The central bank mulls over relaxing the existing interest cap on private sector foreign loans to help businesses enjoy uninterrupted external borrowing, said a top Bangladesh Bank official yesterday.

At present, businesses are not allowed to take foreign loans at interest rate higher than 5 percent including the London Interbank Offered rate (LIBOR).

Libor has been on the rise since February 7, reaching 2.31 percent, the highest since 2008, which is making it difficult for local businesses to maintain the interest rate cap.

Following requests from businesses and bankers, the central bank has decided to look into the matter, said BB Deputy Governor Ahmed Jamal at a roundtable on external private commercial borrowing by Bangladeshi firms.

The Policy Research Institute organised the roundtable at its office in the capital.

“The country's image will diminish if any borrower fails to repay the loan,” Jamal said.  The Bangladesh Investment Development Authority, the sole authority to give approval to term loans for the private sector, has recently proposed to the central bank to allow businesses to enjoy three-month foreign loans without taking any prior approval.

The central bank is scrutinising the issue positively as part of its ongoing programme to further liberalise the country's foreign exchange regime, the BB deputy governor said. The authority concerned should increase the cap to LIBOR plus 4.50 percent, said Ahsan H Mansur, executive director of the PRI.

The 5 percent all inclusive cap on foreign lending may have also contributed to the decline in disbursement of foreign loans in recent times, he said.

Three factors -- complexity in the application process, involvement of uncoordinated agencies and applications of arbitrary all-in cost cap -- appear to be discouraging entrepreneurs from making use of foreign borrowing.

On average, the private sector utilised less than 50 percent of the approved limit on foreign borrowing because of the complexities, Mansur said. Emphasis should be put in giving loan

approvals in due time as the country will need to increase private sector investment by at least 5 percentage points from the existing 22-23 percent of GDP, Mansur added. The authority concerned should take prudential regulations for private sector foreign loans considering its sensitiveness, said Naser Ezaz Bijoy, chief executive officer of Standard Chartered Bangladesh.

The Asian economic crisis of 1996 emerged because of excess borrowing by businesses from external sources, he said.

The country's entrepreneurs have been facing infrastructural and energy crisis for a long time, which have discouraged them to set up new plants and expand existing ones, said MA Jabbar, managing director of DBL Group.

“We need more fund and the authority concerned should take measures to ensure foreign loans without any complexities,” he added.

The country's banking sector is now facing an acute liquidity crunch, so foreign loans will help in meeting the growing credit demand by the private sector, said Uzma Chowdhury, corporate finance director of Pran-RFL Group.

Sadiq Ahmed, vice-chairman of the PRI, moderated the dialogue, while Zaidi Sattar, chairman of the PRI; Faisal Ahmed, chief economist of the central bank; Masrur Reaz, senior economist of the International Finance Corporation; and Arif Dowla, managing director of ACI Ltd, also spoke.