Merchant bank and Obu

Some major activities of Merchant Bank in Bangladesh:

Securities and Exchange Commission (SEC) originates a regulation in 1996 on merchant banking activities specifically- “SEC (Merchant banker and Portfolio Manager) Regulation,1996”. As per regulations, a merchant bank is allowed to perform four types of activities:

 Issue Management

The Issue Management group is capable of devising innovative solution for raising capital – debt e.g. placement of bonds and debentures, and raising equity through private and public placement – from the market suiting the unique needs and constraints of the corporate clients.  All corporate bodies

Underwriting

Underwriting refers to the guarantee by the underwriters that in the event of under-subscription, the underwriter will take up the under-subscribed amount on pro-rata basis upon payment of price of that option 

Portfolio Management

Merchant banks allow small investors to open investor account with merchant banks and provide support for the purchase and sales of shares. Clients shall have absolute discretionary power to make investment decision. Individuals, Professionals, & Corporate Bodies.

  
Corporate Advising

Through corporate advising, the merchant bank helps the issuer analyses it’s financing needs and suggests various ways to raise needed funds.All corporate bodies

An offshore bank is a bank located outside the country of residence of the depositor, typically in a low tax jurisdiction (or tax haven) that provides financial and legal advantages. But practically, any banking unit (in Bangladesh with prior approval from Bangladesh Bank)  may be treated as off shore banking unit irrespective of geographical location or presence, which operates all transactions in convertible FC and is free to accept deposit/ borrow fund from abroad & make advance/ investment abroad

Advantages of OBU

1. Greater privacy
2. Less restrictive legal regulation
3. Low or no taxation
4. Easy access to deposits

5. Receipt & utilization of fund at lower rate.

6. No exchange difference to be paid by the client

7. Protection against local political or financial instability

Main features of off shore centers/units

1. All transactions are done in FC and no local currency is allowed.

2. Local capital requirement is either non-existent or extremely low.

3. Taxes including with holding taxes on internal income and other forms of levies are practically non-existent.

4. Entry of foreign banks to conduct off shore business.

5. Licence fee for registration and operation is either nil or very low.

6. Separate reporting/accounting

OBU : Bangladesh Perspective

In Bangladesh off shore banking was started in 1985 and Bangladesh Bank declared its policy in this respect vide BRPD circular No. BCD(P) 744(27) on 17th December, 1985. The primary objective of off-shore banking was to activate financing business and industrial activities in the newly created Export Processing Zones (EPZ).

Rules & Regulations for OBU Operations

1. The OBU will be a part of a bank whether incorporated in Bangladesh or outside Bangladesh but it shall maintain its own separate accounts relating to off shore banking business.

2. The OBU will have to obtain licence from Bangladesh Bank and the operations of the unit shall be subject to the relevant laws of Bangladesh.

3. The OBU will be free to accept deposit and borrow from abroad, make advances/investments abroad and also make permissible transactions with Type-A industries in EPZs.

4. There will be no statutory capital and reserve or liquidity requirement for an OBU.

5. The OBU will be allowed to carry on transactions in freely convertible FC
6. Industrial units outside the EPZs and Type-B & Type-C units in EPZ may avail Term Investment.
7. OBU will render Bill Discounting Services to the AD Branches in Bangladesh under UPAS (Usance Payment At Sight) system.

8. Local banks may also maintain foreign currency accounts with OBUs in the manner they maintain such accounts with their foreign correspondents.

9. Records of OBUs will not be accessible to anyone in Bangladesh except Bangladesh Bank and will submit reports/returns to Bangladesh Bank.

10. OBUs would be free to take out insurance abroad and not be subjected to local insurance laws.

11. OBUs would get coverage under EPZA Act. 1980.

12. Interest payable on foreign currency loans/deposits obtained by OBUs from outside Bangladesh will be exempted from payment of income tax.

13. After obtaining a licence for OBU, a registration fee of USD 5,000 is initially payable by the bank to EPZ Authority and a normal renewal fee each year.

Area of Operations for OBU

1. Deposit Collection
2. Investment/Credit Deployment
3. Fund Collection/Borrowing
4. UPAS
5. All FC related transactions for its clients.

Client of OBU

1. Non-resident (Individual and or Industry)
2. Bangladeshi National working abroad.
3. Type-A Unit (100% foreign owned) operating in EPZ & outside EPZ
4. Type-B, Type-C and industrial units outside the EPZ (only for term loan)
5. AD Branch under UPAS facilities (for Bill discounting)

Compliance to Regulatory authority

1. Financial statements as per Bangladesh Bank BRPD Circular No. 14 dated 25.06.2003.

2. Statement of Classification and provisioning of Investment as per BRPD Circular No. 05 dated 05.06.2006

3. Statement S-11 for reporting of Foreign Exchange transactions as per FE Circular No. 13 dated 22.09.2008 and as per Guidelines for Foreign Exchange Transactions Vol-II, 2009.

