After initial rejection, Bangladesh Bank reconsiders MGI's $80m IFC loan

The Bangladesh Bank is now reconsidering an application by Meghna Group of Industries (MGI) to obtain an $80 million loan from the International Finance Corporation (IFC) for the purchase of four ships, after initially turning it down.

Private commercial lender Modhumoti Bank applied to the central bank on behalf of MGI for a no-objection certificate (NOC) to receive the loan proceeds.

“The application was initially rejected over concerns about the lack of hedging against exchange rate risks and the potential impact on local banks if strong borrowers shift to foreign lenders,” said BB Deputy Governor Md Kabir Ahmed.

However, the central bank is now reviewing the proposal in an effort to support healthy large businesses and facilitate the expansion of the country's domestic shipping fleet, he told The Daily Star after this newspaper reported on the BB's reluctance to approve the loan.

On the issue, Mostafa Kamal, chairman and managing director of MGI, said the central bank is reviewing the application while the company responds to its queries.

"To obtain an IFC loan, many conditions must be met. After fulfilling all of them, we received approval for an $80 million loan to purchase four ships," he said earlier, adding that MGI has sufficient foreign exchange earnings to service the debt.

MGI is one of Bangladesh's largest conglomerates and a major commodity importer and processor. The group has been operating ships on international sea routes since 2010 and currently owns 27 ocean-going mother vessels. In addition, it has a fleet of 145 feeder vessels, including 130 of its own, operating on inland waterways since 1996.

A senior central bank official, speaking on condition of anonymity, said that companies operating under the Bangladesh Investment Development Authority (Bida) receive initial approval for foreign loans from the investment promotion agency.

However, companies operating under the Bangladesh Economic Zones Authority (Beza) must obtain an NOC from the central bank before taking foreign loans, he said.

The MGI entity seeking the loan falls under Beza's jurisdiction and therefore requires approval from Bangladesh Bank.

"Considering the repayment risks associated with foreign borrowing, the application was initially rejected," the official said.

Earlier, Arief Hossain Khan, executive director and spokesperson of Bangladesh Bank, told The Daily Star that the central bank's caution regarding external borrowing stems from the systemic risks such loans can pose.

"If a company takes a foreign loan and later fails to repay it, the repayment burden can ultimately fall on the central bank and the state," he said.

He added that the BB welcomes foreign direct investment and equity participation but views foreign loans as riskier because they must be repaid in foreign currency.

"If production is mainly for the domestic market and does not generate export earnings, there is no foreign exchange inflow to repay the debt. That is why the central bank closely reviews such proposals and does not always approve them," he said.

The central bank recently approved a case involving Popular Pharmaceuticals, allowing the company to obtain a $30 million IFC loan in local currency to repay working capital loans taken from domestic banks.

The Bida scrutiny committee on foreign loans and suppliers' credit approved the loan at its 188th meeting on April 29. The BB governor chairs the committee.

Bida officials said the loan was approved to help consolidate high-interest borrowing from local banks. The loan will be disbursed in taka, and both the interest calculation and repayment will be made in local currency. The approval also carried a condition that the decision would not be treated as a precedent for similar cases.

Regarding the matter, the BB spokesperson said that when loans are disbursed and repaid in local currency, foreign exchange risks are avoided.