As importers hold on to payments, banks put in trouble

Deferred payments against Letters of Credit (LCs) by importers have added to the stress of banks who are already in a tight corner with a two-month suspension on interest payments, thus forcing them to delay settlements with foreign banks.

In the last week of April, the Bangladesh Bank instructed all banks to make import payments to the foreign banks in due time.

The directive came after delay by a good number of banks in making payments against LCs, creating a negative impression on the country's banking sector abroad, said Rahel Ahmed, secretary general of Association of Bankers Bangladesh (ABB).

The delay will increase LC confirmation charges making imports costlier, said Rahel, who is also the managing director of Prime Bank.

LC confirmation fees were always high in Bangladesh because of the banking sector's negative image globally, he added.

He was apprehensive that the delay in settling LCs in the time of Covid-19 was likely to increase the charges further.

In some cases, importers are applying a force majeure provision of the International Chamber of Commerce (ICC) for their inability to make payments.

For instance, a local bank sent a swift message to Standard Chartered Bangladesh, indicating their inability to make payments due to a force majeure event, citing "in this situation all the banking activities are out of our control".

Banking activities were allowed under emergency services, so the claim was not accepted by Standard Chartered.

Force majeure is a common clause in LC contracts that essentially frees both parties from liability or obligation when an extraordinary event or circumstance beyond the control of the parties takes place.

 "As Standard Chartered works for LC confirmation of local banks, some banks have sent letters to us saying that they do not want to make payments as their clients called force majeure," said Naser Ezaz Bijoy, chief executive officer of the bank.

If a country does not call force majeure, an individual client cannot apply this provision, according to the amended ICC guidelines.

So, Standard Chartered did not accept their force majeure call, he said.

LC confirmation cost is higher in Bangladesh than in Pakistan as the former's market is mostly unknown to investors abroad due to not having a government bond.

Foreign banks which give confirmation to the local banks for LCs charge 2 percent to 3.5 percent in Bangladesh when the rate is 1 percent to 1.5 percent in Pakistan despite having a lower country rating than Bangladesh, he said.

He said despite having various challenges, Pakistan has sovereign bonds. As a result, investors are well aware of both good and bad sides. But in the case of Bangladesh, the only bad side is exposed to the investors.

The payment delay will cause a decline in credit limits for local banks. If credit limits decline and the import volume remains the same, LC confirmation costs will increase, he explained.

The delay in LC payment accounted for a surge in forced loans in April as many banks made payments to the foreign banks on maturity dates by creating forced loans for local importers, according to industry insiders.

The total loan in the banking sector increased by Tk8,531 crore in April. The amount stood at Tk10,66,579 crore in March, according to the Bangladesh Bank data.

The forced loan led to this increased amount, said Syed Mahbubur Rahman, former chairman of ABB and managing director of Mutual Trust Bank.

And the remaining amount accounted for non-payment of interests during the period, he said.

Fresh disbursement was very small in April as business activities remained shut during the coronavirus shutdown, he added.

The drastic fall in export earnings and remittance inflows squeezed the dollar capacity of many banks, causing a delay in foreign currency settlements.

The LC rate went above Tk86 in recent times due to dollar scarcity in banks, he said.

Banks are already in a bad situation due to interest suspension for two months – April and May, he said, which stuck interest repayment of Tk15,000 crore to Tk16,000 crore.

Delay in LC payments by importers and the applying of force majeure worsened the banks' conditions, he added.