4. Any other statement as per requirement of Head Office and other regulatory authorities including Bangladesh bank time to time.

Off-shore Banking Unit (OBU) in IBBL

1. IBBL started its OBU operation in the year 2010 with the approval of
2. Bangladesh    Bank.

3.  At present Head Office Complex Branch and Agrabad Branch are
4. operating the function of OBU for IBBL and Uttara branch will also join
5. the journey very soon

7.  IBBL is mainly extending UPAS facilities through OBU

Why OBU investment is decreasing in IBBL as well as Bangladesh

1. BIDA is not giving new approval

2. Bangladesh Bank also does not want to increase OBU funding because it discourages local currency funding.

NEW OBU POLICY

 Bangladesh Bank has come up with a comprehensive guideline on Offshore Banking Operations on February 25, 2019 to bring offshore banking under a stringent regulatory framework. The new policy offered a lot of changes and imposed restrictions on export financing and others. Later on, Bangladesh Bank eased the policy by amending few of its clauses through the revised circular issued in May 27, 2019.

The major changes brought into the policy amendment include the following:

● Allowing local companies to avail foreign currency loan subject to approval from Bangladesh Bank

● Exporters to avail short term financing against shipments, which is popularly known as export bill discounting

● Joint venture companies operating in export processing zones/economic zones/hi-tech parks to avail short term loan facilities without prior approval from Bangladesh Bank.

The revised policy also addressed a few other issues such as allowing banks to borrow/lend from/to other OBUs in Bangladesh, waived from maintaining separate nostro account etc.

MAINTENANCE OF CRR AND SLR: The biggest challenge of the new policy is to apply Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) on OBU liabilities which has not been waived or restated despite appeals from different bodies. The magnitude on the bank's OBU for managing this additional liquidity (CRR: 5.50 per cent & SLR: 13.00 per cent; together 18.50 per cent) would be challenging while the industry is already facing liquidity challenges. This decision will significantly reduce the industry's loanable fund and create pressure on local currency liquidity. The main impact will be in terms of maintenance of a portion of CRR in local currency and almost entire amount of SLR in local currency; i.e. if we consider BDT 600. billion as OBU liability, then BDT 111 billion would be required for CRR & SLR. This is a hefty additional requirement for the banks effective from September 01, 2019 to maintain with Bangladesh Bank or through Bangladesh Bank approved securities or in nostro accounts.

INCREASED OBU BORROWING COST: Imposing CRR and SLR on OBU liabilities will increase the OBU funding cost significantly which will make OBU loans unattractive. The cost impact on OBU for applying CRR & SLR would be around 0.50-0.80 per cent p.a. for each dollar of OBU liabilities. Other impacts include maintaining provisions for OBU exposures, preserving capital and Interest payable on OBU liabilities are subject to Withholding Tax which was earlier exempted. Moreover, the lending rate for import and export bill discounting is capped at LIBOR+3.50 per cent p.a. which may not be reasonable enough to offset the cost of borrowing along with CRR and SLR cost, provision, capital charge, and operational costs. If we consider average cost of borrowing LIBOR+ 2.00 per cent, CRR & SLR cost 0.60 per cent, provision, capital charge, and operational costs, it will be really difficult to lend within LIBOR+3.50 per cent as capped by Bangladesh Bank. 

GLOBAL OBU PRACTICES: The main purpose behind the establishment of OBU was to extend foreign currency lending at a lower cost to eligible borrowers to facilitate trade finance and long term project financing. As of now, most of the transactions in OBU are on discounting of local import and export bills under Usance Payable at Sight (UPAS) arrangement while a smaller part in project finance or long term loans. Another objective was to attract more international investment by offering tax and other benefits. Globally, most of the offshore banks are located in jurisdictions that offer low taxation, or no taxation, commonly known as 'tax haven' countries. Offshore banks which are located in stricter regulatory jurisdictions, many of them being subsidiaries of larger onshore institutions, however operate under a separate flexible foreign exchange guideline. In most of the jurisdictions, capital requirement for OBU is either non-existent or extremely low, and taxes, VAT and other forms of levies are practically non-existent. Neighbouring countries like India offer IFCS Banking Unit licence (IBU) which is exempted from CRR and SLR requirements.

LOCAL BANKS PUSHED INTO DISADVANTAGED POSITION: It is notable that, due to banks expanding OBU facility, both confirmation cost and financing cost of usance import bills came down significantly over the past few years. OBUs have made it easy to access low-cost financing opportunity for both importers and exporters of the country, which would have otherwise been met by borrowing from banks in local currencies at higher interest rates or through overseas bank's counter. The new local OBU policy will increase the cost of fund for OBU significantly and make local bank's OBU unattractive while overseas banks and lenders will enjoy advantage as they are not subject to these regulations.

Another policy differentiation is when multinational organisations/overseas lenders directly lend to local corporates. In most of the cases these multinational organisations do not pay any taxes. As a result, local bank's OBUs are forced into non-competitive position both from CRR & SLR requirements and higher taxed entities.