Offshore banking, the unit of commercial banks that gives out foreign currency loans, is increasingly getting popular among both overseas and local investors because of the low cost of funds.

For instance, in 2016, loans under offshore banking grew 20.41 percent year-on-year to Tk 39,329 crore, according to data from the Bangladesh Bank. In 2014, the amount was Tk 26,174 crore.

The low cost of the fund is driving the growth of offshore banking.

A loan through the offshore banking unit costs 4-6 percent in contrast to about 10 percent locally.

“Offshore banking is getting popular with clients because of the low interest rate,” said Ahmed Kamal Chowdhury, managing director of Prime Bank.

Foreign currency loans are helping local producers, mostly garment manufacturers, to keep their product prices low.

“The availability of foreign currency loan has, in fact, helped bring down the overall interest rate in the banking sector,” he said.

Islami Bank leads the charge in offshore banking: as of last year it gave out Tk 3,103 crore.

Eastern Bank comes in second spot with about Tk 2,256 crore loans, followed by Brac at Tk 2,163 crore, Prime Tk 1,786 crore, City Tk 1,478 crore, UCB Tk 1,176 crore and AB Tk 1,136 crore, according to central bank data.

Among the state-owned banks, only Agrani has offshore banking: its portfolio, as of 2016, stood at Tk 109 crore.

Private banks' offshore lending last year totalled Tk 22,735 crore, while the nine foreign banks lent Tk 16,484 crore.

The initiation of offshore banking in Bangladesh dates back to 1985, when a guideline was issued to bring in foreign investment.

But the offshore banking units' activities were limited earlier as foreign currency was not available. They picked up steam in the last several years because of the mounting reserves, and faster growth of remittance and exports.

Through the offshore units, local banks borrow foreign currencies from abroad or local authorised dealer banks and lend to both foreign and local firms at LIBOR (London Interbank Offered Rate) plus rate.

The BB has been also liberal in allowing banks to provide foreign currency loans to local businesses.

An economist of the central bank said low-cost borrowing was giving foreign producers an edge over local producers, who had to pay higher interest for their local currency loans.

This prompted the central bank to open up -- a move that has helped in bringing down the overall lending rate, he said.

The economist said excess liquidity in the market is also pushing the interest rate down as most foreign currency loans are used for imports.

Imports, in terms of letter of credit settlement, surged 10.15 percent year-on-year in the first eight months of the fiscal year.

On the other hand, exports grew only 3.31 percent during the period, according to data from the BB.

The fast expansion of foreign currency loans has prompted the central bank to take an initiative to amend the guideline on offshore banking to beef up monitoring, said a senior BB official.

At present, regular banking norms do not apply to offshore banking.  The amended guideline will introduce conventional banking norms such as similar capital requirement, provisioning, classification, credit rating, single borrower limit for offshore banking too. Offshore banking needs to be organised in a better way to mitigate any future risk from exchange rate fluctuation, the central bank economist said.

Chowdhury of Prime Bank said the main objective of offshore banking was to bring in foreign deposits but the banks could not do it. Now, offshore banking units mainly lend to local companies. Default rate in case of offshore banking came down to 0.26 percent last year from 0.29 percent in 2015, according to data from the.

But a top executive of a private bank said the risk of offshore banking lies in the recovery process, which is lengthy.

“If a client defaults, then it is very difficult to recover the loans. Banks can't recoup the loan directly from the client as custom clearance is also related to it,” he added. 

The Asian Development Bank (ADB) and City Bank yesterday signed a $5 million loan agreement to support import and export financing for Bangladeshi businesses.

The Trade Finance Programme (TFP) of the ADB will provide trade loans under the deal to City Bank to on-lend to local firms, the Manila-based lender said in a statement.

“We are pleased to be growing the partnership with City Bank and to support more trade, which is directly linked to job creation and economic growth,” said Edward Faber, TFP relationship manager for Bangladesh.

“With ADB's backing, City Bank will be able to increase its financial support to local companies, including small and medium businesses,” Faber said. City Bank became a partner bank in ADB's TFP in early 2016 under the TFP's guarantee product. Since then, ADB and City Bank have worked on eight transactions together valued at $15 million.

“City Bank signed the Trade Finance Guarantee Facility agreement last year and our relationship with ADB has been stronger since then,” said Sohail RK Hussain, managing director of City Bank.

“As City Bank's vision is to be the financial supermarket, we believe that our participation in this revolving credit agreement will help us offer diversified and competitive trade finance products and services to our customers," he said.

The TFP has been operating in Bangladesh since 2005 and currently works with 14 local partner banks. To date, the programme has supported over 1,700 transactions, for almost $2.5 billion in trade in Bangladesh.

City Bank is one of the oldest private commercial banks in Bangladesh with total assets at about Tk 260 billion as of December 2016 and an extensive network of 120 branches all over Bangladesh.

The ADB TFP, backed by ADB's AAA credit rating, provides guarantees and loans to over 200 partner banks to support trade, enabling more companies throughout Asia to engage in import and export activities.

The taka has gained significantly -- by 1.7 percent in a single day -- against the dollar yesterday, owing to intervention by the central bank, said treasury officials of commercial banks.

In a verbal order on Wednesday, Bangladesh Bank put a cap on the US dollar rate at inter-bank exchange rate plus Tk 2, to rein in the depreciation of the taka in the last two weeks, ahead of Ramadan. The inter-bank exchange rate was Tk 80.23 yesterday.

The average bills for collection (BC) selling rate, used for import payments, went down to Tk 82.24 against the dollar yesterday from Tk 83.66 a day earlier, according to data from Bangladesh Foreign Exchange Dealers' Association (BAFEDA).

Citibank NA and Standard Chartered quoted the BC selling rate of a dollar at Tk 82.20 yesterday, down from Tk 84.80 on Wednesday.

“The banks were forced by the central bank to quote a lower price. BB has also assured us of dollars if needed,” said a senior treasury official of a private bank.

The central bank yesterday sold $5 million to Bangladesh Krishi Bank. In April (till yesterday), the central bank injected $101 million into the banking system, according to the BB.

Central bank officials, led by Governor Fazle Kabir, sat with senior officials of the commercial banks to discuss the issue at the BB headquarters yesterday. The governor asked the banks to keep the dollar rate stable.

“We may sit with the treasury officials again on Sunday,” said a senior official of the central bank who attended the meeting.

In just two weeks since April 11, the average BC selling rate went up 3.49 percent to Tk 83.66 against the dollar, he added.

Explaining the sudden hike in the rate of the greenback, bankers said commodity imports have gone up ahead of the month of Ramadan. A declining inflow of remittance and a rise in foreign loan repayments were also responsible for the hike, they added.

Import expenditure in terms of letter of credit (LC) settlement increased 20.46 percent year-on-year to $3.74 billion in March, according to BB data.

The LC opening value surged 20.60 percent to $4.31 billion in the same period.

Officially, Bangladesh has been maintaining a floating exchange rate for over a decade now, but the central bank has to intervene from time to time to control the market.