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CHAPTER 16
SECTION - I
LOANS, OVERDRAFTS AND GUARANTEES

1. Grant of credit facilities in Taka to non-residents, to companies Restriction on

(other than banking companies) controlled directly or indirectly by lending
persons resident outside Bangladesh and to residents against
guarantees or collateral lodged outside Bangladesh, the extension
of loans and overdrafts in foreign currencies and the giving of
guarantees on behalf of residents of Bangladesh in favour of non-
residents or on behalf of non-residents in favour of residents are all
regulated under sections 3, 4, 5, 18 and 20 of the FER Act. This
Chapter contains the general regulations covering the granting of
such loans, overdrafts, credit facilities and guarantees.

2. The ADs may provide short term credit facilities for a period not Loans and
exceeding 2 weeks to their branches and correspondents abroad overdrafts to
only by way of overdrafts arising in the latters' non-resident Taka non-resident
bank branches
accounts, if any, on account of negotiation of LCs opened by them and
for import from Bangladesh. correspondents

3. The ADs should not grant Taka loan against overseas guarantees
or collateral outside Bangladesh without prior approval of the Trading &
commercial
Bangladesh Bank. Applications should be made on Form L (See
loans and
Appendix 5/75). The applicant is required to state the purpose for overdrafts
which the credit facilities are required, the period for which the
facilities would be needed, the value of his stocks and assets in
Bangladesh and reasons why borrowing against an overseas
guarantee or collateral outside Bangladesh is necessary. He is also
required to state in what manner the proposed loan or overdraft is
expected to be paid off.

4. (A) By virtue of Section 18(2) of the FER Act, no person Working

resident in Bangladesh may grant any loan, advance or credit capital loans
facility to any company (other than banking company) which is for foreign
owned or
controlled whether directly or indirectly, by persons resident controlled firms
outside Bangladesh except with the approval of Bangladesh Bank.
For the purpose of Section 18(2) of the FER Act, the word
"Company" includes a firm, branch or office of a company or firm.
Pursuant to this provision, Bangladesh Bank has accorded general
authorisation to banks for extending to foreign owned/controlled
industrial and trading firms/companies operating in Bangladesh
Taka working capital loans necessary for their operation in due
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course of business, according to prevailing credit norms and on the

basis of normal banker customer relationship.

(B) Term loans in Taka for capacity expansion/BMRE of foreign

Term lending in owned/controlled industrial firms may be extended/renewed by banks
Taka to foreign without prior Bangladesh Bank approval provided that:
owned/ (i) the term loan in Taka does not exceed, as percentage of total term
controlled borrowing, the percentage of equity of the firm/company held by
companies Bangladesh nationals and firms/companies not owned or controlled
by foreigners, and
(ii) total debt of the firm/company does not exceed the 50:50 debt
equity ratio.

The prevailing credit norms and regulatory provisions regarding

lending including single party exposure limits etc. will have to be duly
complied with, and the term loan facilities extended will have to be
reported post facto to General Manager, Foreign Exchange
Investment Department (FEID), Bangladesh Bank, Head Office,
Dhaka in proforma prescribed at Appendix 5/75. Term borrowing
proposals not conforming with the stipulations in the above paragraph
may as before be forwarded to General Manager, Foreign Exchange
Policy Department (FEPD), Bangladesh Bank, Head Office, Dhaka for
consideration and specific decision.

Besides, if requested, Bangladesh Bank may give consent to term

borrowing proposals not conforming with the stipulations in above.

(C) A company is deemed to be controlled directly or indirectly by

persons resident outside Bangladesh-

(a) if it is a branch office of a company incorporated outside

Bangladesh;
(b) in the case of partnership, if
(i) 50% or more of the capital of the partnership is owned by
foreign nationals or,
(ii) the majority of the partners are foreign nationals; and
(c) in case of companies incorporated in Bangladesh, if
(i) 50% of the shares or more are owned by foreign nationals or,
(ii) 50% or more of the directors in the Board of company are
foreign nationals. In the case of equal share holding or equal
representation on the Board of Directors, a company is deemed to be
foreign controlled if its Chairman is a foreign national.

