The public sector lender State Bank of India (SBI), which has been operating for four decades in Dhaka, has suspended export-import transactions in dollars with Bangladesh, raising concern among the business community of both countries as India is the second highest import source for Bangladesh.
However, the SBI will continue transactions in rupee and taka, according to a circular the lender issued on 24 August.
At present there are no agreements between Bangladesh Bank and the Reserve Bank of India about settling transactions in rupee and taka.
India's top lender halted foreign transactions with Bangladesh as it considers the country risky for meeting up foreign payment obligations amid faster erosion of its foreign exchange reserves.
In the circular, SBI categorised Bangladesh as "High Risk and Under Caution" as per its country risk model.
The bank said Bangladesh is facing a shortage of foreign currency due to higher import bills and weakness of the taka against the dollar in recent times.
Considering the present economic situation and shortage of foreign currency, it has been decided not to assume USD or other foreign currencies exposure on Bangladesh till further instructions, according to the letter.
However, exposure in taka and Indian rupee will continue, according to the letter that was obtained by The Business Standard.
Various businessmen who have foreign transactions through the SBI shared the letter with this reporter.
Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA) Executive President Mohammad Hatem said the SBI's decision will have a negative impact on global image for Bangladesh, adding that the country should protest the move.
Hatem, who has both export and import businesses with India, said the Indian bank had a record of not making payments but no Bangladeshi bank had such a bad record.
Citing an export dispute with Indian company Lilliput, he said the company did not make the payment to Bangladeshi exporters even after shipment of goods.
Even the Bangladesh government could not secure the payment even after several meetings with higher-ups of the Indian government, he added.
Global news agency Reuters also ran a report titled "India's top lender asks exporters to trade with Bangladesh in rupee, taka" referring to the SBI's letter.
"SBI's circular is very alarming, as they have said not to take exposure on Bangladesh exports," Reuters quoted an exporter as saying.
"Bangladesh is a major trading partner and if a premier bank like SBI does not take exposure, how will the trade grow? It is going to go down."
Md Serajul Islam, spoke person and executive director of Bangladesh Bank refused to make any comment over rating of SBI to Reuters.
A senior executive of the Bangladesh Bank on the condition of anonymity said the Reserve Bank of India, aiming to make Indian rupee a reserve currency in future, is pushing its neighbouring country to settle foreign payments in rupees.
The Reserve Bank of India also issued a circular in this regard, encouraging Indian banks to go for payment settlement in rupee.
The Bangladesh Bank formed a committee of five members to review that circular – to see if transaction in rupee is viable for Bangladesh.
The committee recently made a presentation in the presence of the Bangladesh Bank governor where the committee showed that transactions in rupee will make Bangladesh a loser as the country is in huge deficit with trade in India, he said.
The SBI rated Bangladesh as risky at a time when global rating agencies kept their outlook stable for Bangladesh despite an elevated current account deficit and declining foreign exchange reserves.
Global rating agency S&P in its latest report released in August expected that Bangladesh's external conditions would gradually stabilise over the next 12 months with solid economic growth continuing to support gradual fiscal consolidation.
The rating agency kept its outlook stable for Bangladesh reaffirming 'BB-' long-term and 'B' short-term sovereign credit ratings.
The Bangladesh Bank held a meeting with another global rating agency, Fitch, on Tuesday over the economic situation of Bangladesh.
A senior executive of the central bank who attended the meeting said the discussion with Fitch was very positive and they expect there will be no change in rating for Bangladesh.
Fitch in its previous report rated Bangladesh as stable outlook.
About SBI rating, a top executive of a private commercial bank said any bank can have their own rating. When a foreign bank rates Bangladesh as a risky country that is an indication of the economic situation of the country.
The SBI is now cautious about foreign exposure as they see high risk because of faster erosion of reserve, he added.
He said businessmen will shift their business to other banks, away from the SBI. The only problem is that SBI's decision will hurt Bangladesh's image, he added.
The total exposure of SBI in Bangladesh was Tk4,584 crore at the end of June this year and default loan rate was less than 1%, according to the Bangladesh Bank data.
The total import value of Bangladesh from India was Tk72,878 crore in the fiscal year-21, which was 17% of total import when export from India was Tk8,551 crore during the same period.
Bangladesh faced severe erosion of foreign currency in recent months due to high import. The Bangladesh Bank depreciated taka faster to save foreign currency. The taka depreciated by 16.7% in the last year while rupee depreciated by 6.74% during the same period, according to Bloomberg.
The foreign reserve of Bangladesh came down to $37 billion in September from $48 billion a year back.