Ties were chilly between the South Asian neighbours from 2001 to 2006 when Bangladesh was ruled by an Islamist-allied government and New Delhi regularly accused Dhaka of harbouring Indian insurgents and fostering militancy.
"This one-billion-dollar line of credit is the largest ever given by India to any country," said Indian Finance Minister Pranab Mukherjee in Dhaka.
"I am confident that this line of credit will be the stepping stone for a shared destiny and will transform our bilateral engagement," he said at the loan signing ceremony.
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The line of credit also marked the single largest loan Bangladesh has received from any nation, development bank or donor agency, Dhaka's Economic Relations Division secretary Mosharraf Hossain Bhuiyan said.
Mukherjee arrived in Dhaka on Saturday for a lightning visit to attend the loan signing and for talks with government leaders.
He was slated to fly out of the Bangladeshi capital late Saturday.
"The terms of credit are very favourabl