Nov LCs settlements rise on deferred payment pressure

Settlements of letters of credit (LCs) for imports increased in November compared to October, thanks to the pressure of deferred LCs payment.

Despite encouraging remittance inflows and export growth in November, LC openings decreased. This decline can be attributed, in part, to banks' high future payment liabilities.

Bangladesh Bank data show that banks settled $5.48 billion in LCs in November, up 5% from October. LC openings fell to $5.09 billion by 6% in November month-on-month.

LC settlements hit a 35-month low in September, while LC openings also fell by about 16.1% month-on-month.

Senior officials at several private banks said that the number of LCs opened and settled in the last few months is less than that. As such, new liabilities on imports grew. The number of LCs opened and settled in November is more than that. As such it was possible to reduce some of the old liabilities instead of creating new liabilities. "This will definitely be good for the economy," said an official.

When asked why LC settlements increased in November, a policy officer at a leading private sector bank said that a large part of the import bills paid in November related to imports months to years ago. "Even though these were imported, we deferred the payments. As a result, their payment pressure was created. Deferred LCs maturing in November have been paid. Apart from this, banks have now opened some Sight LCs."

An import LC with an obligation to pay within one month of opening is referred to as a Sight LC. However, if the payment period is extended from four months to one year, it is called a Deferred LC. Interest is charged separately for these late payments.

Bankers said an increasing trend is being observed among businessmen toward opening Sight LCs. An official of a food importing company said, "Now we are facing a lot of problems in paying six months after opening an LC. First, dollar availability is not ensured at the time of payment. Second, the central bank is continuously devaluing the local currency. As a result, it is not possible to predict how the dollar rate will be after six months. Due to these reasons, there is a problem in determining the price for the sale of imported products. For these reasons, we want to make the payments even if we buy dollars at slightly higher rates."

According to central bank data, the dollar was sold at Tk96 from the reserve in October last year but it stood at Tk110.25 in November this year. Due to this devaluation of the local currency, the cost of LCs payment has gone up a lot. However, to manage the dollar, traders have to pay rates as high as Tk125-127.

When asked why the opening of LCs is decreasing, several bankers said that in the next few months, the banks will have to pay the liabilities of the LCs opened earlier. So they calculate payment maturity before opening LCs. Due to these reasons the opening of LCs has decreased slightly.

Banks reduced LC openings by around 12% and settlements by 24% during the July-October period of the current fiscal year compared to the same period of the previous fiscal, central bank data shows.

Syed Mahbubur Rahman, managing director of Mutual Trust Bank, told The Business Standard that there has not been much change in the trend of LC opening and settlements in November. "We have reduced the LC opening a lot, which is now around $4.5-5 billion per month. But in normal times this amount was much higher."

Elaborating on some negative impacts on the economy, he said, "The fall in imports has started to affect investment and employment. Our new job creation is slowing down as LC openings decline. Many factories are not able to produce according to their capacity as they cannot import enough raw material. If this continues, at some point many companies may start laying off their workers."