How to take foreign loans in Bangladesh in 2022 | Step by step process of getting loan from foreign entities

11 Jan 2022

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Tahmidur Rahman, Director and Senior Associate

This post will explain in details about Overseas Financing & Foreign loans for Bangladeshi Companies- How to take foreign loans in Bangladesh in 2022. Here in this post we explain the Procedure & Guidelines for the required approval of foreign loans by Bangladeshi Companies.

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Foreign Loans
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1) How to take foreign loans in Bangladesh in 2022 | Step by step process of getting loan from foreign entities

Overseas Financing by Bangladeshi Companies 

Over the last decade, obtaining a foreign loan by Bangladeshi entities or companies, have increasingly become a routine occurrence. Bangladeshi companies choose international loans for a variety of reasons, including lower interest rates and the ability to borrow a big sum from a single lender.

The Government of Bangladesh has been enabling foreign borrowing legally approved by the Scrutiny Committee in order to attract foreign investment in the private sector through simpler long-term financing of industrial projects at lower cost of funds and to relieve strain on foreign currency reserves.

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Obtaining  foreign Loans in Bangladesh in 2022

In 2022, Short-term loans from parent corporations and shareholders are now available to foreign-owned service companies as operating capital. Overseas-owned enterprises operating in Bangladesh now have more flexibility in receiving foreign loans according to the Bangladesh Bank.

According to a notice released by the central bank’s Foreign Exchange Policy Department, foreign-owned service companies can now obtain short-term loans as working capital from their parent companies and shareholders for essential business needs (FEPD).

Previously, such loans were exclusively available to foreign-owned industrial businesses that participated in manufacturing. Such loans were not available to service or trading enterprises. However, service businesses can now take out such loans as well.

The central bank further stated that such a loan might be available in convertible foreign currencies for a maximum of six years from the start of manufacturing and/or service output operations, with the opportunity to renew or extend the term during that time. Borrowing businesses may pay interest at a maximum of 3% per year until additional instructions are issued, with all other relevant transaction directions remaining intact.

 What are the usual requirements to borrow?

Though each foreign lender has its unique set of criteria, the following is a summary of some of the most frequent requirements that a company may be expected to meet before acquiring the foreign loan.

 

  • Borrower possesses the necessary licences and permits to operate its business.
  • The borrower’s business records are up to date.
  • Borrower is a firm that is conscious about the environment.
  • All industry standard certifications have been obtained by the borrower (e.g. ISO certification).
  • Borrower is a company that follows all labour laws.
  • The borrower or the project has proper insurance.
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Step by Step requirements and all the possible documents that you may need

When the documents are issued, they will be thoroughly reviewed by the BIDA Inter-Ministerial Committee. When the committee is content with the verification then they may give the approval or can obtain additional documentation. Hence it is important to carefully prepare the papers.

 

  • The Company’s Board of Directors approval for the proposed foreign loan.
  • Copy of the most recent BIDA registration form, duly attested by a First Class Gazette officer;
  • Original copy of the parties’ Loan Agreement; (For the lender, a copy of the detailed repayment schedule; original copy of the grade period;)
  •  CIB Inquiry Forms 1&2 duly completed, as well as an undertaking from its Sponsors or Directors;
  • Sponsors’ or directors’ credentials;
  • The company’s and its sponsors’ CIB certificates;
  •  Record of previous foreign loans/deferred payments (if available);
  • Audited previous year’s balance sheet;
  • Utilization Certificate from nominated bank;
  • Latest company credit rating report;
  • Latest financial analysis 
  • Updated feasibility report of the proposed project in detail;
  • Form-X, Form-XII and Form-XV from RJSC&F;
  • Certificate of Incorporation of commencement;
  • Memorandum & Articles of Association;
  • Proforma Invoice or Price Quotation (where applicable);
  • Original copy of the Bank Solvency Certificate;
  • Descriptive statement of the use of the loan;
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Criteria for foreign borrowing

Foreign lenders typically conduct extensive due diligence on the borrower. Financial due diligence is typically performed by the lender; however, for technical, environmental, and legal due diligence, the lender may hire external consultants. The borrower will be responsible for the costs of these consultants.

The lender may require the borrower to appoint a process agent in the country of its choosing,  an auditor affiliated with an international auditing firm; and a compliance manager. The auditor and compliance manager may require a timely report to be submitted directly to the lender following disbursement.

