The Bangladesh Bank's recent decision to relax lending restrictions has sparked both excitement and caution among financial experts. This move, effective immediately, allows banks to lend up to 25% of their capital to a single borrower or business group, a significant increase from the previous 15% ceiling. The suspension of the earlier cap until June 2028 is a substantial boost for large conglomerates, industrial groups, and trading houses seeking financing from a single bank. For instance, a bank with Tk1,000 crore in capital can now lend Tk250 crore to one borrower group, a substantial increase from the previous Tk150 crore limit.
This relaxation is particularly timely, as it addresses the ongoing pressure on business financing. The central bank's reduction in the risk-weight treatment of non-funded exposures, such as letters of credit (LCs) and guarantees, further enhances the lending capacity for trade finance activities. By counting only 25% of the value of such facilities against lending limits, banks can now open import and export LCs without breaching regulatory exposure limits. This change effectively frees up substantial lending capacity for trade finance, making it easier for banks to support importers facing higher working capital needs amid foreign exchange volatility and elevated trade costs.
However, this decision is not without its risks. Bankers have warned that increasing the single-borrower limit raises concentration risks for banks. Defaults by large corporate groups could have a proportionately bigger impact on financial stability, as these large borrowers were previously restricted to a 15% ceiling. In 2022, the central bank tightened single-borrower exposure rules to reduce excessive concentration of loans among large business groups, indicating that the current relaxation may need to be carefully monitored.
From my perspective, this move by the Bangladesh Bank is a strategic response to the evolving needs of the business sector. While it provides much-needed support to struggling businesses, particularly importers, it also highlights the importance of maintaining a balanced approach to lending. The potential concentration risks cannot be ignored, and the central bank's decision to suspend the earlier cap until 2028 suggests a cautious approach. As an expert, I believe that this decision raises a deeper question about the long-term sustainability of such lending practices and the need for ongoing regulatory adjustments to ensure financial stability.
