Correspondent banking relationship -- Bangladesh perspective

Correspondent banking is the provision of banking services by one bank (correspondent bank) to another bank (the respondent bank). By establishing multiple correspondent relationships globally, banks can undertake international financial transactions for themselves and for their customers in jurisdictions where they have no physical presence. Large international banks typically act as correspondents for thousands of other banks around the world.

Bangladeshi banks mostly act as respondent banks because they have to rely on the big global banks like Standard Chartered Bank, UK; Commerzbank AG, Germany; Mashreq Bank, UAE; JP Morgan Chase Bank, NY and Wells Fargo Bank, NY to conduct their international business. As a respondent bank, we usually obtain the following array of services through various correspondent banks:

* Issuing import Letter of Credit (LC) abroad and receiving export LC from abroad.

* Maintaining Nostro Account in a variety of currencies (USD, Euro, Pound Sterling etc.) to make wire transfers for payment against import, receipt of export proceeds and inward remittance, fund transfer, paying tuition fees abroad, treasury fund management etc.

* Availing Credit Line to confirm and discount our LCs abroad as foreign supplier often seeks confirmation of LCs for payment guarantee.  

It's not so easy to establish as well as maintain the already established correspondent banking relationship, in respect of Nostro Account with world's renowned banks and availing credit line from them. For this, few things must be ensured by Bangladeshi respondent banks including but not limited to stable financial performance, strong balance sheet, strict anti-money laundering and combating financing of terrorism measures, corporate governance and management capacity.   

CORRESPONDENT BANKING RELATIONSHIP IN BANGLADESH -- CURRENT STATUS: There is a good number of correspondent banks operating in Bangladesh. Some have full fledged branches, some have representative office only and some are controlling the Bangladesh part from other countries, mostly from India.

Not all banks are focused on the same issues. For example, some are giving Relationship Management Application (RMA) service only, some are focused on Account Relationship i.e., clearing business, some are focused on trade business i.e., confirmation and discounting of foreign LCs, and some are giving trade loan for offshore banking units. For example, Wells Fargo Bank NA, New York, Habib American Bank, New York, and JP Morgan Chase Bank, New York are mostly focused on catering clearing service to Bangladeshi banks alongside credit line to confirm and discount LCs. On the other hand, some middle eastern and Asian banks are very much active in trade business by confirming and discounting foreign LCs issued by Bangladeshi banks.

However, Standard Chartered Bank (SCB), New York and Mashreq Bank, UAE are offering almost all types of correspondent banking products. They are active in clearing service, trade business and also in providing funded facility to be used at the offshore banking units (OBU) of the Bangladeshi banks. They are the main players in the correspondent banking market of Bangladesh. SCB is currently offering account relationship in 6 (six) currencies to Bangladeshi bank -- in USD, EUR, GBP, ACU Dollar CNY and JPY. Mashreq Bank is also currently offering Nostro Service in USD, AED and ACU dollar.

Multilateral development banks like Asian Development Bank (ADB) and International Finance Corporation (IFC) also play very important role in trade finance business in Bangladesh by giving credit line to some banks. ADB under their Trade Finance Programme (TFP) is offering credit line (both funded and non-funded) to Bangladeshi banks. ADB and IFC's credit line to Bangladeshi banks is a great comfort for the foreign correspondent banks as they can accommodate the transactions of Bangladeshi banks against ADB and IFC's credit line. And ADB & IFC backed transactions (LC confirmation and discounting) usually enjoy lower pricing as compared to other transactions.  

Alongside the above foreign correspondent banks and Multilateral Organisation, some local banks of Bangladesh like AB Bank, Eastern Bank, Sonali Bank, Prime Bank are also offering correspondent banking service albeit in limited scale through their foreign branches.

Although there are so many players in the correspondent banking market in Bangladesh and fair degree of competition is also there, in terms of clearing service in USD, Bangladeshi banks are largely dependent on Wells Fargo Bank NA, NY, Habib American Bank, NY, JP Morgan Chase Bank, NY, SCB, NY, Mashreq Bank, NY, and Citibank, NY. However, considering the full package of correspondent banking service, SCB and Mashreq Bank are the key market players here and any sort of disruption like reduction of exposure to Bangladeshi market or in the worst case de-risking by these two banks may expose the banking sector of Bangladesh to a very vulnerable situation to conduct international trade for the time being at least. 

