Many foreign banks have stopped renewing the credit facilities of the local banks while some are not even allowing using the credit line approved by them, resulting in causing problems to some Bangladeshi banks for import.
Against this backdrop, the cost of import has risen, and the banks have reduced the number of letters of credit (LC).
Bangladeshi banks import with the support of foreign banks which also provide loans to local entrepreneurs and banks to pay the import bills.
The foreign banks charge interest and commission for the service. The rate of interest and commission increases with the rise of risk. So the import expenditures go up.
The situation has been prevailing since last June as the dollar market has observed instability ever since.
Bangladesh Bank has removed six treasury chiefs including the one of Standard Chartered Bank (SCB). Notices are sent to managing directors (MD) of these Banks as well.
SCB is one of the partners in Bangladesh's import trade, with the help of which other banks guarantee import deposits and pay liabilities. As action is taken against this bank, the confidence of foreign banks on the country's banks has further decreased.
Although the MDs of several banks were contacted, they refused to comment on the dollar market.
But the former chairman of Association of Bankers Bangladesh, the organisation's top executive, and former MD of Mutual Trust Bank Anis A Khan said, with the actions the central bank has taken due to profit in dollar, the foreign banks are thinking there is a lack of good governance in the banks.
Foreign banks observe the situations when a country's economy faces instability and during that period they increase service charge and interest rate, he said adding the whole pressure falls upon the importers, and the prices of the commodities are hiked.
The effects
Mashreq Bank, the leading financial institution of the United Arab Emirates, handles the most foreign trade of Bangladesh. The bank has recently reduced the transaction limit of banks in Bangladesh by 25 per cent.
Globally, SCB has reduced transactions with Bangladeshi banks. They have also stopped lending to offshore banking units of the country's banks. At the same time, SCB has to take separate approval from its regional office in India before lending more than $1 million to banks in the country.
Some banks of Bangladesh used to get loan assistance for importing consumer goods through Malaysia's RHB Bank. These transactions were done through the bank's Singapore and Malaysia branches. However, from the beginning of last month, the bank again stopped the transaction.
India's public sector State Bank of India used to provide loan facilities (UPAS Loans) on behalf of Bangladeshi banks. They are also not issuing any new UPAS loans. Apart from this, India's Axis Bank, ICICI Bank are reducing the facility limits offered to Bangladeshi banks, not wanting to do any new transactions. India's HDFC Bank is also not looking to do the transaction.
The Korean Development Bank (KDB) has completely waived its loan limits to Bangladeshi banks. Now only Asian Development Bank (ADB) is providing loan facility against guarantee of International Finance Corporation (IFC).
Meanwhile, foreign banks used to charge a maximum interest rate of 3.5 per cent with Libor to guarantee the payment of bills. It increased to 3.75 per cent. However, on August 16, Bangladesh Bank instructed that the interest rate will not be more than 3 per cent with Libor. For this, foreign banks have reduced transactions. It has also reduced loan opening. Foreign banks are not willing to guarantee payment of bills at such low interest rates.
Why foreign banks required
Although many banks have been established in Bangladesh, there have not been banks of large capital and international standards. As a result, foreign transactions are not possible without the help of large foreign banks. Most of the loans that are opened for import in Bangladesh are late payments. In some cases the bill can be paid even after 360 days. In this case, a foreign bank gives a loan and receives interest in return.
The support of foreign banks is a must to function foreign trade. These banks guarantee loans, review financial reports and provide loan facilities. These banks also have accounts (nostro) of Bangladeshi banks. Debts are paid from this account. Therefore, the more contracts with foreign banks, the stronger the bank is in foreign trade.
For example, private sector's Eastern Bank has such 594 bank contracts. Again, Social Islami Bank had agreements with 420 foreign banks in 2019. In 2021 that has decreased to 388.
On condition of anonymity, the head of international trade department of a bank said, when a letter of credit (LC) is opened for the import of pulses from Australia, the Australian bank does not know Bangladesh, nor the bank of this country. For this, the support of an international bank is needed to guarantee the loan. Again, if you want to pay late, a foreign bank gives you a loan. Therefore, foreign trade is not possible without foreign banks.
Pubali Bank's former MD Helal Ahmed Chowdhury said, steps should be taken to ensure the foreign banks do not look down on local banks. Only then the situation will improve.
All the steps of central bank
Bangladesh Bank has stopped the loan or increased the margin rate of some products to overcome the dollar crisis. Again Bangladesh Bank is verifying before opening the letters of credit of more than 3 million dollars. Action has been taken against the banks for making abnormal profits through dollar trading. Also ordered not to take profit of dollar to the banks' income.
People related to the sector say that treasury chiefs are in touch with all foreign banks. Questions arise among them as they are suddenly removed from their duties. Because of this, the foreign banks are reducing the benefits.
Bangladesh Bank is selling dollars from reserves to reduce the country's dollar crisis. The price of the dollar has also increased from Tk 86 to 95. Although the banks are keeping the dollar price up to Tk 106-107 due to import cost. Due to various measures taken to pull the import rush, the opening of letters of credit has decreased. In addition, expatriate income and exports have increased. Still, the dollar market is not normalizing. Dollar trading between banks has not started. Banks are still bringing expatriate income at a rate of over Tk 110. For import more than Tk 11-12 than the official price per dollar has to be paid.
Many import duties are being deferred due to the crisis. As a result, a fear of simultaneous big pressure has occurred.
The former chief economist of the Bangladesh Resident Mission of the World Bank, Zahid Hossain, said to Prothom Alo that Bangladesh Bank is trying to control the price of the dollar through orders.
The management through which the central bank is controlling the dollar market, foreign banks will turn their backs. Has the market become normal after all these steps? So, many steps had not been right. The space must be given for the currency to fluctuate, then the true picture is found. Foreigners do not take things positively otherwise. It would not bring good result.