Safeguarding global exposure of our banking sector during Covid-19 pandemic

Banking services are the parts and parcels of economic development activities. Without support from the banking system, it is not easy for economic development to move forward. Banks in modern days do not only provide lending facilities, but also offer various other services to facilitate economic transactions for both domestic and cross border transactions. 

The Banking system of Bangladesh faced critical situations during the great global recession that took place between 2008 and 2009. 

Thereafter, the sector along with robust economic growth, established a sound footing in the global market through handling international transactions without a record of rare default, thus resulting in adequate exposures of foreign banks in the Bangladeshi economy. 

Consequently, our economy was in a position of being benefited in the context of low-cost trade finance, favourable credit line in foreign currency, including the reasonable cost for letter of credit (LC) confirmation, and many other facilities. 

But the disruption created by the Covid-19 pandemic changed it all. As per insider information, in the current situation banks are facing problems in international business. Correspondents abroad are watching the Bangladesh market without support. 

As a result, difficulties are arising in getting LC confirmation, trade financing at a reasonable cost, bill discounting, refinancing for additional periods, using counterparty limit, and so on.

As per December 2019 information from the central bank, non-performing loans (NPL) stands at 9.32 percent, with 1.02 percent as net NPL. 

Despite that, our banking system is, with few exceptions, well capitalised, has sound liquidity, robust profitability and so on. In international transactions, there are rare records of default in making payments by Bangladeshi banks.

We need to retain the robust strength of our banks for the days to come. To make business relations with those abroad, our banks need to pass through different pathways. On completion of the required formalities, corresponding foreign banks will establish a relationship with our banks and grant different facilities including counterparty credit line, LC confirmation services, bill discounting facilities, buyer's credit for import payments and others.

Along with foreign banks, different multilateral banks have been engaging with our banks in the recent past for extending trade credit facilities. Without such facilities from intermediaries, international transactions are difficult to execute at a reasonable cost. The sustained inflation rate indicates such a situation prevailing in our country.

We need to continue the trend even in the disruptive situation so that international traders do not face bottlenecks in executing transactions. But banks are facing problems in confirming LCs due to high cost for buyer's credits, reluctance in extending tenure of payments by external sources etc.

To cope up with the pandemic, the central bank is providing policy support to international trades, such as extension of back to back and usance import settlement time by six months, loan from export development fund (EDF) to be extendable to one year, revise the yearly interest on EDF and set at 2 percent from six-month USD LIBOR + 1.50 percent. 

Meanwhile, Refinancing facilities have been declared for settlement of payment against back to back LCs opened earlier under supplier's/buyer's credit. Additional fund of EUR 200 million had been injected in green transformation fund (GTF) with refinancing facilities for imports of industrial inputs by all sectors. These are some of the good initiatives taken by central bank to ease the situation.

As our banking system was on strong footing, we need to keep it at the same level. Deterioration of its performance may lead its external exposure to jeopardize. Hence the banking system require policy support. The central bank has already given some support to keep its operations afloat.

Definitely the situation does not justify repayment of loans by borrowers since there are inadequate cash flows. These types of situation require some effective support with regards to granting a moratorium to repay loans, waiver of adverse classification of assets, and relaxation in provisioning against assets. 

In the situation of crisis, global rules permit such facilities for the required period. This way of transactions facilitates stakeholders and banks to maintain their financial position in the books of accounts in a stable and robust position. 

Financial position in terms of solvency is a matter to international counterparts. Short time liquidity assistance can easily be supported by the central bank through changes in policy rates including mandatory reserve requirements. Cash liquidity in the way of non-traditional open market operations can be a remedy for banks and can act as a short term support. 

Moreover, the banks in Bangladesh will not face any liquidity problems with regards to lending as the central banks and the government announced huge stimulus schemes under different names. 

This includes working capital financing for all sectors including SME, pre-shipment financing for exporters, enhancement of EDF size, refinancing for agriculture credit, refinancing scheme under financial inclusion programme and etc.  

As such, banks will not face liquidity problems, rather the liquidity window, as usual, is expected to remain open at the end of the central bank.

As noted earlier, the solvency is a prime factor for banks to operate in global markets as it depends on profitability. 

In case of any entity plugging into negative territory, with regards to the aspect of profitability, it may face liquidation. Banks cannot be escape from the situation.

Therefore, the authority should look into their profitability for which effective regulatory support needs to be extended. No restrictions should be imposed to book the legitimate income in the books of accounts. 

But recently interest income has been reportedly booked in non-interest bearing blocked accounts against the financing for the specified periods. This may result in bank profits to go into negative territory. 

If it happens, the negative impact will be found in international business operations with an increase in cost for confirmation of LCs, non-availability of short trade finance and many other odds including maintaining correspondent relations with banks abroad. 

As all talk about prudential regulations, our regulatory steps need to be prudent. Recent regulations on booking income in the separate books of accounts deserve attention for review so as to keep banks resilient to operate international transactions amid odds like Covid-19.