation of the SRO (statutory regulatory order) relating to OBU operations in Bangladesh from the Law Ministry.

"We'll issue a fresh directive aiming to mitigate the risk of OBU operations in Bangladesh through strengthening monitoring and supervision after cancellation of the SRO," the BB official said while replying to a query.

Talking to the FE, a senior official of a leading private commercial bank said the demand for foreign-currency loans from OBUs has been on a gradual increase after the opening up of private-sector credits allowing entrepreneurs to borrow from overseas sources.

"The OBUs are now playing a significant role in the credit market in Bangladesh following the higher demand for foreign loans, mainly due to lower interest rates on such lending," the senior banker explained.

He also said the central bank should issue a policy in this connection immediately and conduct audit to each OBU to assess their actual financial position.

The central bank is working since 2015 to issue the directive to monitoring and supervise the OBU operations properly.