Central Bank Simplifies Foreign Guarantee Rules

Commercial banks in Bangladesh have been granted greater flexibility in extending credit to companies operating in the country, following a new policy allowing them to accept guarantees from overseas banks without seeking prior approval from bangladesh bank. The measure is expected to streamline the lending process and improve access to financing, particularly for firms that lack sufficient collateral within the country.

Under the updated guidelines issued by bangladesh bank, local banks and financial institutions may accept guarantees or standby letters of credit from foreign banks with strong credit ratings from internationally recognised rating agencies such as Moody’s and S&P Global. Previously, banks often needed regulatory approval before accepting such foreign guarantees, which could delay loan processing.

Senior officials of bangladesh bank said the policy change is designed to support business operations and facilitate smoother credit flows, especially for companies undertaking project-based work or operating in sectors where tangible assets are limited. Many businesses in Bangladesh, including subsidiaries of multinational corporations, do not always maintain substantial fixed or movable assets locally that can be pledged as collateral for bank loans.

For example, a company may secure a project valued at Tk20 crore but require only Tk2 crore in short-term financing to implement the work. In many cases, domestic banks require collateral to approve such loans. When the borrowing firm cannot provide adequate security, a reputable foreign bank may issue a guarantee to support the loan. This arrangement reduces the lender’s risk while enabling the company to obtain the required financing.

Multinational corporations operating in Bangladesh often obtain such guarantees from leading global banks. These institutions commonly include HSBC, JP Morgan Chase, Bank of America, Bank of China, and Standard Chartered, which possess strong international credit ratings and extensive global operations.

The circular issued by bangladesh bank outlines several mandatory conditions for accepting overseas guarantees or standby letters of credit. These financial instruments must be unconditional, irrevocable, and payable on first demand. Moreover, the issuing foreign bank must hold a satisfactory credit rating from a recognised international credit rating agency, equivalent to the highest categories under the central bank’s regulatory rating framework.

Domestic lending institutions must still follow their own internal credit policies and risk management standards before approving loans backed by foreign guarantees. Banks are required to assess the financial health of the borrower through audited financial statements, detailed cash flow analysis, and other relevant indicators of financial performance.

The new rules also include safeguards to prevent additional financial burdens on borrowers. No fees, commissions, or other economic benefits related to these overseas guarantees may be charged to the resident borrower either directly or indirectly.

Additionally, lending banks must ensure that the governing law, dispute resolution procedures, and enforceability of the guarantees are clearly defined and legally verified before loan disbursement. In cases where a borrower fails to meet repayment obligations and the guarantee is invoked, bangladesh bank must be notified immediately.

Regulators have also stressed the importance of ongoing monitoring. Banks must ensure that the borrowing entity demonstrates improvement in business performance, including growth in turnover, profitability, and cash flow, along with satisfactory management of loan accounts.

Main Requirements for Overseas Guarantees

Financial analysts believe the initiative will strengthen the investment environment by enabling companies to access credit more easily while maintaining prudent oversight within the country’s banking sector. By allowing direct acceptance of credible foreign guarantees, bangladesh bank aims to promote business activity without compromising financial stability.