LC cancellation doubles to $3.3b in 11 months to May

Dhaka,  Wed,  23 August 2017
Published : 14 Jul 2017, 21:53:19 | Updated : 15 Jul 2017, 13:25:10

LC cancellation doubles to $3.3b in 11 months to May

Banks' bottom line feared to receive a blow
Siddique Islam
The rate of cancellation of letters of credit (LCs) for imports more than doubled in the first 11 months of the just-concluded fiscal year (FY) compared with the same period the year before.

The value of cancelled LCs rose to $3.30 billion during the July-May period of FY 2016-17, according to the central bank's latest statistics, from $1.44 billion in the corresponding period of FY2015-16.

Officials said Bangladesh Bank (BB) recently advised the commercial banks to immediately realise the import payments against the unsettled LCs, which prompted cancellation of the LCs at an accelerated rate.

The BB move was to reduce the value of outstanding LCs through ensuring payments or revoking the expired import cases, they added.

However, the value of outstanding LCs came down slightly to US $ 22.03 billion in the first 11 months of the last FY from $ 22.84 billion in the same period of the previous FY.

Some banks were unnecessarily showing the expired import cases under outstanding LCs over the years, according to a senior official of the BB.

"There is no scope to show the unsettled import cases as LCs outstanding for an indefinite period," he told the FE Thursday, adding that the unsettled or expired import LCs will have to settle or cancel within a reasonable time.

Besides, the central bank is now collecting the LCs outstanding statement separately from the banks to know the real situation about the unsettled LC cases, according to another central banker.

The figure of LCs cancellation was big in terms of the country's overall import volume, the official admitted. "But it may rise further in the coming months."

The country's overall import payments grew by nearly 12 per cent to nearly $ 41 billion during the period under review from $ 36.66 billion in the same period of the previous FY, the BB data showed.

"LCs may be cancelled for various reasons," said Nurul Amin, Chief Executive Officer (CEO) and Managing Director (MD) of the Meghna Bank Limited.

He said that the banking business, particularly post-import financing, would be affected slightly for the cancellation of the LCs.

"Import orders are canceled in some cases when the suppliers (exporters) either fail to supply the commodities on time or quote higher prices than fixed rates in the LCs," explained Syed Mahbubur Rahman, MD and CEO of Dhaka Bank Ltd.

In many cases, especially in the private commercial banks (PCBs), he said, the commission against opening LCs will be refunded if the import orders are cancelled.

The overall profits of the country's banking sector might face a setback by the end of this calendar year because of such LC cancellations, the senior banker added.

When contacted, a senior executive of a leading state-owned commercial bank said that the banks were cancelling the unsettled/expired LCs in line with the BB's advice. "It will help the banks to clean their books."

The BB data showed that cancellations of the LCs for industrial raw materials jumped by 158.32 per cent to $1.40 billion during the period under review from $541.24 million in the same period of the FY16.

During the period, the LC cancellation of intermediate goods rose to $270.12 million during the period from $118.51 million in the corresponding period of previous FY while cancellation of capital machinery LCs stood at $239.15 million from $103.73 million.

Besides, the cancellations of the LCs for petroleum products rose to $211.96 million in the July-May period of the FY 17 from $24.80 million in the same period of the previous fiscal.
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