Banks to be fined for failure to pay foreign parties for LCs

The Daily star, April 08, 2014

Bangladesh Bank has decided to fine the delinquent banks that have failed to make payments to foreign parties against letters of credit (LCs), a top BB official said.

“It is reported internationally when a bank fails to pay against an LC on maturity. We have no option but to fine these delinquent banks,” Abu Hena Mohammad Razee Hassan, deputy governor of BB, told The Daily Star yesterday.

The wilful default by a few banks is set to cast a bad light against the country’s entire banking sector, negating the benefits of Bangladesh coming out of the grey list of Financial Action Task Force, the global money laundering and terrorist financing watchdog.

The finance minister and central bankers said the country will not have to bear the extra cost in LC confirmation charges it had to count when it was on the grey list.

The LC confirmation charge is imposed when an exporter’s (foreign party) bank wants security in receiving payments under the LC.

Accordingly, an importer’s (local party) bank approaches international banks such as HSBC, Standard Chartered or Citibank NA, to provide guarantee to the exporter’s bank about the payments.

And, these banks impose a charge, which is called LC or ad confirmation fee. This is also called a ‘risk fee’ taken by the confirming bank.

The LC confirmation charge depends on some factors, mainly the country risk and the reputation and strength of the issuing bank. It is also called commitment fee and varies from bank to bank.

Presently, banks charge 1.5 percent to 2 percent of LC value as confirmation fee, meaning a local importer has to pay $2 million to another bank as LC confirmation fee against an import of $100 million worth of goods.

“It should be 0.5 percent of LC value, especially after Bangladesh’s good score in FATF assessment,” said the BB deputy governor, adding that some banks’ failure to pay against LCs has shrunk local banks’ bargaining capacity to reduce LC confirmation fees.

Some other BB officials said Bangladesh’s credit rating might also deteriorate for this failure.

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