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Offshore Banking in Bangladesh

Offshore banking units are allowed to offer services in foreign currencies. The banking unit opened up banking facilities for the Type-A, industry situated at EPZ area and extending discounting facilities to the ADs in order to meet up their obligations abroad at relatively lower interest rate. However, enterprise in the country may also enjoy foreign currency loan from the Offshore Banking Unit at lower interest rate subject to the approval of the Board of Investment (BOI). Practically, the major lending function as a part of core banking activities are basically captured by the OBUs belonging to foreign banks due to availability of low cost fund and global network. OBUs of the local banks are basically concentrating on discounting business of its different ADs import bills under UPAS credit arrangement.
UPAS Letter of Credit Through Offshore Banking Unit (OBU)
Financing through OBUs under UPAS arrangement has become the main function of the OBUs in the country. Practically, the major lending functions as a part of core banking activities are basically captured by the OBUs belonging to foreign banks due to availability of low cost fund and global network. OBUs of the local banks are basically concentrating on discounting business of its different ADs import ills under UPAS credit arrangement. The operational procedure (flow chart) of UPAS credit under OBU arrangement is depicted below. However, in recent time, OBUs started discounting services to the ADs local export bill as well. Banks render UPAS credit facilities to its valued customer in the following two ways: One, UPAS credit service through own offshore banking unit (OBU); two, UPAS credit service through overseas Correspondent Bank.

Operational Procedure of UPAS Documentary Credit by OBU
Step-1: Purchase/Sale Agreement
Step-2: Financing Arrangement between the importer and the bank
Step-3: Importer approaches to Issue LC
Step-4: Issuing of LC according
Step-5: Discounting by OBU
Step-6: Lodgment & Reporting to respective authority
Step-7: Reimbursement to OBU
Few Banks in our country started providing UPAS facility early 2008. During that time, these types of LC issuance were very limited among the big corporate of our country. Following some policy changes, the use of UPAS expanded. However, it is mentionable that although OBUs [especially PCBs and IBs] has increased capacity to accommodate UPAS transactions, major exposure is still lying in foreign books. A few OBUs of FCBs hold around 50 percent of the UPAS market share. With the expansion of the use of UPAS In between April 13 and April 2014, the volume increased from around USD 520 million to USD 3355 million (BB information). This is over 60 percent of the total import finance and around 30 percent of the total trade finance volume of the country. Two FCBs hold the maximum portion of these outstanding liabilities. It can be observed (in 2014) that Bangladesh Bank has already addressed the issue by allocating the liabilities on quarterly basis to minimize the potential impact of sudden high outflows of foreign currency in near future?”. There are a few examples of using SWAPs by the OBUs. To inject liquidity, Bangladesh Bank developed a USD/BDT swap line facility for OBUs of Bangladesh in November, 2013. The maximum amount of swap for each bank was USD 20 million. The central bank of Bangladesh has introduced US dollar (USD) and Bangladesh Taka (BDT) swap arrangement through OBUs of the commercial banks. Under the arrangement, the banks are allowed to swap maximum $20 million from Bangladesh Bank (BB) against their BDT through their OBUs for maximum six months. The interest rate for USD was 6month LIBOR+1% while that of taka was Reverse Repo Rate. Later Bangladesh Bank withdraws that swap line. One important observation in connection with import finance was the huge increase in the buyers’ credit  through OBU/correspondent bank) under deferred payment credit popularly known as UPAS. Bangladesh Bank addressed the issue by allocating the liabilities on quarterly basis to minimize the potential impact of sudden high outflows of foreign currency in near future.

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