Country ratings to lower fees charged by FCBs for LC confirmation

Country ratings to lower fees charged by FCBs for LC confirmation
Sheikh Shahariar Zaman

Foreign banks engaged in confirmation of letter of credit (LC) will face competition after Bangladesh has received good ratings back-to-back from S&P and Moody’s.

The multinational banks charge fees to endorse LC opened with local banks. Now, the charge for the service is expected to come down significantly in the coming months following the positive ratings.

The LC confirmation charge depends on risk factors of a country and the local banks.

Last week, S&P has assigned BB- and Moody’s Investors Service Ba3 rating for Bangladesh meaning macroeconomic fundamentals of the country is better and it has less chance to face severe stress on creditworthiness.

Bangladesh’s rank is above Pakistan and Sri Lanka but lower than India in the sub-continent.

“We will face competition as foreign banks will now have to charge less fees for confirming the LCs,” said Mamun Rashid, country head of Citibank NA Bangladesh, which provide LC confirmation service.

It is not possible for a foreign bank to charge higher fees as country risk for Bangladesh is now known to everybody and they will have to charge accordingly or lose business, he explained.

“If a foreign bank charges higher rate, local banks can go to another that offers lower rate,” he said.

Within three months there will be visible change in the rate of fees, he hoped.

Citicorp, one of the biggest banks in the world, has recently conducted its own rating for Bangladesh and its rating is similar to those of the two international agencies, Mr Mamun said.

International banks working in Bangladesh now can bargain with their head offices to increase the exposure limit for the country, he said.

Mutual Trust Bank managing director Anis A Khan said foreign banks will fix a limit on LC value for all local banks for which they will not need any confirmation.

“Suppose a foreign bank gives $50 million limit for a certain local bank and it does not need any confirmation until the limit is exhausted,” he explained.

For LC confirmation above the limit, the charge is expected to fall by fifty percent of the current rate, he said.

It is expected that it will take one and half years to complete the whole process, but the impact will be visible after three to four months time, Mr Anis said.

The benefit will also pass on to exporters as they also import a huge volume of raw materials for re-exporting in the form of finished goods, he said.

The country’s imports were worth $21 billion and exports $15.56 billion in the last fiscal.

Exports of readymade garments coupled with robust remittance flow and procurement of minimum foreign commercial loan and extremely well debt servicing performance are the reasons behind the good country ratings.

source:http://www.thefinancialexpress-bd.com/more.php?news_id=97849&date=2010-04-18