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Many banks in Bangladesh have reined in opening most of the letters of credit (LC), including for importing daily necessities, due to the ongoing crisis of foreign currencies in the country.
Even with the dollars coming from remittances and export earnings, the bank authorities are unable to pay their import payment obligations and foreign debts of their customers. Not only that, bank officials are even hesitant to open LCs worth $200,000 to $300,000.
Against the backdrop of banks refusing to open LCs for general customers, many small businessmen are lobbying the chairman-MDs of the banks to open LC.
Mahmud Hossain Opu/Dhaka Tribune
However, directors of various private banks and influential businessmen are still opening LCs according to their needs.
The Bangladesh Bank says that the banks are opening commercial LCs every day.
Bangladesh Bank Executive Director GM Abul Kalam Azad said: “Bangladesh Bank has not given any instructions to stop opening LCs despite the dollar shortage.”
He said banks are opening LCs against products as per capacity. In the last 10 days, 55 banks have opened LC for the import of goods.
Bangladesh Bank is regularly supplying dollars to meet the market demand, he said, adding: “It will continue in the future as well.”
However, the managing directors of several banks said that they are encouraged not to open LCs for the time being if they cannot raise foreign currency themselves.
Wishing to remain anonymous, a managing director of a private bank said: “At least 22 to 23 banks in the country do not have any dollars to meet their LC liabilities. These banks have fallen into deficit while paying the import liabilities.”
Banks struggling
While many banks stopped opening LCs even for importing daily necessities, the few banks that still have dollars are also struggling.
Due to the crisis, the inter-bank foreign exchange market has become almost collapsed.
According to Bangladesh Bank, Agrani Bank’s authorized dollar reserve capacity is $52 million.
That is, even after paying the import liability, the bank can keep this amount of dollars as its own.
However, central bank data show that the state-owned bank currently has no dollars to pay its liabilities. On the contrary, the bank has spent $256 million.
Due to the dollar crisis, the state-owned Agrani Bank is taking more time than usual to pay for LCs, which is a common scenario in most other banks in the country as well.
Some banks are even taking a month to clear payment of LCs.
In this situation, the image of the banking sector of Bangladesh is being undermined by the foreign banks that have guaranteed LC.
Many foreign banks have now started reducing their credit lines for Bangladesh amid the crisis.
Euro, Hong Kong dollar, US dollar, Japanese yen, pound and Chinese 100 yuan banknotes are seen in this picture illustration, January 21, 2016 Reuters
According to Bangladesh Bank, Standard Chartered Bank, Middle East-based Mashreq Bank, Abu Dhabi Commercial Bank (ADCB), Germany-based Commerce Bank, India’s Axis Bank have failed to pay several LCs on time recently.
Even the country’s largest banks like Islami Bank Bangladesh Limited, the largest remittance collector, could not clear LC liabilities on time.
About 30% of Bangladesh’s total remittance flow comes through Islami Bank. Additionally, in terms of export income, it ranks at the top.
Despite all these, the top bank of the country is struggling with the payment of import liabilities.
Apart from Islami Bank, state-owned Sonali, Agrani, Janata, and Rupali banks have already delayed the payment of several LCs.
According to Bangladesh Bank, at the end of last July, Rupali Bank declined demand for opening an import LC of $15.5 million from a government institution.
Another state-owned Sonali Bank said it was unable to send Tk105 crore against 33 payments of various amounts outside the country.
In both cases, foreign exchange crisis and exchange rate losses are cited as reasons.
According to the existing policy of Bangladesh Bank, the country’s banks can reserve foreign currency equivalent to 15% of their regulatory capital. But many banks are now in deficit.
Meanwhile, the top executives of the banks presented their crisis to Bangladesh Bank. The bank executives sought dollar support from the central bank, portraying the true picture of the dollar crisis.
Mutual Trust Bank Managing Director (MD) Syed Mahbubur Rahman said: “70% of our bank’s foreign exchange comes from remittances. In recent times, remittance flows have declined at an unusual rate. Due to this, extra precautions have been taken to open import LCs.”
Textile industry under pressure
Meanwhile, Bangladesh Textile Mills Association (BTMA) has sent a letter to Bangladesh Bank seeking a solution to the dollar crisis.
The letter mentions that due to the prevailing dollar crisis, garment firms are unable to open LCs for the import of raw materials with commercial banks under Export Development Fund (EDF) and Usance Payable at Site (UPAS).
