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Definition: Back to Back Loan
ABack to Back Loanis a loan agreement between two companies in different countries (let it be A & B) such that company of country A will loan a certain amount in its own currency to company of country B and similarly company of country B will loan certain amount in its own currency to company of country A. In such cases, loan is actually given to subsidiary of foreign company. Thus it eliminates the concept of currency fluctuations as they are loaned with the currency of country in which they are situated and both companies benefit from fixed rates.
Following diagram gives a brief view of back to back loan:
Back to back loan are generally found in unstable economies where chances of currency fluctuations are high and company is in dire need of money. Most back-to-back loans are due within 10 years. Such type of loans are also called as parallel loans except for the thing that unlike in back to back loan, here, the parent company takes responsibility to payback whole amount if subsidiary defaults.
Consider a company PQR in India and company DEF in America. Now for example both the companies need money but are concerned about the fluctuation of rupee with respect to dollar. Then company PQR will loan certain amount (in rupees) to company DEF such that company DEF gives same worth of amount to company PQR in dollars. This is called as back to back loan. In such cases, loan is given on current exchange rates and an interest rate is fixed. After the agreed period, companies payback the loan with interest at agreed rates, thus insuring against the currency risk during the term of loan.