Bangladesh Bank Eases Foreign Loan Guarantee Rules

Commercial banks in Bangladesh will no longer require prior approval from the central bank to accept guarantees from foreign banks when extending loans to companies operating within the country. The decision, issued through a recent regulatory circular, is expected to simplify financing procedures and improve access to credit, particularly for firms that struggle to provide sufficient collateral.

Under the revised policy, banks may directly accept guarantees from overseas financial institutions, provided that the guarantor bank holds a satisfactory credit rating from internationally recognised rating agencies such as Moody’s or S&P Global. Officials of bangladesh bank say the move aims to facilitate smoother financing for businesses while maintaining appropriate risk management standards in the banking sector.

According to central bank officials, many companies operating in Bangladesh—especially multinational corporations and project-based contractors—often lack adequate fixed or movable assets locally to offer as collateral. As a result, they frequently rely on guarantees from international banking partners to secure loans from domestic lenders.

For instance, a company that wins a contract valued at around Tk20 crore may require approximately Tk2 crore in working capital to execute the project. However, when approaching a local bank, the firm may be asked to provide collateral, which it may not possess in sufficient quantity. In such situations, a foreign bank can step in to provide a guarantee, enabling the domestic lender to extend the loan while mitigating financial risk.

Multinational companies commonly obtain guarantees from globally recognised banks such as HSBC, JP Morgan Chase, Bank of America, Bank of China, and Standard Chartered. With the new policy in place, commercial banks will be able to accept these guarantees without seeking prior approval from bangladesh bank, thereby reducing administrative delays.

The regulatory circular specifies that overseas bank guarantees or standby letters of credit must meet strict conditions. They must be unconditional, irrevocable, and payable on first demand. In addition, the issuing foreign institution must maintain a satisfactory credit rating from an internationally recognised rating agency, equivalent to the highest categories under the domestic regulatory rating framework.

Banks and financial institutions in Bangladesh must still adhere to their internal credit risk policies when accepting such guarantees. Lending institutions are required to assess the borrower’s financial condition by analysing audited financial statements, cash flow projections, and other relevant financial indicators before approving any loan facility.

The policy also includes safeguards designed to protect borrowers. No fees, commissions, or economic benefits associated with overseas guarantees or standby letters of credit may be charged to the resident borrower, either directly or indirectly.

Furthermore, lending institutions must ensure that the governing law, dispute resolution mechanism, and enforceability of the overseas guarantees are clearly defined and legally vetted before credit disbursement. In the event that a borrower defaults and the guarantee is invoked, bangladesh bank must be informed immediately.

Regulators have also emphasised that banks must closely monitor the borrower’s business performance after the loan is granted. Lending institutions are expected to ensure improvements in turnover, profitability, and cash flow, alongside satisfactory account conduct.

Key Conditions for Overseas Guarantees

Financial sector analysts believe the measure may encourage investment and facilitate smoother financing for both foreign and domestic companies operating in Bangladesh. By allowing the direct acceptance of internationally backed guarantees, bangladesh bank aims to strengthen credit flow while ensuring stability within the country’s banking system.