Other Relevant Criterias for Foreign Loans

i. Debt-to-equity ratio: The debt-to-equity ratio based on anticipated borrowing should be kept to a bearable level. While relatively higher debt levels may be warranted for long gestation infrastructure projects, total debt including the proposed borrowing should not breach 70:30 debt equity ratio even for these projects;

ii. Liabilities to the Government: There should be absolutely no liability to the government, either in Taka or in foreclosed property.

iii. Status of implementation and utilization report of authorized foreign borrowing: On a semi-annual basis, the borrowing firm must submit to the BOI the status of implementation and utilization report of the approved loan in the specified format.

iv) If capital machinery and equipment to be bought: Quality, price, and economic life; The capital machinery and equipment to be procured with the proposed borrowing should either be brand new or, if refurbished, have a sufficient useful life as specified by the Government’s Import Policy Order.

v) Validity of the approval: The Scrutiny Committee’s approval of foreign borrowing is valid for 6 (six) months from the date of the BOI’s permission letter. 

Vi) Common Terms:
a) The borrowing firm must follow Bangladesh Bank’s laws and regulations on the use and repayment of the loan, as well as the interest thereon.

Foreign Loans In Bangladesh

What are the due dilligence you may expect from your foreign lenders?

Foreign lenders typically conduct extensive due diligence on the borrower. Financial due diligence is typically performed by the lender; however, for technical, environmental, and legal due diligence, the lender may hire external consultants. The borrower will be responsible for the costs of these consultants.

The lender may require the borrower to appoint a process agent in the country of its choosing,  an auditor affiliated with an international auditing firm; and a compliance manager. The auditor and compliance manager may require a timely report to be submitted directly to the lender following disbursement.

How to get the BIDA Clearance for Foreign Loan in Bangladesh

After obtaining the prescribed application from BIDA, the applicant must submit the aforementioned documents, along with the applicable licence fee, to the Security Committee of Bangladesh Bank for review. If the committee grants clearance after reviewing the submitted documents, BIDA will grant the loan in accordance with their recommendation.

The official time limit for such a process will be entirely dependent on the Borrower for document collection and, to a lesser extent, on the Scrutiny Committee to conduct the meeting, and the fee schedule for approval will be tentatively between BDT 5k and BDT 100k depending on the amount of lending.

How to get a Trade License in Bangladesh?

Click here and go to the post, Tahmidur Rahman speaks in details about Trade License in Bangladesh | Fees, Processing and Renewal!

Regulatory Permissions from Bangladesh Bank and Board of Investment (BOI).

 

Foreign loans with a term of less than a year require Bangladesh Bank’s prior authorization. The Board of Investment must authorize all other foreign loans (including supplier credits, financial loans from institutions or individuals, and debt issuance in international capital markets) (BOI).

Borrowers in special economic zones, such as the EPZs, are eligible for certain concessions (Export Processing Zone).

It normally takes three to six months for the BOI to approve the application. The loan must be applied for using a stipulated application form, which, along with accompanying documentation, must clearly state the loan’s purpose and planned usage by the borrower, as well as the repayment schedule with dates and amounts, and interest payment dates and amounts.

The following documents must be supplied with the application as supporting documentation:

  • The term sheet, facility agreement, and security documents are all part of the loan documentation. These may be submitted in draft form:
  • The borrower’s corporate documents, such as the memorandum and articles of association; resolutions of the borrower’s Board of Directors approving the foreign loan on the terms and conditions reflected in the loan documentation and the application;
  • If the loan is to be used to import any equipment, a pro-forma invoice for that equipment;
  • Report covering key financial and commercial matters in in respect of the loan and related project.

Foreign loans from Multilateral Development Banks

Each of the major Multilateral Development Banks, including the Asian Development Bank and the World Bank, has a Commercial Liaison Office run by the Commercial Service.

These financial organizations lend billions of dollars to initiatives in developing nations like Bangladesh that aim to boost economic growth and social development by decreasing poverty and inequality, increasing health and education, and expanding infrastructure development.

The Commercial Liaison Offices assist American firms in learning how to participate in bank-financed projects and lobby on their behalf.

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General Questions that people ask about Foreign Loans in Bangladesh

 

Is it possible to receive international venture capital funding to launch a business in Bangladesh?

IFC and IDLC funding helped Chaldaal, a food e-commerce firm, raise US$ 5.5 million. This is a positive indicator since if the business thrives, additional financial institutions may be willing to invest in it. Sindabad, a B2B e-commerce, received US$ 4.2 million from Aavishkaar, an Indian Impact Fund. Handy Mama, C-work, Gaze, and Beatles are among the four start-ups that BD Venture has invested in. They joined other Angel Investors in a second round investment in Esoshikhi, an educational technology. The government has set aside Tk 1 billion in the budget for new business ventures. However, the specifics of how that cash will be used have yet to be determined. The cabinet recently approved the ICT Ministry's initiative to establish a venture capital business.

