Risk minimisation as trade service facilitation

In the context of Bangladesh, banks have noteworthy involvement in trade facilitation by engaging in relevant legal enforcements and commercial risk minimisation. Banking industry of the country has been facilitating payment, finance and risk management services to the traders and thus contributing in growing global trade integration of Bangladesh and other economies of the world. With the growing business complexities, technological changes, market expectations and financial crimes, trade services are becoming increasingly challenging to the banks and financial institutions of the country, as in the other countries of the globe.

Regarding trade services in Bangladesh, Private Commercial Banks (PCBs) as a group is the major market share holder in the trade facilitation. PCBs were also the most dominant share holder as a bank group in export financing, remittance services, and maintenance of foreign currency accounts. Of the payment methods, documentary credit or LC remained the most prominent payment technique in import and export transactions. Though the extensive use of documentary credit started in response mainly to regulatory compulsion, LC remained the most dominant even after removing restrictions on most areas of transactions. Rather, use of LC increased both in onshore and offshore trade facilitation. This is in sharp contrast to the global practice in general where most payment transactions take place through open account. Documentary collection remained the second most important trade facilitation tool in the country. Of the different types of LC, back-to-back and transferable LC remained dominant; however, there are decreasing trend in the use of transferable LC. In offshore banking, Usance Pay at Sight (UPAS) remained the key component in the asset side. Though total volume of short-term and long-term foreign loans facilitated by banks increased consistently, the growing trend of short term credit is particularly visible and should be kept under constant monitoring of the Bangladesh Bank.

Poor drafting of LC clause and inappropriate use of incoterms in LC operation became a matter of concern to many of our trading partners since last two years. The root cause might be the using of the same SWIFT template from generation to generation without carefully considering the present context, changing guidance rule, and the underlying transactions. It is essential to work on the issues to uphold the country's reputation for due competitiveness. Global and local evidences also indicate that SWIFT messaging, which is the most reliable messaging system till date, may cause serious fraud, if mishandled.   

Correspondent banking relationship remained a critical factor for trade facilitation for the last three years in the country. The impact of the de-risking has now been rebounded to some extent, as the development institutions are now working to redefine correspondent banking business with an expectation to bridge the gap between uncertainty in regulatory expectation and compliance programme of global correspondent banks. However, the role of certain banks as advising bank, second advising bank, nominated bank under documentary credit, and collecting bank and presenting bank under documentary collection have changed remarkably. Some traders and banks in Bangladesh are also facing challenges.  For credibility, Bangladesh Bank (BB) may think of assessing and publishing status report on correspondent banking relationship every year.

Credit risk and default loan scenario in trade services in Bangladesh is not different from the NPL scenario in the country as a whole. In several instances, banks had to create forced Loan against Imported Merchandise (LIM) and Loan against Trust Receipt (LTR) due to the non-compliance of the importers. Non-compliance on the part of exporters resulted in NPL in some cases where there are evidences of unholy collusion between traders. As the data on classified loans are commonly misleading, the NPL data on trade financing should be disclosed separately for better transparency. In spite of the improvement, there are instances of delay in payment and spurious discrepancies in handling documents under LC. In regard to handling fraudulent activities in LC, there should be applicable supportive local laws/set of rules alongside universally accepted guiding rules like UCP 600. Since there is no specific law for governing the cases under documentary credit, there are frequent interventions of court refraining banks to honour its obligation on the plea of quality and/or quantity claim. Time has come to have separate letter of credit law for the country. This can be achieved either by enacting separate law like USA, China and Vietnam etc. Moreover, considering the unique nature of trade transactions and growing complexity, a separate bench in the court may be needed to ensure effective use of regulatory machinery. In regard to growing expansion of the use of UPAS, banking activities in EPZs and other financing issues in offshore banking, the country needs a regulatory guideline immediately. Considering the requirements of specialised efficiency and market credibility, stringent criteria may be followed to allow offshore banking units in the country.

Though the available sets of AML rules are in line with globally accepted standards, still there is scope to improve their enforcements.  Authorised dealers (ADs) need to be more serious regarding legal compliance and identifying right prices for the exportable and importable products to address TBML. Compliance is already the greatest concern in banking industry, and greater compliance requirements are affecting operational costs of trade financing. Reporting system has a role in this connection. 

Enforcement of online reporting and monitoring system by the Bangladesh Bank have brought positive changes in terms of decline in irregularities by banks and improvement in data accuracy. Since the obligation of ensuring the prices of importable items as 'competitive' and the price of exportable item as 'fair' rests primarily with banks, they have to find out an effective mechanism to implement the obligation. Though the Customs authorities offered a list of minimum prices for selected items, the problem remains. The country needs greater coordination amongst different stakeholders to address the pricing issues. From anti-money laundering perspective, greater use of LC offers better protection, monitoring and control of the regulatory authority. Any attempt to move towards open account in line with global trend might prove to be risky from the point of view of TBML.

There are evidences that in Bangladesh, a good number of trade transactions started on wrong foundations. In many cases, the contract or purchase/sale contracts are not legally enforceable for ensuring optimum protection. Contract Act of the country is not always suitable for international trade transactions. Though eighty-nine global countries ratified the UN Vienna Convention as the regulatory guideline, Bangladesh is yet to do that. For sound purchase/sale agreement, it is essential to have coverage of a regulatory framework. Alongside ratifying UN Vienna Convention on Contract of Sale, there should be clear instruction on the other non-ratifying countries in regard to the guiding framework for all international trade transactions. It is also right time to undertake preparatory work for adapting with on-going global trade digitisation movements.   

Dr Shah Md Ahsan Habib is Professor & Director (Training), BIBM.

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