Foreign Bank Guarantees Allowed Without Approval

Commercial banks in Bangladesh will now be able to accept guarantees from overseas banks when providing loans to companies operating in the country without obtaining prior approval from bangladesh bank. The regulatory change is intended to make credit access easier for businesses, particularly those that struggle to provide sufficient collateral for loans.

The decision was announced through a circular issued by bangladesh bank, which stated that local banks and financial institutions may accept overseas bank guarantees or standby letters of credit issued by reputable foreign institutions with strong international credit ratings. The move aims to reduce administrative procedures and speed up the lending process while maintaining adequate safeguards for the banking system.

According to senior officials, many companies working in Bangladesh—especially those involved in project-based activities—often face difficulties securing bank loans because they lack enough fixed or movable assets to pledge as collateral. As a result, they frequently seek support from foreign banks that can provide guarantees for their borrowing.

In practical terms, a company may win a project valued at about Tk20 crore but need only around Tk2 crore in working capital from a bank to carry out the work. When approaching a local lender, the firm may be asked to provide collateral that it cannot readily offer. In such cases, a foreign bank may provide a guarantee to support the loan. This arrangement enables the local bank to lend funds while minimising credit risk.

Foreign multinational companies operating in Bangladesh often rely on their international banking partners to issue such guarantees. These partners commonly include large global financial institutions such as HSBC, JP Morgan Chase, Bank of America, Bank of China, and Standard Chartered.

The new regulatory framework specifies several conditions for accepting overseas guarantees. These guarantees or standby letters of credit must be unconditional, irrevocable, and payable on first demand. In addition, the issuing foreign bank must hold a satisfactory credit rating from a recognised international credit rating agency, equivalent to the top categories recognised by bangladesh bank’s regulatory standards.

Despite the relaxation of the approval requirement, local banks must continue to apply their own credit risk management procedures. Lending institutions are required to assess the financial strength and repayment capacity of borrowers by analysing audited financial statements, cash flow projections, and other relevant financial indicators.

The circular also makes it clear that resident borrowers cannot be charged any fees, commissions, or other financial benefits related to these overseas guarantees, either directly or indirectly. This provision is intended to ensure that companies seeking credit are not subjected to additional costs beyond normal lending terms.

Furthermore, banks must carefully verify the legal aspects of the guarantee before disbursing any loan. This includes confirming the governing law, dispute resolution mechanism, and enforceability of the guarantee. These legal conditions must be properly reviewed to ensure that the foreign guarantee can be effectively invoked if necessary.

If a borrower fails to repay the loan and the overseas guarantee is invoked, the lending institution must immediately inform bangladesh bank. The central bank has emphasised that lenders remain responsible for ongoing monitoring of borrowers’ financial performance and loan repayment behaviour.

Banks are also expected to ensure that borrowers show improvement in their business operations after receiving credit. Indicators such as rising turnover, better profitability, stronger cash flow, and proper account conduct will be considered essential for maintaining the lending relationship.

Key Provisions of the Policy

Financial experts believe the initiative could support business expansion by improving access to credit, particularly for multinational companies and firms engaged in large projects. By allowing reputable foreign guarantees to be accepted more easily, bangladesh bank aims to encourage investment and enhance the efficiency of the country’s banking sector while maintaining prudent oversight.