When an LC is opened by a Bangladeshi commercial bank, the LC will be forwarded to its correspondent bank [a foreign commercial bank] for acceptance.
Without this step the LC will not be accepted by the exporter’s bank.
The web of correspondent banks used by Bangladeshi commercial banks is essential to maintain a smooth flow of imports.
This week, Selim RF Hussain, senior commercial banker and MD of Brac Bank, brought attention to the suspension of credit lines from these correspondent banks, effectively making imports more expensive and more difficult.
The correspondent bank when it receives an LC will review the credit status of the originating Bangladesh commercial bank.
This is a systematic process within the correspondent bank.
It may go quickly or slowly according to the actual market conditions.
What is happening now is that these LC reviews are more elaborate, time consuming and expensive.
There seem to be more rejections.
This takes place due to the events and revelations of the past month and the chaos in Bangladesh, particularly with so many charges of abuse of the financial system.
Selim RF Hussain stated that all of the numbers in the banking system are false.
In particular, what he was referring to is the amount of non-performing loans.
Realistically, none of this is a surprise. Students of the financial system have been aware of the high level of non-performing loans.
The regulatory authorities turned their backs on this situation and the political authorities encouraged this behavior.
The value of a bank, its capital is the difference between its assets, largely loans, and its liabilities, largely deposits.
Estimating deposits is simple. Estimating the value of a loan is difficult. How do you know if the borrower will repay you?
A proper estimate of how much the bank can expect to be repaid is needed to determine the value of the assets.
Capital of a bank is by regulation around the world expected to be a certain fraction of its assets correctly valued.
The implication of the remarks of Selim RF Hussain and the information pouring forth from the banks is that we have no idea of the actual level of non-performing loans.
The correspondent banks lose confidence in the banking system and importing becomes slower and more expensive.
The exporters do not use LCs accepting the risk that they will not be paid.
The capital position of the commercial banks is uncertain but less than claimed.
The particular situation of concern at this time is the import of fertilizer.
This is absolutely essential for the agricultural sector and must arrive on time to meet the timing of application by the farmers.
This will certainly be cleared up but the delays are disturbing.
The decline of Bangladesh’s ratings by the international rating agencies contributes to this falling confidence.
Such rating will surely improve but it will take time.
The actions of the correspondent banks will reduce imports and improve the balance of payments.
But there will be an adverse impact on production and GDP.
Reputation is everything in finance.
The revelations currently taking place and the collapse of the government have shaken the confidence of everyone in the financial sector.
Doubts have long been expressed but as actual estimates of fraud have emerged there is a growing sense of reality of what has happened.
Forrest Cookson is an economist who has served as the first president of AmCham and has been a consultant for the Bangladesh Bureau of Statistics.
