The decision by the Bangladesh Bank (BB) to remove limits on letters of credit (LCs) for six banks that are currently experiencing financial difficulties is a major step forward for the banking industry. Following a meeting at BB headquarters on Monday, this decision was made. It follows the strict rules that were first imposed in August, which required these banks to maintain a 100% cushion for opening LCs.
Along with deputy governors Nurun Nahar, Md Habibur Rahman, and Md Kabir Ahmed, Bangladesh Bank Governor Ahsan H. Mansur chaired the meeting. The chairmen and managing directors of Bangladesh Commerce Bank, Padma Bank, Union Bank, Social Islami Bank, First Security Islami Bank, and ICB Islami Bank represented the troubled banks.
The governor responded favourably to their pleas, according to Social Islami Bank’s acting managing director, Muhammad Forkanullah. He emphasised the seriousness of the issue in the aftermath of a political transition on 5th August that resulted in board reconstitutions in many of these banks by stating that the central bank requested information on debt recovery, deposit mobilisation, and general banking activities.
The central bank has also been urged by the faltering banks to provide quick liquidity support, which is essential for handling the continuous pressures from deposit withdrawals. They have characterised the current disbursement method as insufficient and voiced worries about the high profit rates linked to this liquidity support. Instead of a phased-out strategy, a more coordinated and rapid effort is required, according to one chairman who asked to remain unnamed.
The Ready-Made Garment (RMG) industry is anticipated to be significantly impacted as the central bank’s move to loosen LC limitations takes effect. An important part of Bangladesh’s economy, the RMG sector, depends largely on LCs to import raw commodities. The seamless flow of imports required for clothing production would be improved if the faltering banks could return to normal operations, possibly stabilising supply networks that have seen disruptions.
Analysts warn that although loosening regulations would give these banks short-term respite, sustained high profit margins on liquidity support might nonetheless impede their recovery and, in turn, the operations of the RMG industry. The sustainability of borrowing costs and financial assistance for faltering banks must be balanced in order to assess the state of the economy as a whole and the RMG sector’s recovery trajectory.
