Confirmation and Discounting Business of banks in Bangladesh

Usance Payable at Sight (UPAS) / Suppliers credit

Usance credit payable at sight is a structure where the Letter of Credit issued by Importer’s bank is a Usance LC and contains clauses that allow the exporter to get paid immediately through a financing bank while the importer pays after the end of the usance period, thus availing credit period. Under the UPAS structure, associated expenses including draft acceptance charge, discounting interest and service charge are paid by the importer (LC applicant).

Suppliers Credit / LC discounting structure (Defered or Usance LC) is conceptually similar to UPAS except that in these classic structures, the associated expenses including draft acceptance charge, discounting interest and service charges are paid by the exporter (LC beneficiary).

Why UPAS LC financing is required

Buyer always wants to buy in credit on the other hand sellers always prefer to sale in cash. UPAS LC is the perfect solution that could accommodate interest of buyer and seller. As seller to be paid at sight but buyer will pay at a future time, so a financing source should be there to finance the transaction for the period starting from when seller receive his payment to when buyer will pay for this purchase.

High LC confirmation fee big challenge for businesses 

Bangladesh's importers have to pay a much higher amount than importers in other South Asian nations to confirm their letters of credit (LCs), thus pushing up the cost of doing business for local entrepreneurs. 

The reasons bankers and businesses give for this are: Absence of a sovereign bond that reflects the country's creditworthiness, some banks' failure to make LC payments on maturity, and the deteriorating health of the banking industry.

 

Even importers in Pakistan, which is a high-risk country with a dwindling economy, be it foreign exchange reserve, exports or GDP growth, have to pay 50 percent less than Bangladeshi importers for confirming an LC.

An importer in Bangladesh has to pay up to 3.5 percent of their import value as confirmation fees on LCs per year.

"Bangladesh has no sovereign bond, so the country's risk is totally unknown to foreign banks and investors,"  A sovereign bond can set a country's benchmark pricing, which Pakistan now has after launching such a bond last year.

"As a result, Pakistan's trade (LC) confirmation charge is 50 percent less than that in Bangladesh,"

 LC confirmation fees are a security tool that reduces risks for exporters. When exporters in Europe or America are not satisfied with the LC-issuing bank (in Bangladesh), mainly for its insolvency risk, or the importing country for its political risks, or both, they may seek an additional guarantee for the payments. Confirmation is a definite and legal undertaking from the importer's bank to the exporter's bank.

Bangladesh imported $55 billion worth of goods in the  fiscal year 2019. Bankers said that of the total imports, at least 25 percent or $14 billion was backed by LC confirmation by a third party bank. If the average LC confirmation was considered 2 percent, then local importers paid an additional $280 million or over Tk2,300 crore as the charge.

LC confirmation charge depends on four major issues – bank risk, country risk, importers and products.  It is high time for Bangladesh to introduce a sovereign bond that can reduce the cost of doing business.

Bangladesh launched a $19 million taka-denominated bond in the London Stock exchange in November last year  is a drop in the ocean.

Businesses in the apparel sector that accounts for most imports, do not need to confirm their LCs because they source things from sellers nominated by their buyers. Also, there is no need for confirmation in case of back-to-back LCs. 

Bankers say that commodity imports such as sugar, edible oil and fuel oil, need to be backed by a third bank in the name of LC confirmation. Again,  chemicals and capital machinery face higher LC confirmation charges than other products.