Amid a greenback crunch for over a 12 months within the home market, Bangladeshi importers are experiencing considerably increased prices due to escalating LC (letter of credit score) affirmation charges charged by overseas banks, primarily pushed by deteriorating well being of the banking sector.
And the burden of those rising prices is being transferred on to shoppers, precipitating an unwelcome surge in inflation.
In response to bankers and companies, importers are actually burdened with affirmation charges of three.5% of their import worth on LCs per 12 months, a considerable improve from 1.7%-2% charged in June final 12 months.
What compounds this predicament additional is the shift in import LC dynamics. Beforehand, roughly one-fourth of import LCs had required third-party financial institution confirmations, however now greater than 80% want such confirmations as banks are unable to open sight LCs. Furthermore, 100% deferred LCs, which have turn into frequent now, should even be supported by confirmations from one other financial institution.
To calculate the monetary toll incurred by Bangladesh by way of LCs in the course of the preliminary two months of the present fiscal 12 months, The Enterprise Normal turns to information from the central financial institution.
The figures reveal that in July and August, banks opened LCs valued at $5.55 billion and $5.59 billion, respectively. Assuming that 80% of those LCs have been confirmed at a fee of three.5% by third-party banks, the ensuing expense for Bangladesh stood at a considerable $390 million, which interprets to greater than Tk4,200 crore yearly, which is in the end borne by shoppers. Even when the LCs have been deferred for six months, the extra value burden could be half of the estimated quantity.
Mostafa Kamal, chairman of Meghna Group of Industries, one of many largest commodity importers within the nation, has expressed concern over the surging LC affirmation charges and attributed the rise within the charges to most banks refraining from opening sight LCs.
Consequently, he finds himself compelled to resort to UPAS LC, an import finance product working beneath a deferred LC system for importers. He mentioned that UPAS LCs require affirmation by a third-party financial institution to be accepted.
Additionally, the imposition of a 20% tax on curiosity funds associated to overseas loans has additional elevated prices, pushing companies to the brink, famous Kamal, including, “If we fail to fulfill overseas cost obligations, we danger defaulting. What choices do we’ve?”
Syed Mahbubur Rahman, managing director of Mutual Belief Financial institution, additionally acknowledged that LC affirmation charges have elevated considerably in current months. This surge has resulted in increased import prices, that are in the end handed on to shoppers contributing to the general inflation fee, he added.
In worldwide commerce, LCs issued by a purchaser’s financial institution could be confirmed by a financial institution within the vendor’s nation or a third-party financial institution, making certain that the vendor receives cost even when the customer’s financial institution defaults. Banks that present LC affirmation for Bangladeshi banks and importers embody Normal Chartered, HSBC, Mashreq, JP Morgan, and banks in Singapore and the Center East.
How a lot extra cash is being drained out?
Quoting customs information, the central financial institution mentioned Bangladesh imported $75 billion value of products final fiscal 12 months.
Bankers mentioned that round 80% or over $60 billion of the entire imports was backed by LC affirmation by a third-party financial institution. If the common LC affirmation charge was thought-about 3% yearly, then native importers paid a further $1.8 billion or over Tk19,000 crore in that 12 months.
Now the query is that if the speed didn’t improve by 1.5 proportion factors or 150 foundation factors, how a lot cash the nation might have saved. Assuming that 80% of complete imports or $60 billion was backed by LC affirmation by a third-party financial institution, the nation might have saved a staggering $600 million or over Tk6,600 crore within the final fiscal 12 months if the LC affirmation charges had not elevated.
Why the cost has skyrocketed
Normally, LC affirmation cost relies on 4 main points – financial institution danger, nation danger, importers and merchandise.
This time another dangers have been added to the checklist. Of those, three are home-grown issues. These are declining native banks’ creditworthiness, downgrade within the nation’s credit standing and delay in funds or default.
The fourth motive is international – the rate of interest hike by 5 proportion factors or 500 foundation factors within the international monetary markets. Bankers mentioned this improve in international rates of interest would result in increased borrowing prices for banks. Banks, in flip, go on a few of these elevated prices to their prospects, together with these searching for LC affirmation providers.
Why LC affirmation cost is increased in Bangladesh
Bangladesh incurs considerably increased bills in comparison with importers in different South Asian nations in the case of confirming their LCs.
Even in Pakistan, a rustic dealing with excessive financial danger with dwindling overseas change reserves, declining exports, and sluggish GDP development, importers pay significantly much less for LC affirmation in comparison with their counterparts in Bangladesh.
In India, the affirmation cost is 0.75% for LCs valued as much as Rs10 crore, and this cost reduces to 0.50% for LCs exceeding Rs10 crore. In distinction, in Pakistan, the affirmation cost ranges from 1.5% to 2.5%.
The managing director of a personal financial institution, who most well-liked to not be named, attributed the upper LC affirmation expenses in Bangladesh to the shortcomings of native banks.
He identified that many banks opened LCs past their cost capability, leading to defaults, which prompted overseas banks to escalate the charges.
But, there are exceptions, corresponding to Dutch-Bangla Financial institution, which has managed to maintain LC affirmation expenses low. In response to its managing director, Abul Kashem Mohammad Shirin, this success is attributed to their prudent method of opening LCs in alignment with their cost capability.
He famous that regardless of a considerable drop in remittance influx by way of the financial institution, from over $200 million to $25-$30 million per thirty days, the financial institution has persistently met its obligations with out default. “There is no such thing as a magic behind it; we have opened LCs primarily based on our cost capability,” he mentioned.
The pinnacle of the treasury division of a number one personal financial institution mentioned many Indian and Pakistani banks have their branches abroad, particularly within the Center Japanese nations and these banks do work, together with confirming LCs in favour of their respective nations.
