Rezaul Karim

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The rate of cancellation of import-related letters of credit (LCs) has increased significantly because of disagreement between importers and exporters and volatility in prices of the commodities/items on the global market, official sources said.

Profit earning of banks from LCs has shrunk due mainly to scrapping of a large number of import document in the recent times, they said.

"Most of the LC cancellations occurred due mainly to faulty agreements and loopholes in conditions agreed upon by the buyers and the sellers," an executive director of the central bank told the FE on Wednesday.

The LCs for import of items worth US$ 2558.42 million were cancelled in 2011-12 fiscal, the Bangladesh Bank (BB) data showed.

Such cancellations were worth $1881.88 million in the 2010-11 fiscal.

The LC cancellations increased by 26.44 per cent in the last fiscal over that of the previous one, according to the BB statistics

"If a large number of LCs were not cancelled by importers and exporters, the respective banks would get the service charges against the LCs. Such service charges would have helped the banks to earn more profit. Since the opposite is happening, the banks' profit from the area is declining," the foreign exchange branch manager of a private bank told the FE.

A number of LCs against various items were also cancelled because of the drastic fall in the prices of commodities in the international market, officials said.

The cancellation of LCs increased last fiscal year owing to the ongoing financial meltdown across the world, a BB high official said.

The LCs for consumer goods worth US$ 256.93 million were cancelled in the fiscal 2011-12.

The BB officials, however, expressed concern over the rising trend in the cancellation of LCs of essential items, saying that the rate of cancellation may go up further in the near future if the prices of the same continue to fall.

The LCs for intermediate goods worth US$ 126.98 million, industrial raw materials worth $1164.91 million, petroleum and petroleum products worth $158.28 million, capital machinery worth $205.81 million, miscellaneous industries worth $244.27 million and others worth 401.25 million were cancelled in the fiscal 2011-12, the BB data showed.

Besides, the LCs for importing goods worth US$ 205 million were cancelled in July-August in the current fiscal.

The BB official said the increased cancellation of LCs might create pressure on the supply situation of commodities in the local market.

"The consumers are not getting any benefit from the declining trend in prices of commodities on the global market due mainly to the lack of proper monitoring by the government," a PCB (private commercial bank) official added.

News: The Financial Express/Bangladesh/02-Nov-12