Bangladesh Bank has asked banks to tighten their lending in foreign currency through their offshore banking units with the view to stabilising the exchange rate.
The instruction came at a meeting yesterday with the top executives of banks that have offshore banking units.
The central bank is concerned about banks' offshore exposure as they are collecting foreign currency funds from local sources instead of foreign sources, putting pressure on the foreign exchange rate, said SK Sur Chowdhury, deputy governor of the BB.
“An asset liabilities' mismatch has been created, which, in turn, is creating volatility in the exchange rates.”
Subsequently, the banks were instructed to abandon their aggressive approach to lending in foreign currency.
“Banks have been asked to reduce onshore borrowing to strike a balance between the inflows and outflows of foreign currency,” Chowdhury added.
At present, the offshore units' total outstanding loans stand at $6.4 billion, which is about Tk 51,200 crore. Of the total offshore exposure, 31.6 percent was borrowed from local source.
The main function of the offshore units is to borrow from foreign sources and lend them to clients who have foreign earnings, said Syed Mahbubur Rahman, managing director of Dhaka Bank.
But banks collect a major portion of their foreign currency funds from local sources, like their own treasury department or other local banks on a short-term, and lend at their offshore units for long-term.
As a result, a tenure mismatch has been created, putting the banks at risk, Rahman said.
Currently, 36 of the 57 banks in the country are running offshore units as per a directive issued by the Banking Control Department of the BB on December 17, 1985.
The central bank is now working on issuing a fresh directive aiming to mitigate the risks of offshore operations in Bangladesh through strengthened monitoring and supervision.
The BB is also concerned about the mismatch in deposit and credit growth, said a senior official of a private bank.
At the meeting, bankers explained that the high credit growth is due to infrastructure and power project lending, he said.
Bankers were suggested to be cautious about lending and bringing balance between deposit and credit growth, he added.
On July 30, the rate of deposit growth stood at 10.88 percent, down from 12.21 percent three months earlier. The deposit growth was 13.13 percent on December 31, 2016.
The deposits had a slower growth than that of the credit growth in the first seven months of the year as the depositors were discouraged to keep money with banks due to the low interest rates.
On the other hand, the overall credit growth as of July 27 stood at 17.16 percent, up from 15.90 percent on March 30. It was 15.32 percent on December 31, 2016.