Lending from offshore units of banks in Bangladesh has declined amid the ongoing foreign exchange crisis, leaving the segment in a fragile situation.

By the end of March this year, the total disbursed loans of offshore banking units (OBU) stood at about Tk 72,437 crore, down 7.68 percent year-on-year, as per the latest central bank data.

OBUs were a lucrative business for banks when the forex flow was good. But now their operations have practically come to a standstill as foreign funds are unavailable, industry people said.

Bangladesh has been facing a foreign exchange crisis for more than two years now, which adversely impacted their OBUs, as per industry insiders.

The country's forex reserves have by fallen more than $24 billion since August 2021 following the Covid-19 pandemic.

The forex reserves stood at $21.78 billion (BPM6) on June 30 this year, as per the latest central bank data.

Besides, Bangladesh Bank found proof that some banks laundered money through their OBUs, prompting the banking regulator to strengthen monitoring of the segment.

An OBU is a specialised unit within a licensed bank that offers financial services, such as loans, in foreign currencies to non-resident customers.

Generally, the unit borrows from foreign banks as well as the central bank to lend funds to various organisations for import payments, export bill discounting, refinance, and mid and long-term loans.

Loans from OBUs started to fall after the central bank instructed banks not to take funds from their domestic unit to finance OBUs, said Mati Ul Hasan, additional managing director of Mercantile Bank.

In January, the Bangladesh Bank barred banks from transferring foreign currency to their OBUs to tackle local forex shortages and reduce the dependency of units abroad on those back home.

Mati Ul Hasan said most banks used to take funds from domestic units to OBUs but they have had to adjust as per the central bank's instruction.

"That is why lending from OBUs has declined," he added.

From 2020, banks were allowed to transfer up to a maximum of 30 percent of their regulatory capital in foreign currency from domestic units to OBUs.

There was no prior limit on transferring or mobilising funds for OBUs.

A senior Bangladesh Bank official said they observed that many banks were excessively transferring foreign currency to OBUs, creating an imbalance in the demand and supply of foreign currency in the local market.

Till March this year, loan disbursement from offshore units of state-run banks fell by Tk 802 crore to Tk 677 crore. Meanwhile, loan disbursement from OBUs of private commercial banks fell by Tk 2,482 crore to Tk 57,984 crore.

Likewise, loans from the OBUs of foreign banks fell by Tk 2743 crore to Tk 13,776 crore.

Amid the forex shortage, foreign lenders are very cautious about providing funds to local banks, which is another reason lending through OBUs declined, said Shaheen Iqbal, deputy managing director and head of treasury at BRAC Bank.

However, Iqbal said lending through BRAC Bank's OBUs has increased.

DEFAULTED LOANS OF OBUs

Defaulted loans at OBUs stood at about Tk 1,877 crore at the end of March this year, up from Tk roughly 1,402 crore in the same period of 2023, central bank data showed.

Bad loans at the OBUs of private commercial banks stood at Tk 1,198 crore while bad loans at foreign banks stood at around Tk 679 crore till March this year.

GOVT INTRODUCED OFFSHORE BANKING ACT 2024

In March, parliament passed the Offshore Banking Act 2024 to give a much-needed boost to the US dollar supply in the country.

Under the act, some rules were relaxed, allowing both Bangladeshis and foreign nationals to avail offshore banking services.

The central bank also increased the interest rates for foreign banks to keep their funds in offshore units.

Also, the interest rates of loans and deposits of OBUs have recently increased.

Besides, the government decided to remove tax on investments in offshore banking.

Loans from OBUs can be executed in five currencies: the US dollar, British pound, euro, Japanese yen, and Chinese yuan. Around 40 banks in the country currently have offshore units.

Although offshore banking was approved in 1985, the related policy was only issued in 2019.