On September 11, BTMA told Bangladesh Bank that domestic companies are not able to import the necessary raw materials despite the huge export demand. They face problems in importing cotton, polyester staple fibre (PSF), and viscose staple fibre (VSF). The reluctance of banks to open LCs will adversely affect the production and export of textile and apparel goods.
The letter mentions that textile mills need to have at least four to five months of raw materials in stock for uninterrupted production and export operations. Besides, it takes about three to four months to get the imported raw materials.
According to the Textile Millers Association, the production activities will continue for the next three months with the raw materials available to domestic garment manufacturers and exporting companies.
Already a month has passed since the letter was sent to the central bank. As a result, production activities are set to continue for the next two months only.
Expressing apprehensions that many spinning mills may shut down if commercial banks do not open LCs for raw material imports, the letter said the existing dollar crisis will worsen if production declines as it will also affect export earnings. Besides, many will lose their jobs, increasing the amount of unemployment.
Imports going down
Meanwhile, the import of industrial production machinery has also decreased. Entrepreneurs and businessmen are not taking any new initiatives for setting up industries, business expansion, and renovation.
According to Bangladesh Bank, there was a 65% decrease in the opening of credit letters for the import of industrial capital machinery (capital machinery) last July-August.
In this context, Khandaker Golam Moazzem, research director of the Centre for Policy Dialogue (CPD), said the future investment is being damaged due to the reduction of LC opening for the import of equipment.
“If this trend continues, there is a fear that the growth of industrial production, exports, and employment will stagnate in the long term,” he added.
In this regard, BTMA President Mohammad Ali said that many investors have backed off due to banks not opening LC. Due to this, all the new factories will not be able to come into production at the scheduled time.
According to Bangladesh Bank data, from July-August, loans for importing industrial machinery stood at $400 million, compared to $1.15 billion during the same period last year. As a result, loan openings have decreased by about 65%.
Most of the capital equipment imported into Bangladesh is used in the export-oriented garment and textile sector.
In the last financial year, credit for the import of manufacturing machinery was opened at $6.46 billion, which is 15% higher than the previous year. Debt settlement was $5.26 billion, which is 40% higher than the previous year.
Hundi getting popular
Currently, the highest exchange rate of the dollar in the banking sector is Tk108 but in the retail market, it is more than Tk115.
Due to this variation in prices, the market for illegal hundi has become stronger. Remittance flow through legal channels has decreased as part of remittances sent by expatriates go to hundi.
This is another reason for Banks not showing their interest in opening import LCs.
Bangladesh Bank has taken several steps to curb inflation and prevent the decline in foreign exchange reserves. As part of this, the government has tightened imports to overcome the dollar crisis.
Now, Bangladesh Bank has to be informed 24 hours before opening a loan of $3 million.
Exports dropping
Statistics show that the country’s export earnings fell by 6.24% in September compared to last August and remittances fell by 25% to $1.54 billion, the lowest in seven months.
Meanwhile, the foreign currency reserves went down to $26.3 billion. However, Bangladesh Bank’s website shows the reserve amount at more than $34 billion.
To prevent the depletion of this reserve, the government has announced a 100% LC margin on all types of products except government imports. As a result, the amount of imports has decreased
Bigstock
However, traders say that even with a 100% margin, importers are not able to open any LC from the bank to import cars. It has almost stopped the import of cars.
In this context, Federation of Bangladesh Chambers of Commerce & Industries (FBCCI) Vice President Habib Ullah Dawn said: “Due to the global crisis, we are with the government even with 100% margin. Still, banks are discouraging the import of cars in the name of various documents.”
LC opening down since June
According to Bangladesh Bank, the LC opening and settlement rate has declined since June. Importers opened LCs worth $8.44 billion in June, which fell down to $5.7 billion in September.
Meanwhile, private sector credit growth fell to 13.93% in September due to the tightening import policy. In August, the credit growth of the private sector was 14.07%.
According to Bangladesh Bank, in March of this year, LC was opened in the country’s banks worth $9.8 billion.
In September, new LC openings went down to $5.7 billion. Due to the insolvency of the banks, the import LCs have come down to almost half, which is $630 million or about 10% less than in August.
Import LC settlements in September also fell by 18% to $6 billion from the previous month. In August, the settlement of import LCs was $7.33 billion.
LC opening and settlement both decreased compared to the same period last year.
In addition, in the last fiscal year, as imports were more than exports, there was a maximum trade deficit of $33.25 billion. And in the first two months of the current financial year (July and August), the trade deficit has increased to $4.5 billion.
(DT)
