Bangladesh Bank is yet to prepare guidelines on the issuance of commercial papers — an unsecured debt instrument — by companies to banks for taking loans although the use of the instrument has increased since its inception in the country in 2013.
BB officials said as banks gave loan against the commercial papers without taking any collateral, a rampant use of the instrument for risky ventures would bring instability to the country’s financial market.
In financial terms, a commercial paper is an unsecured promissory note with a fixed maturity of around 365 days.
A commercial paper is an instrument which is used by a corporate group to take loan from a bank while another bank has to act as an issuing and paying agent (IPA) in favour of the group.
The bank which purchases the commercial paper will receive the amount of loan from the IPA bank if the corporate group fails to repay the loan in due time.
The corporate groups rated high by the reputed credit rating agencies in the developed countries are usually allowed to issue commercial papers in accordance with the rules and regulations set by the financial regulators of the countries, a BB official told New Age on Monday.
The commercial papers played a role in fuelling the recent economic recession in North America and Europe as a number of conglomerate groups and banks became defaulters due to their failure in repaying the loans taken against the papers, he said.
According to the BB data, Pran Agro Ltd issued commercial paper worth Tk 20 crore with 10.25 per cent rate of interest to Eastern Bank while Mutual Trust Bank acted as an IPA.
Similarly, Butterfly Marketing Ltd issued commercial paper worth Tk 50 crore with 10.25 per cent rate of interest to Eastern Bank while Dhaka Bank acted as an IPA.
State-owned Sonali Bank has recently applied to the central bank to act as IPA for a commercial paper worth Tk 100 crore.
A number of banks and non-bank financial institutions including The City Bank, Prime Bank and IDLC have already involved in purchasing or issuing bank guarantee for the commercial paper.
The BB official feared that the financial sector would face debacle if the corporate groups rated low by the credit rating agencies issued the commercial papers.
‘Our neighbouring counties like Pakistan and India have already issued guidelines on the commercial papers and they have set a number of conditions on the issuance on such paper,’ he said.
In the developed countries, the corporate groups are now allowed to issue commercial papers if they hold no defaulted loan in last 10 years.
The corporate groups have to show healthy profits in last few years to get approval to their commercial papers.
The BB official said that the central bank should also work out the amount of commercial papers enough for the country as a huge number of commercial papers usually created obstacle to achieving the expected GDP growth.
Fresh investment to set up new industrial unit will also face crisis if banks give more attention to the short-term commercial paper instead of long-term financing, he said.
The long-term financing is usually made to set up fresh industrial units which boost up the GDP growth.
Eastern Bank managing director Ali Reza Iftekhar told New Age on Thursday, ‘Bank loans will become defaulted if commercial paper issuing corporate groups have no reputation.’
‘It is an important issue to prepare guidelines on the commercial paper. I will request BB governor Atiur Rahman to take measure in this regard,’ he said.
EBL is the first bank in the country to purchase commercial paper and it considered the reputation of the corporate groups when it took decision about the matter, Iftekhar, also president of Association of Bankers, Bangladesh, said.
Source: New Age