(D) The ADs will maintain and carefully preserve separate company
wise records of loans/ overdrafts granted to the foreign or foreign
controlled companies.
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(E) Head Offices/Principal offices of the ADs are also required to

submit a consolidated statement (See Appendix 5/76) as of 31st
December each year showing local borrowing facilities allowed to
foreign or foreign controlled companies in Bangladesh to the
General Manager, Foreign Exchange Investment Department,
Bangladesh Bank, Head Office, Dhaka.

5. (a) ADs may grant credit facilities against goods intended for
export from Bangladesh to companies and business houses Loans against
controlled by persons resident outside Bangladesh without prior commodities
intended for
approval of the Bangladesh Bank. Business houses controlled by
export from
persons resident outside Bangladesh may be given credit facilities, Bangladesh
without Bangladesh Bank's approval against pledgement of
merchandise like jute, hides and skin which are mainly exported
from Bangladesh.

(b) Purchases by the ADs of usance bills covering imports into

Bangladesh result in the payment by them in foreign currency or a Purchase of
payment in Taka to a non-resident account, whereas, they do not usance bills
receive payment for the bills from the importer pending maturity
and thus the transactions result in the extension of credit facilities
to the importer in Bangladesh. ADs may extend such facilities to
foreign owned or controlled firms on banker customer relationship
and normal banking practices.

6. (a) Applications for credit facilities in Taka to any person,

Private
whether resident in Bangladesh or otherwise, for purposes other loans/overdrafts
than trading or commercial against overseas guarantee or collateral against
outside Bangladesh should be referred to Bangladesh Bank for guarantees
or collaterals
prior approval. The application should be made in Form L
lodged outside
(Appendix 5/75) Bangladesh

Prior Bangladesh Bank approval will however not be required for Taka advance
Taka advances by way of purchase of cheques in freely convertible against cheque
currencies drawn by foreign embassies/international purchase
organisations/foreign nationals employed therein on their bank
accounts abroad, provided that (i) the Authorised Dealer is fully
satisfied about collectibility of cheque proceeds in foreign currency
within four weeks of purchase, (ii) the expected collection period is
fully factored in while deciding the purchase price in Taka, and (iii)
the purchases are with recourse to drawers of the cheques for any
difficulty in collection.
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Loan for (b) No credit facility should be given to foreign nationals for
investment dealings in shares and securities, purchase of cars etc. without prior
approval of Bangladesh Bank. Applications in form L may in such
cases be forwarded to Bangladesh Bank for consideration.

Loans and 7. ADs should not grant any loan or overdraft in foreign currencies
advances by whether secured or unsecured except with the prior approval of
the ADs in Bangladesh Bank. Applications for this purpose should be made by
foreign letter giving full details of the purpose for which such loans or
currency
overdrafts in foreign currency are required, particulars of the
guarantee or collateral, if any, and the proposed mode of
repayment of the loan or overdraft.

Guarantees on 8. ADs may furnish guarantees to non-residents on behalf of

behalf of residents only within the authority set out in the following
residents in paragraphs:
favour of
non-residents
i) ADs may issue bid bonds/performance bonds on behalf of
suppliers in Bangladesh in favour of international agencies inviting
tenders for supply of goods/services. In such cases ADs should
ensure genuineness of the tender/supply contract/work order etc.
before issuing of bond/guarantee.

Minor ii) ADs may freely give guarantees on behalf of their customers in
Guarantees their ordinary course of business in respect of missing documents,
authentication of signature, release of goods on Trust Receipts and
defects in documents negotiated under LC or otherwise.

