Interest rate of Indian state credit higher than other overseas loans

A proposed Indian credit worth $1 billion for Bangladesh could be the easiest loan deal between the two neighbours but its interest rate is going to be higher compared with loans from multilateral and bilateral lenders, officials and experts said. Moreover, indications are there that Dhaka might be forced to swallow the ‘costly’ form of financial assistances, suppliers’ credit, under which New Delhi would sell out its products as a condition to bankrolling the credit.
The prime minister’s economic adviser Mashiur Rahman at a seminar on Sunday said the proposed loan programme under the Indian state credit had been offered at an interest rate of 1.75 per cent plus LIBOR (London Inter-bank Offered Rate) with a repayment period of 20 years after a grace period of five years. 

‘This will be the easiest loan Bangladesh has ever received from its big neighbours,’ the communications minister, Abul Hossain, told New Age.    The communication ministry is expected to receive a half of the amount for funding a dozen transport-related projects. The credit was sought during the prime minister’s visit to New Delhi in January, he said. 
Ever since the visit and Hasina-Manmohan joint communiqué, economic experts and analysts inquired about the proposed billion-dollar credit programme as available public data showed Bangladesh had been receiving loans from many bilateral countries and multilateral lenders at a lower than 1.75 per cent interest rate.
Since 1973, Bangladesh has signed more than 150 loan deals with the Asian Development Bank. The interest rate of about 90 per cent of such deals is 1 per cent. Between 1988 and 2008, Dhaka struck 39 credit deals with Tokyo, all on 1 per cent interest rate, according to an ERD publication.
The experts inquired about the nature of the loans as the government has not clarified the matter as yet. Former caretaker government finance adviser Mirza Azizul Islam observed there was ambiguity in the proposed credit which needed to be clarified. He observed if it was suppliers’ credit, the country might be compelled to buy products from India at a higher rate.
Records showed more than one-third of the loans Dhaka received from New Delhi until 2008 were hard-term borrowings with higher than 5 per cent interest rate plus LIBOR and the suppliers’ credit which forced the recipient country to buy commodities from the lending country.
Since its independence in 1971, Bangladesh has received assistance of around $440 million in the form grants ($113 million), commodity aid ($151.1 million) and project aid ($176) till 2008 from New Delhi, according to a publication of the Economic Relations Division.
The first bilateral financial deal was signed on May 15, 1972, between Dhaka and New Delhi for bankrolling of 80 million Indian rupees. It was mostly hard-term borrowing as its interest rate was 6.25 per cent with a five-year repayment period and one-year grace period.
There have been 24 other hard-term loans and 18 suppliers’ credits offered by India for Bangladesh until now. For the suppliers’ credits, Bangladesh needs to bear service charges of 12.5 per cent in addition to around 5 per cent in annual interest rate, said the ERD publication.
A meeting between the finance minister, Abul Maal Abdul Muhith, and the Indian high commissioner to Bangladesh, Rajeet Mitter, on Saturday on the implementation aspects of the proposed billion-dollar credit indicated that bulk of the amount would be in the form of suppliers’ credit.
Rajeet Mitter told reporters after the meeting technical works had already begun under the joint communiqué.    ‘Three components — supply of locomotives and passenger coaches, buses, and dredgers — were included in the joint communiqué the technical works of which have already begun,’ he said.    In reply to a question, he said they had also talks with their Bangladesh counterparts about the required supplies and the specification.
Multilateral lenders such as the International Monetary Fund and the World Bank have strong reservations about suppliers’ credit.    They have always suggested that the country should not to go for suppliers’ credit as purchase rate for products becomes at last double than the actual prices.

– Shakhawat Hossain, The Daily New Age, 14 February 2010


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