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External Commercial Borrowing
External Commercial Borrowing (ECB) is the borrowing of funds from international lenders by a country’s business sector. In Bangladesh, the ability of private firms to access foreign currency loans from outside financial institutions or corporations has aided industrial growth, particularly in the context of new projects, expansion, and capital goods imports.
The Bangladesh Investment Development Authority (BIDA) oversees and regulates this borrowing process, ensuring that it is consistent with the country’s economic priorities and financial stability.
The architecture and effectiveness of foreign commercial borrowing in Bangladesh are examined in this essay, with an emphasis on private sector external debt. It examines the approval procedure, the sorts of projects sponsored, and the economic consequences of such borrowing.
The Eligibility and Approval Process
Private enterprises registered with the Board of Investment (BOI) and incorporated under the Companies Act of 1994 are eligible to apply for external commercial financing. These borrowers can look to organizations or individuals in other countries for commercial loans, financial loans, bank loans, buyer’s credit, or supplier’s credit. However, it is vital to highlight that foreign loans cannot be utilized for working capital or capital market investment.
Companies must receive approval from the Scrutiny Committee of the Board of Investment, which is chaired by the Governor of the Bangladesh Bank (BB), in order to acquire foreign loans.
The application process requires the submission of the required documents, which include the Certificate of Incorporation, Memorandum and Articles of Association, Term-sheet or Loan Agreement, feasibility report, financial analysis, equity forms, and other appropriate credentials. The Scrutiny Committee assesses these applications based on business viability, borrower creditworthiness, repayment length, and debt-equity ratio, among other factors.
Foreign-owned (100%) investment projects in Export Processing Zones (EPZ) are exempt from obtaining prior clearance from BIDA or BB for foreign currency loans from overseas financial institutions or corporations.
The Power Sector and Other Requirements
The Power Sector has unique requirements for external commercial borrowing in addition to the standard requirements. For this sector, the Letter of Intent, Implementation Agreement, and Power Purchase Agreement are required papers.
External Borrowing Trends in the Private Sector
An examination of private sector external borrowing in Bangladesh from 2011 to 2013 indicated a considerable increase in sanctioned loans. In 2011, about 20 private firms were approved for loans totaling USD 936.30 million. In 2012, this value climbed to USD 1579.57 million among 81 firms, while in 2013, it increased to USD 1555.33 million among 116 enterprises. During this time, around 55 enterprises gained clearance for loans worth USD 1357.06 million on an annual basis.
However, in comparison to the permitted loans, the disbursement of external debt was comparatively modest, creating concerns that require additional study.
Debt Sustainability Analysis
In November 2013, the International Monetary Fund (IMF) and the International Development Association (IDA) conducted a Debt Sustainability Analysis (DSA), which found that Bangladesh was unlikely to encounter severe debt-related stress in the next two decades. The DSA took into account both domestic and external debt numbers and predicted various debt indicators up to 2034 under various scenarios.
The DSA results demonstrated Bangladesh’s resilience to debt-related shocks, particularly external debt, making a solid case for permitting additional private external loans into the economy.
Bangladesh’s External Commercial Borrowing Effectiveness
A survey of thirteen private enterprises from various industries, including RMG, footwear, telecommunications, power generation, and pharmaceuticals, revealed information about the effectiveness of external commercial borrowing in Bangladesh. Between 2007 and 2013, these corporations borrowed a total of USD 894.24 million.
According to the poll, the key reasons for borrowing from foreign sources were lower interest rates compared to domestic possibilities and the inability of local banks to provide large financing due to insufficient capital bases. The majority of the borrowed funds were used to import capital machinery for new projects or expansion of existing ones, demonstrating that the loans were put to good use.
External commercial borrowing has been critical in propelling Bangladesh’s industrial growth and development. Foreign currency loans have helped private sector businesses fund new initiatives and grow existing operations. BIDA and the Scrutiny Committee manage the clearance procedure, which guarantees that the borrowing is consistent with the country’s economic priorities and financial stability.
