Bangladesh Bank has allowed local companies to arrange foreign-currency bank guarantees and standby letters of credit (SBLCs) for foreign firms that secure contracts through international tenders for projects in Bangladesh.
The move is expected to make it easier for foreign companies to participate in projects in Bangladesh where bid bonds, performance guarantees or SBLCs are required by government agencies and project authorities.
The central bank issued a circular in this regard today.
Under the new arrangement, authorised dealer (AD) banks can issue guarantees or SBLCs in foreign currency on behalf of resident entities in favour of government authorities, departments, agencies, state-owned enterprises and project or procurement entities.
The facility will be available to local companies acting as strategic partners, local agents or authorised representatives of foreign firms that secure contracts or work orders through international tenders, according to the circular.
The decision provides local companies with a formal channel to support their foreign partners in meeting financial guarantee requirements attached to project contracts.
However, Bangladesh Bank said the local company must have a genuine contractual or commercial relationship with the foreign contractor and provide documents to the bank proving the relationship.
The underlying contract must also allow the project authority or procuring entity to accept the guarantee or SBLC arranged by the local company.
AD banks will have to assess the risks before issuing the guarantees and ensure that their exposure is adequately covered by collateral or counter-security, depending on the nature and extent of the risk.
The agreements between local and foreign companies must clearly specify how the local entity will be reimbursed for costs, liabilities and expenses arising from the guarantee or SBLC.
The agreements must also include arrangements for settling any amount the bank may have to pay if the guarantee is invoked.
AD banks will have to follow existing credit norms, risk-management policies and prudential requirements while issuing the guarantees.
They must also comply with the prescribed single-borrower exposure limit and obtain approval from their boards or competent authorities, where required.
If a guarantee is invoked, the claim will ordinarily be settled in the taka equivalent.
However, where the tender or contract specifically requires payment in foreign currency, the bank may settle the claim in foreign currency through the RTGS system.
BB said the measure was taken to facilitate the participation of foreign companies in projects in Bangladesh by enabling their local partners to arrange the guarantees and SBLCs required by project authorities.
