Eastern Bank Ltd (EBL) and leading agro-processor Pran Agro Ltd today closed the country's first local currency interest rate swap (IRS) deal, a financial instrument for managing interest rate volatility.

Unlike conventional loans, IRS involves no upfront capital transfer but rather orchestrates the exchange of fixed and floating rate payments at periodic intervals. This strategic tool allows entities to hedge against potential risks and fluctuations in interest rates.

Under the deal, the EBL will pay Pran at fixed 7 percent while Pran will pay EBL based on an interbank repo (IBR) rate every quarter for a year, the bank said in a statement. The Bangladesh Bank publishes the IBR rate daily and the first quarter average was 6.37 percent.

Pran will make more profit if the IBR falls or stays below 7 percent and will incur losses from the transaction if the IBR rate exceeds 7 percent consistently.

This is the first time that the risk from swaps will be fully managed locally in a Bangladeshi bank through the use of government treasuries and repos, officials of the bank said.

"The successful execution of Bangladesh's first local currency interest rate swap is a great tool to reduce interest rate risk," said Ali Reza Iftekhar, managing director and CEO of EBL.

He said EBL is proud to collaborate with Pran Agro Ltd in this endeavour and the bank is confident that this pioneering step will pave the way for further growth.

The EBL CEO spoke at a programme organised at the bank's headquarters in Dhaka.

The execution of the deal required extensive regulatory engagement with four departments of Bangladesh Bank, starting from November 2021 and finally getting the approval on February this year, said an official of EBL.

Through this groundbreaking initiative, Pran Agro has effectively minimised the inherent interest rate risk associated with its manufacturing profits, the bank said in the statement.

"Furthermore, the company has realised tangible benefits with a favourable payment received during the initial quarter of this arrangement."

The landmark development highlights the immense potential of interest rate swaps in enhancing financial resilience and bolstering economic growth, it read.

Interest rate swaps are integral tools used across the globe, from developed economies to emerging markets, including India, where daily trading volumes of around rupees 30,000 crore, the EBL said.

With Bangladesh now a $460 billion economy, the prospects for fostering a vibrant swaps industry are immense, said Mohammad Shahriar Siddiqui, director of the banking regulation and policy department at the Bangladesh Bank.

Uzma Chowdhury, a director of Pran- RFL Group, also attended the event.