Banks can't channel funds to offshore units

Banks have been restricted from providing fund support to their offshore units and at the same time, they have been asked to fully transfer funds obtained from the onshore units by the end of December 2024.

According to a new policy issued by the Bangladesh Bank yesterday, offshore banking units will not receive any kind of fund facility from their parent banks in the country. As a result, they will have to rely solely on foreign sources.

Earlier, banks had the option of transferring funds up to 30% of their regulatory capital to their offshore units. 

Bankers say nearly the entire fund of offshore units is invested in short-term loans. The new policy is expected to result in a foreign currency crisis in the offshore units, potentially impacting import financing and bill discounting.

Bill discounting is a trade-related activity in which a company sells its outstanding invoices to a financier (a bank or another financial institution) that agrees to pay the company for them at a future date.

Offshore banking functions as a separate banking system within a bank, providing opportunities to lend to foreign companies and collect deposits from international sources. 

In this system, calculations are conducted in foreign currency, and none of the regulations applicable to scheduled banks in Bangladesh apply to offshore banking. Only profit and loss accounts are considered. Presently, 35 banks in Bangladesh are engaged in offshore banking activities.

Bankers also said if offshore units do not get funds from their home sources, there may be a temporary crisis. However, if they manage to overcome the crisis by collecting funds from foreign sources, the country's foreign currency inflow will increase.

Currently, offshore units have about $6 billion of funds from banks in Bangladesh. The domestic dollar liquidity flow of the banks will further increase if their offshore units' funds are brought back. However, bankers say most of these funds are invested.

Till 2019, banks could transfer funds up to 20% of their regulatory capital to the offshore units, the central bank circular said. But during Covid, it has been increased to 30% in 2021.

"Even though the central bank has raised the limit, some banks were providing funds up to 40-50%. When the matter came to notice, banks were asked to bring it down to 30% by December 2021," the circular also mentioned the previous developments.

Bangladesh Bank Director Mohammad Shahriar Siddiqui told TBS that offshore unit fund is a completely separate source of the country's banking regulations. 

"They can be considered as foreign banks within the country. So far domestic banks could provide fund support. From now on, there is no opportunity in the new circular to any fund," he added.

On the question that most of the funds of the offshore units are currently invested, he said, the units can invest in short term. In other words, if the invested funds of the offshore units return, they will be able to adjust domestically.

The managing director of a private bank told TBS that the new policy has been made for the entire banking sector as a result of the irregularities of some banks. 

"As a result, banks' offshore banking units will weaken," he said.

"We could do import financing, bill discounting from this fund. Now if the supply of this source decreases, the import financing of our country may be disrupted," he continued.

A senior official of the Bangladesh Bank said the biggest mistake of the central bank was to increase the investment limit of banks in offshore units. "In FY22, our import volumes increase significantly. Then the banks invest a large amount from offshore units as one-year short-term loans. Although banks still have to suffer to get back that investment."

"At present, some 6-8 banks are in default with foreign banks, resulting in a reduction of new funds. Additionally, due to the increasing dollar price and a dollar crisis, traders are struggling to meet the liabilities of their offshore units," he added.

According to a central bank report, in 2022, traders received a $9.56 billion facility in buyer's credit of short-term foreign loans. However, by the end of November 2023, the outstanding amount of this loan had reduced to $6.47 billion