Eastern Bank has struck an interest rate swap deal with Summit Group, a first-of-its-kind agreement for a local bank.
An interest rate swap is a contract between two parties to exchange interest payments with the view to reducing or increasing exposure to fluctuations in interest rates or obtaining a marginally lower interest rate.
The deal struck up yesterday at the EBL headquarters in Dhaka pertains to the interest payment on the $71.25 million loans taken by concerns of Summit Group -- Barisal Power and Summit Narayanganj Power Unit II -- in December 2016.
The interest rate on the loans -- taken from Infrastructure Development Company Ltd (IDCOL) and the Islamic Corporation for the Development of the Private Sector (ICD) -- is 3-month LIBOR plus 4.25 percent.
As per the swap deal, the EBL will pay the interests to the IDCOL and ICD as per the original loan conditions, while the two Summit concerns will pay the local bank a fixed rate of 4.25 percent plus swap rate, which is nearly 3 percent, for the next five years.
At present, the 3-month LIBOR is 2.38 percent; if it shoots upwards of 3 percent anytime over the next five years the two Summit companies profit.
Conversely, if the rate stays the same or declines, the EBL profits as the fixed payments received from Summit would be higher than what it would be paying out to the IDCOL and ICD.
“This is a first-of-its-kind deal executed by a private commercial bank in Bangladesh,” said Ali Reza Iftekhar, managing director of the EBL, at the agreement signing ceremony.
Interest rate swaps are becoming increasingly popular among all the major global producers and traders given growing volatility in the market, he said.
“This landmark deal opens up the possibility for the EBL to provide hedging facility to Bangladeshi enterprises to better manage their price risks,” said Iftekhar, also a former chairman of the Association of Bankers, Bangladesh, a platform of private banks' chief executive officers.
Azeeza Aziz Khan, director of Summit Corporation, expressed gratitude to the EBL as the lender has kept its faith on Summit.
Abdul Wadud, managing director of Summit Power, said that it was a unique agreement by the EBL and Summit.