State-owned banks asked to clear overdue payments, private banks to step in for LC opening

Bangladesh Bank Governor Ahsan H Mansur today (19 August) urged all state-owned banks to take steps for clearing overdue payments to the foreign banks.

In a meeting with the managing directors and CEOs of 12 banks, Mansur also urged private banks to participate alongside state-owned banks in opening letters of credit (LCs) for government imports.

The central bank governor sought suggestions from top bankers on potential reforms for the banking sector.

Four state-owned banks, three foreign banks, and five private banks participated in the meeting where the governor announced that banks can now sell dollars to customers at a maximum rate of Tk120.

On Sunday, a meeting between Chief Adviser Dr Muhammad Yunus and the governor decided to increase the existing band for inter-bank foreign exchange transactions from 1% to 2.5% as an initiative to increase liquidity in the foreign exchange market. Under the current crawling peg system, the current mid rate is Tk117. Means, banks can add 2.5% and could raise the rate to Tk120.

Several MDs present at today's meeting said they have been asked to submit suggestions for banking sector reforms. Discussions also covered how to improve relationships between local and foreign banks, and measures to combat inflation.

The MD of a leading bank emphasised the need for a more robust legal system to recover loans. "We have requested a more developed legal framework for loan recovery. The governor assured us that while businessmen will not be harassed, those involved in wrongdoing will face consequences," he added.

He said the banks currently have good dollar liquidity and that the dollar rate has reached a transactional level. The governor also instructed them to activate the interbank dollar market and discussed how to develop the financial account balance of the country's Balance of Payments.

According to the central bank, despite a decline in exports, Bangladesh's trade deficit decreased by $6 billion to $20 billion in the first 11 months of FY24, thanks to a significant reduction in imports, according to central bank data. The financial account surplus at the end of May decreased by $226 million compared to April, totalling $2.08 billion.

The market will decide the interest rates and exchange rates, says BB governor

Selim RF Hussain, chairman of the Association of Bankers Bangladesh (ABB) and Managing Director of BRAC Bank said, "The governor told us in the meeting that henceforth the interest rate and exchange rate of taka and dollar will be determined based on the demand and supply of the market. He told us that he does not like too much central bank's intervention in the market. But if they see the dollar rate going abnormally high, then maybe they will intervene."

ABB Chairman further said, "Many dishonest officials of the central bank used to set a dollar rate for all our banks, then let 7-8 other banks trade dollars at different rates. The governor assured us that this will not happen from now on."

"I think the difference between repo and treasury bills interest rate should be brought down gradually. Otherwise, every bank will invest in treasury bills instead of landing on customers, which is happening currently. Besides, the governor said that the contractionary monetary policy will continue," he added.

The governor also said Bangladesh has not yet defaulted on any foreign payment. The central bank will take care of it in the future. Four state-owned banks have also been asked to trade dollars at market rates, he said.

Selim RF Hussain said about $1 billion in payments of state-owned banks are overdue to foreign banks. The governor asked them to clear this overdue by buying dollars from the market. Foreign banks have reduced the loan limits of many of our private banks because of overdue amounts of state banks.

"Whether the government will give money to troubled banks, I don't know. In the long run, financial institutions should be independent. People's tax money should not be given to these banks. A bad company with poor governance should not be given continuous support. However, how the central bank will manage the matter is a matter for their consideration," he added.

When asked whether he would give any information to the central bank governor about the officials of Bangladesh Bank who were involved in the irregularities, he said, "As far as we know, the officials involved in irregularities are being investigated. In particular, senior officials, including the former governor were involved. Many influential politicians were also involved here. If the central bank calls us, we will appear with evidence."