Despite the efficiency of external commercial borrowing, the low proportion of disbursements relative to approved loans warrants more investigation. The Debt Sustainability Analysis, on the other hand, reassures that Bangladesh is well-equipped to deal with debt-related difficulties, particularly external debt concerns.
External commercial borrowing has aided Bangladesh’s economic development by providing private firms with critical resources for growth and development. As long as the borrowing is consistent with the country’s economic goals and regulatory safeguards are in place, it can serve as a catalyst for long-term development and prosperity.
External Commercial Borrowing (ECB) in Bangladesh
|What is External Commercial Borrowing (ECB)?||External Commercial Borrowing (ECB) refers to the borrowing of funds by private sector enterprises in Bangladesh from foreign lenders in foreign currency. |
It includes commercial loans, buyer’s and supplier’s credit, etc., primarily used for importing capital goods, financing new projects, or expanding existing production facilities.
|Which entities are eligible for ECB in Bangladesh?||Private enterprises incorporated under the Companies Act 1994 and registered with the Board of Investment (BOI) are eligible to apply for External Commercial Borrowing (ECB) in Bangladesh.|
|What are the main purposes for obtaining ECB?||The main purposes for obtaining ECB in Bangladesh include financing new projects, importing capital machinery, and expanding existing production facilities. It is not permitted to use foreign loans for working capital purposes or investment in the capital market.|
|What is the role of Bangladesh Investment Development Authority (BIDA)?||BIDA plays a vital role in the ECB process. It scrutinizes and approves applications for foreign loans, ensuring that they align with the country’s economic priorities and financial stability. The applications are then submitted to the Scrutiny Committee headed by the Governor of Bangladesh Bank (BB) for final approval.|
|Are foreign-owned investment projects exempt from approval?||Yes, foreign-owned (100%) investment projects located in Export Processing Zones (EPZ) may obtain foreign currency loans from overseas financial institutions or entities without prior approval from BIDA or BB.|
|What documents are required for ECB approval?||The application for ECB approval must be submitted with several supporting documents:|
including the Certificate of Incorporation, Memorandum and Articles of Association of the company, Term-sheet or Loan Agreement with repayment details, financial analysis, board resolution related to the proposed borrowing, feasibility report of the investment project, relevant equity forms, bank certificate on creditworthiness, and track record of foreign borrowing.
Additional documents may be required for specific sectors like the Power Sector.
|How are ECB applications processed?||After submission, ECB applications are duly scrutinized by BIDA. Upon satisfactory evaluation, they are forwarded to the Scrutiny Committee, which includes the Governor of Bangladesh Bank (BB), for final approval. The process has been streamlined through BIDA’s online OSS platform.|
|What is the trend of private sector external borrowing in Bangladesh?||The trend of private sector external borrowing in Bangladesh has shown significant growth in approved loans over the years. Between 2011 and 2013, around 81 enterprises were approved for loans totaling USD 1579.57 million, increasing from USD 936.30 million among 20 enterprises in 2011. |
However, there has been a relatively low proportion of disbursement compared to approved loans, warranting further investigation.
|What does the Debt Sustainability Analysis (DSA) indicate?||The Debt Sustainability Analysis (DSA) jointly conducted by the International Monetary Fund (IMF) and the International Development Association (IDA) suggests that Bangladesh is highly unlikely to face significant debt-related stress within the next two decades. |
The analysis considers both domestic and external debt and projects various debt indicators up to 2034, demonstrating the nation’s resilience to shocks related to debt conditions, particularly external debt.
|How have private companies used external loans?||A survey of selected private companies between 2007 and 2013 revealed that the borrowed funds were primarily used for importing capital machinery to expand existing projects or establish new ones. |
The loans were found to be utilized productively, with most companies benefiting from lower interest rates and the availability of substantial financing for their projects.
Company Law practice in TRW law firm in Bangladesh
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