Banks get more room to handle large LC payments

Ahsan H Mansur, former governor of Bangladesh Bank, welcomed the decision to raise the limits after four years, saying it could send a positive signal to the market.

“It will send a message of confidence to the market. However, the central bank must maintain policy consistency. If it suddenly cuts the limits again, that could send a negative signal to the market,” he said.

Mansur cautioned that managing liquidity in the banking sector would require particular care as export earnings were growing slowly, inflation remained high and the economy continued to depend on external assistance.

Easing pressure from large import payments

The NOP measures the net difference between a bank’s foreign currency assets and liabilities under the applicable regulatory calculation. The prescribed limit determines how much net foreign currency exposure a bank can maintain, including its exposure to exchange rate movements.

Before July 2022, the NOP limit was set at 20% of a bank’s regulatory capital. The central bank subsequently tightened the limits.

For lenders handling large import transactions, a higher limit provides greater flexibility to accumulate and retain dollars ahead of payment deadlines instead of purchasing substantial amounts shortly before settlement.

“In case of large payments – $60-$70 million, we don’t need to buy dollars from the market after raising the limit,” said a senior official at EBL.

Masrur Arefin, managing director of City Bank and chairman of the Association of Bankers, Bangladesh (ABB), said large payments for state-owned importers could put pressure on the foreign exchange market.

“City Bank handles LC payments for the state-owned Bangladesh Petroleum Corporation, amounting to approximately $90 million. For such large LC payments, we have to buy dollars from the market. This creates a degree of pressure on the dollar rate and the market,” he said.

“An increase in the NOP limit would allow us to collect and hold dollars in advance, reducing pressure when such large payments fall due,” he said.
Arefin said City Bank’s NOP limit had been reduced to $43 million from $73 million and that the bank had reapplied to the central bank to raise it.

He said it is important to ensure that large payments did not push up the dollar rate. Previously, the NOP ceiling was linked to 15% of capital in some circumstances, but it is no longer directly linked to capital and is determined by the Bangladesh Bank, he added.

Industry insiders said large state-owned importers, including the Bangladesh Petroleum Corporation and Petrobangla, require banks to open LCs worth hundreds of millions of dollars for fuel and energy imports.

Not all private commercial banks have the capacity to handle payments of this scale. Treasury bankers said higher limits for lenders with stronger foreign currency inflows would help them manage large transactions more efficiently while reducing the risk of breaching regulatory limits.

The additional flexibility could also help banks plan their foreign currency requirements more strategically when several large payments fall due around the same time.

Higher limits could reduce sudden dollar demand

Bankers said lenders operating under tighter NOP limits often had to purchase substantial amounts of dollars shortly before settling large import bills.
When several banks seek dollars simultaneously, the resulting demand could put sudden pressure on the interbank foreign exchange market.

Higher limits are expected to allow eligible banks to accumulate dollars gradually ahead of payment deadlines, potentially reducing abrupt demand spikes and short-term exchange rate volatility.

Hassan O Rashid, managing director of EBL, said LC openings are increasing, particularly as the cost of essential commodities is rising. He added that government LC payments are often large, and a higher NOP limit could help prevent sudden spikes in the dollar exchange rate.

Giving an example, he said, “Suppose the dollar is trading at Tk124 today and a large government payment is due tomorrow. If the dollar rate suddenly rises by Tk1 on the day of payment, a higher NOP limit would allow us to settle the payment at Tk124 without intervening in the market.”

Tareq Refat Ullah Khan, managing director of BRAC Bank, said, “If a bank has a large requirement but a low NOP limit, the limit does not offer much benefit. If my bank has to make a payment of $100 million in a single day and I want to buy the dollars from the market that day, it will put pressure on the exchange rate. But with a higher NOP limit, that pressure can be avoided.”

The timing of raising commercial banks’ NOP limits is significant as Bangladesh faces seasonal demand for imported consumer goods ahead of Ramadan, alongside uncertainty over geopolitical tensions and their potential impact on energy supplies and prices.

However, the extent of the benefit will depend on banks’ actual foreign currency inflows, outstanding payment obligations and the availability of dollars in the market. A higher regulatory limit does not itself create additional foreign currency or guarantee that banks will have sufficient dollars to meet their obligations.

Risks remain despite regulatory relaxation

While the decision is expected to ease operational constraints on large import payments, market participants have warned that greater flexibility could create risks if it is not accompanied by effective supervision.

One concern is that banks with higher NOP limits could retain dollars instead of selling them in the interbank market, particularly if they expect exchange rate movements to make holding foreign currency more profitable.

“If several banks adopt such a strategy simultaneously, the supply of dollars available to other lenders could tighten, potentially aggravating market pressures,” said a senior Treasury banker at a private commercial bank.

A higher permitted net foreign currency position can also increase a bank’s exposure to exchange rate movements, potentially generating gains or losses depending on the direction of its position and subsequent changes in the dollar’s value against the taka.

The Bangladesh Bank will therefore need to ensure that banks use their expanded limits to manage genuine payment requirements rather than build speculative positions or hoard foreign currency.

A senior official of a private commercial bank said the central bank had reduced the NOP limits of several large banks by $20 million to $30 million in 2022, when Abdur Rouf Talukder was governor.

Arefin said there had also been a misunderstanding over NOP limits at the time. Some banks were reluctant to sell dollars in the interbank market and instead held on to them, causing interbank transactions to dry up, he said.