March sees surge in import LC openings, settlements amid dollar liquidity boost

Infographics: TBS

The opening and settlement of import Letters of Credit (LCs) in March saw a notable increase compared to February. Bankers attributed this rise to an improvement in the dollar liquidity situation within the banking sector.

According to central bank data, banks opened import LCs totalling $6.13 billion in March, marking a 17% increase from February's figure of $5.28 billion.

The opening of import LCs in March 2023 amounted to less than $6 billion. Over the past year, there have been only three instances where import LCs exceeded $6 billion.

A senior official from a private bank told TBS that while the dollar crisis persists, the situation has improved recently. 

"In recent months, with exports exceeding $5 billion monthly and robust remittance inflows, dollar liquidity has improved in the banking sector. Consequently, banks are now considering opening Import Letters of Credit (LCs) for previously overlooked products," he said.

"Even two to three months ago, 25% of the LCs we opened were Sight LCs, while the remainder were Deferred LCs. In contrast, over 50% of LCs opened in March were Sight LCs," the official added.

For a Sight LC, the payment must be made within one week. Banks opt for opening sight LCs when they have a good amount of dollar liquidity. On the other hand, Deferred LCs provide a time window of 90-180 days for payment. 

In most cases, banks prefer to open deferred LCs for import transactions. In other words, a significant portion of the LCs, for which payments were made in March, were opened for import transactions that took place between September and December last year.

A senior official from another private bank said businessmen are now leaning towards opening Sight LCs more, given the uncertainty surrounding the future fluctuations in the dollar's price. 

"Traders incur significant losses when the dollar strengthens, hence the growing preference for Sight LCs," he said.

The official, however, noted that LC openings are expected to decline in April. Factories and banks were closed for an extended period due to Eid, resulting in reduced LC openings and settlements.

According to central bank data, the opening of import LCs for consumer goods decreased by approximately 18% from July to February of the current financial year compared to the same period in the previous financial year. Additionally, LC openings for capital machinery, intermediate goods, and industrial raw materials decreased by 19%, 17%, and 4% respectively during the same period.

Selim RF Hussain, chairman of the Association of Bankers, Bangladesh (ABB) and managing director of BRAC Bank, said that the dollar situation has considerably stabilised, with a corresponding decrease in its price. Banks currently hold a substantial reserve of dollars.

However, there has been a noticeable slowdown in the demand for opening import LCs, which can be attributed to weakened consumer demand across various sectors, stemming from overall economic pressures and escalating inflation, he said.

Hussain anticipates that as the economic recovery progresses, consumer demand will rebound, albeit gradually.

LC settlements rise 14.5%

Central bank data reveals that the settlement of import LCs in March amounted to $5.45 billion, marking a 14.5% increase from February's settlement of $4.76 billion. 

However, during the July-February period of the current financial year, settlements have decreased by approximately 14% compared to the same period in the previous financial year.

Banks affirm their ability to open LCs, but traders contend that they are unable to open enough LCs. Furthermore, the dollar price remains elevated in LC settlements, with banks indicating settlement rates in the range of Tk114-115.

City Group is a major importer of consumer goods in the country. 

Biswajit Saha, director of Corporate and Regulatory Affairs for the group, said, "We are still unable to open LCs as per our demand. Additionally, we are required to maintain margins for LC openings, which is burdensome. Furthermore, banks are imposing settlement charges ranging from Tk118-119 for LCs."

Saha emphasised the necessity of increasing the single-party borrower limit for businessmen at this juncture.

Conversations with various banks reveal that they are currently assessing future payment obligations and adjusting their LC openings accordingly. As a result, banks are facing less pressure from deferred LC payments.