Can I take loan from foreign bank in Bangladesh?

A company can obtain a soft loan in one of two ways: automatically or through the government: The automatic method allows a borrower to get a loan from a foreign firm without first obtaining clearance from Bangladesh's Central Bank. The loan arrangement must, however, be recorded with the BIDA in this case.

How to determine the existing indebtedness structure and creditworthiness of the borrowing company?

(a) CIB report: A CIB report will be needed for all proposals to be processed. The CIB report will be collected by BOI from Bangladesh Bank. (a) Bank certificate: Existing indebtedness structure and creditworthiness of the sponsors involved, duly confirmed by their bankers, will be required for foreign borrowing permission. The chosen bank will submit to BOI the required inquiry papers as well as an undertaking from the borrowing company's Sponsor Directors.

What are the funding programs for Bangladeshi Entrepreneurs?

Robi, a mobile telecom business, has overhauled its Accelerator program. They broadened the scope by allowing applications from anybody in Robi payroll. They expanded its coverage to include all of Bangladesh. They got almost 2200 applications, of which 56 were chosen for pitching. Finally, eight funds and incubation facilities were given. These programs were aired on television in order to raise awareness and encourage people about the notion of entrepreneurship. Grameenphone has renamed its Accelerator program GP Accelerator 2.0, which is divided into two parts: Pre-Accelerator and Accelerator. Pre-Accelerator is an 8-week program that provides training and coaching to assist verify their concept and get it to market. The accelerator is a 4.5-month program for teams with a Minimum Viable Product (MVP).

How to determine the Quality & Commercial viability of the project for Foreign Loan?

The following financial analyses are necessary to verify the quality/commercial viability of the project feasibility study; a) The project's internal rate of return (IRR) b) The payback period c) The break-even point at what capacity and what time of year d) A sensitivity analysis in terms of IRR d) Ratio of Debt Service Coverage (DSCR)

What are the challenges regarding overseas financing in Bangladesh?

Globally, governments that backed startups saw an increase in their GDP. In the fourth industrial revolution period, creativity and technology assistance are critical for competing in global marketplaces. As a result, startups should be at the top of everyone's priority list. It is a priority for our government, but it should be represented at all levels of policy making. Our entrepreneurs have difficulties in obtaining trade licenses, intellectual property rights, and other business licenses and permissions. Foreign investors are hesitant to invest in a company that lacks all necessary legal documentation. Foreign investors are likewise unconvinced about the ease with which they might abandon their investments. Regional centers such as Singapore and China have vast amounts of money to invest, yet we are unable to entice them to engage in our enterprises.

Can an individual from Bangladesh take loan in foreign currency?

Provided, however, that for sufficient reasons, the Central Bank may permit a person resident in Bangladesh to borrow or lend in foreign exchange from or to a person resident in or outside Bangladesh, and/or permit a person resident in Bangladesh to borrow or lend in BDT from or to a person resident outside Bangladesh.

Can a foreign director give loan to Bangladeshi company?

Yes, it is permitted.  But bear in mind, a company cannot lend to a director without paying taxes, while a director can lend to a company.

How do I record a loan repayment?

When your company records a loan payment, you debit the loan account to remove the liability from your books and credit the cash account. Repayments on an amortized loan are made over time to meet interest expenditures and principle reduction.

What are the 3 classification of loans in Bangladesh?

A loan is a sum of money borrowed from a lender by an individual or a business. It is divided into three types: unsecured and secured loans, conventional loans, and open-end and closed-end loans. Before any money crosses hands, the beneficiary and the lender must agree on the conditions of the loan. In some situations, the lender may compel the borrower to put up an asset as collateral, which will be specified in the loan agreement. Individuals, businesses, and governments can all get loans. The major reason for taking one out is to obtain funds to increase one's total money supply. The lender earns money by charging interest and fees.

Company Law practice in Counsels Law Partners 

The Barristers, Advocates, and lawyers at CLP Law chamber in Gulshan, Dhaka, Bangladesh are highly experienced at assisting clients in dealing with and registering branch offices in Bangladesh.   For queries or legal assistance to set up a branch office in Bangladesh, please reach us at:

E-mail: [email protected]
Phone: +8801727983838
Jamilla Villa (4th Floor Flat No-C2 House 4/A/1 Road no: 2, Gulshan 1, Dhaka, 1212

 

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