Import LCs opening, settlement rise in October due to fertiliser imports

Import letter of credit (LC) openings and settlements increased in October, driven by rising remittance inflows and seasonal fertiliser demand.

Data from the Bangladesh Bank show banks opened LCs worth $5.42 billion in October, up 14% from September but down $700 million from August. 

Import LC settlements also increased by 13% in October compared to the previous month. In September, LC settlements hit a 35-month low, with LC openings also falling by about 16.1% from August.

Senior officials from several private banks said LC openings in October were in line with normal levels of around $6 billion per month, after declining significantly in September due to low remittances and uncertainty about the dollar rate in banks. It was $6.17 billion in August.  

Last August and September, the central bank cracked down on banks for buying remittances at high prices, fining the heads of treasury departments at 10 banks Tk1 lakh each. This led to many banks stopping buying remittance dollars at high prices to avoid penalties, reducing remittances to $1.33 billion in September, $600-700 million less than usual.

The sharp decline in remittances in September had a negative impact on the country's forex reserves and balance of payments, and the central bank was concerned. In October, the central bank took a flexible approach and allowed banks to bring in remittances at higher rates. As a result, remittances rebounded to nearly $2 billion in October.

State-owned banks are opening more LCs for fertiliser ahead of the boro paddy cultivation season, while intermediate goods LC openings have increased slightly. However, banks remain wary due to the dollar crisis and future payment pressure and are offering 6-9 month deferred LCs, while traders prefer draft LCs (payable within 7-10 days of LC opening), said a senior official of a private bank.

LC settlements increase slightly in October 

According to central bank data, LC settlements in October totalled $5.22 billion, higher than in September but lower than in July and August.

Bankers say nearly all LCs currently being disbursed are deferred LCs opened 6-9 months ago, which are due to be paid as they mature. Banks could pay more for LCs, but customer pressure to repay short-term foreign loans taken from various foreign banks and institutions prevents them from doing so.

Central bank data show short-term foreign loans down $1.23 billion in July–September, raising concerns about tighter liquidity and higher repayment pressure. Short-term foreign loans stood at $12.49 billion in September, down from $13.66 billion in July.

Merchandise exports plunged to a 26-month low to $3.76 in October, raising concerns about the dollar crunch and its impact on import LC openings and settlements, bankers say.

Mashrur Arefin, managing director and CEO of City Bank, told The Business Standard, "The central bank governor, as promised to us, has already started the process of embracing a market-driven FX rate now that one single rate for dollar buy has already been achieved. Regulators even have no objection if banks, on their own, give additional incentives to remittance beneficiaries. All this loosening up on the buy side got reflected in October's brilliant remittance inflow."

"Our opening of new LCs in bigger numbers and bigger volumes is an effect of these changed circumstances. Soon, we will start to open LCs for small- and medium-sized businesses too, as our dollar holding position keeps improving further," added the seasoned banker.