CURRENT CHALLENGES OF CORRESPONDENT BANKING RELATIONSHIP:

1. Concentration Risk

Since Correspondent Banking market of Bangladesh is predominantly controlled by few large foreign banks, Bangladeshi banks are therefore facing 'Concentration Risk' in terms of availing correspondent banking services.

ii). Compliance first

In today's correspondent banking parlance, compliance has become the first priority. Correspondent banks may compromise business but not any deficiency in Anti Money Laundering (AML) and Combating Financing of Terrorism (CFT) measures of Bangladeshi respondent banks. 

iii. De-risking:

One of the key challenges of Correspondent Banking Relationship (CBR) being faced by Bangladeshi banks currently is de-risking. It refers to the termination or restriction of CBR by Global correspondent banks with our banks. Since the global financial crisis of 2008, global banks have been reviewing their CBRs and many have decided to de-risk some of their correspondent banking services to different regions, jurisdictions including ours. Cut off of all clearing services in USD by HSBC in the year 2016 is the latest example of de-risking faced by Bangladeshi banks.

The World Bank Group's paper on 'The decline in Access to Correspondent Banking Services in Emerging Market, Trends, Impacts and Solution' published in the year 2018 found following reasons for de-risking:

a) Profitability/low business volume

b) Overall risk appetite of correspondent bank

c) Inability of respondent bank to undertake Customer Due Diligence

d) Changes to supervisory requirements in correspondent bank's jurisdictions

e) Money laundering/terrorist financing risks in respondent bank's country

f) Respondent bank's high-risk customer base

g) Sovereign credit risk rating of respondent bank etc.

iv) Delayed payment/non payment

In Bangladesh, there is no single instance of default to meet up correspondent bank's payment obligation. However, we are far away from the standard practice of making timely payment. Due to this delay in payment, confirmation rate faced by Bangladeshi banks are significantly higher than that in India, Pakistan and Srilanka, although we have better sovereign rating than Pakistan and Sri Lanka. Following table depicts the comparison:  

v) Performance of macro economy and banking industry

Adverse macro economic indicators pertaining to import, export, remittance, GDP growth, inflation, foreign exchange reserve, exchange rate, balance of payment (BoP) pose serious threats to correspondent banking relationship. On the other hand, dismal performance of banking industry like high non performing loan (NPL), liquidity crunch, regulatory relaxation in key policy decisions like loan classification, provisioning, rescheduling are the other reasons of discomfort for correspondent banks.

vi). Financial performance of respondent bank

Financial performance of the respondent bank, especially in respect of liquidity, capital adequacy, asset quality and profitability are always causes of concern for correspondent banks.  

vii). Adverse media news

Adverse media news regarding the economy, banking industry or a particular bank dents the confidence of foreign correspondent banks to take exposure on Bangladeshi banks.

WAY OUT TO OVERCOME THE CHALLENGES: The following may help strengthen the respondent banks' position while maintaining relationship with overseas correspondent banks:

* To ensure stricter Anti Money Laundering and Combating Financing of Terrorism related laws from the regulator and meticulous implementation of the same by the banks

* To show zero tolerance to delay in payment from bank's policy making level

* Diversifying correspondent relationship to overcome concentration risk

* To pursue International Best Practice in terms of corporate governance

* Dialogue with correspondent bank from the policy making level in case of de-risking

* To increase Knowledge and responsibility of correspondent banker

Finally, it can be said that correspondent banking relationship is a win-win case for both the larger correspondent banks and small respondent banks like ours. But to avail smooth correspondent banking services by the way of navigating the risk of de-risking and concentration risk, we must have to ensure corporate governance, zero tolerance to delayed payment and stricter compliance culture in the banking industry.    

 (Views contained in the article are writer's own and do not necessarily reflect that of the bank he is associated with.)

Md. Razon Mia is a banker.

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