Export iii) ADs may furnish performance bonds or guarantees in favour of

guarantee overseas buyers on account of Bangladeshi exporters without prior
approval of the Bangladesh Bank subject to usual banking norms
and the following conditions:

(a) the tender floated by the foreign buyer calls for bank guarantee/
performance bond;

(b) the tenderer is a bonafide importer/user/trader of the

commodity/product concerned;
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(c) there is no export ban in Bangladesh on the

commodity/product to be supplied;
(d) the past performance of the exporter is considered satisfactory
by the AD.
The remittance, if any, to the beneficiary as a result of invocation
of the bond or guarantee can be made subject to report to the
Bangladesh Bank.
Repayment
9. ADs have to take prior permission from Foreign Exchange guarantees
Policy Department, Bangladesh Bank before issuing any guarantee against
suppliers'
on behalf of industrial concerns under public/private sector credits
favouring foreign suppliers towards repayment of suppliers'
credits.

10. (a) Subject to such conditions as may be imposed by Banking

Regulations and Policy Department from time to time, ADs may
issue Taka guarantees on behalf of foreign or foreign controlled
companies/firms operating in Bangladesh in favour of residents in
Bangladesh: (i) against 100% cash deposit and/or where the
guarantee is required to be submitted with tender documents in lieu
of earnest money deposit, subject to the condition that validity of
the guarantee issued in lieu of earnest money will be limited to the
period within which the decision regarding acceptance or rejection
of the tender is taken, (ii) against adjustment of the amount from
the overdraft limit, if any, allowed to the company/firm concerned.
Guarantee on
(b) An AD may without prior approval of Bangladesh Bank, issue behalf of
guarantee, bid bond or performance bond in foreign currency on non-residents
behalf of a non-resident firm/company favouring residents in in favour of
Bangladesh provided a back to back guarantee covering the residents in
guaranteed amount from an overseas correspondent or other bank Bangladesh
abroad is held by the AD. The AD should satisfy itself about the
bonafides of the overseas guarantee before issuing its own
guarantee/bid bond/performance bond there against.

(c) In all other cases not specified above prior approval of the
Bangladesh Bank is required for issuing guarantees on behalf of
non-residents in favour of the residents in Bangladesh.
Applications for these cases should be made by letter in duplicate
giving full particulars of the guarantee/bond, the period, purpose
and the method by which the AD will be reimbursed in the event
of the guarantee/bond being invoked.
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Guarantee 11. ADs may issue, on behalf of residents, bid bonds/performance

favouring local
project
bonds/guarantees in foreign currency in favour of local project
authorities on authorities against goods/services procurement tenders financed by
behalf of international/foreign donor agencies, on the condition that in case
residents.
the guarantee is invoked the claim there against would be paid only
in Taka equivalent and not in any other currency.

Guarantee 12. Non-resident international agencies may demand bank

favouring a
non-resident on
guarantees from non-resident contractors against supply of
behalf of materials/downpayment for the ongoing projects in Bangladesh
another non- financed by them. Such guarantee on behalf of a non-resident
resident
contractor in favour of the non-resident beneficiary may be issued
by an AD against 100% counter guarantee from a reputed
international bank abroad, or against 100% cash collateral in
foreign exchange received from abroad through banking channel.

Guarantees and 13. ADs may not, without prior approval of Bangladesh Bank,
pledging of
collateral in
furnish guarantees to or hold collaterals on behalf of overseas bank
favour of branches or correspondents in respect of credit facilities or
overseas bank guarantees to be extended by them or for any other purpose. All
branches and
correspondents
applications to Bangladesh Bank should be made by letters giving
details of the purpose for which guarantee is to be furnished or
collateral deposited. Prior approval is not however, necessary in
cases where the ADs are satisfied that the amount of the fixed
deposit or other collateral held by them represents funds remitted to
Bangladesh through normal banking channel from the country of
residence of the borrower.

Renewals of 14. In cases where the extension of loans or overdrafts or

loans,
overdrafts and
guarantees require prior approval of the Bangladesh Bank, the
guarantees renewal of such loans, overdrafts or guarantees shall also require
prior approval of the Bangladesh Bank.
LCs to finance
imports or 15. Nothing in this chapter shall affect the establishment of LCs in
exports not accordance with the provisions of Chapter 7 and the advice,
barred
confirmation and negotiation of credits established by non-resident
banks to finance exports from Bangladesh.