Forex crisis: Local banks walking a tight rope
Local banks are fast depleting their dollar reserves and denying importers’ Letters of Credit (LCs) in a crisis mirroring a devastating time bomb, with the long-run consequences yet to be determined.
Bankers, importers and exporters the Business Times reached out to, who spoke on condition of anonymity, said the shortage of foreign currency has triggered a major crisis.
A banker said that banks have been asked to roll-over debt which means that they should reinvest in government foreign bonds without taking the money out and put pressure on depleted foreign reserves. He said due to the shortage of dollars, they had difficulty in securing $70 million from the market to pay off some bills.
Since the Ceylon Petroleum Corporation decided to raise fuel prices, analysts said that the corporation was able to reduce its overseas borrowings to pay their debt to the two state banks.
The shortage of dollars is also due to pressure mounting on the due payment of a foreign debt of $1 billion by July 27 with about $300 million from it borrowed from state banks.
A senior official at a state bank however said the situation was temporary and that the government was working on streams of inflows to cover the present crisis.
Senior management at the Central Bank (CB) said that private banks were told to manage their foreign currency funding without drawing down on CB reserves.
The way it works is, each bank has an import requirement for US dollars and an inflow of US dollars from exports. These exporter dollars must be converted by exporters which banks can purchase to fund imports; in a depreciating currency environment exporters often hold on to their US dollars and do not convert which poses a problem for import driven banks as they have to go to the CB to borrow. According to CB rules, exporters have been asked to convert 25 percent of their foreign earnings to rupees.
Given the current shortage of forex, there is no other alternative available, analysts say noting that it is a kind of an exchange control and banks have been encouraged to earn dollars through business activities without trying to buy from the market.
But what this also means is that if a small bank does not have its dollars, it cannot serve its customers.
The CB’s external reserves have come down to US$4 billion from $8 billion some years ago which is probably just enough to meet dollar debt for 2021/22.
Certain banks are ‘selective in servicing importer LCs while some importers – that includes pharmaceutical importers are not getting dollars from smaller banks to open LCs.
This is aggravated by the government’s stance to not seek the support of international financial institutions such as the International Monetary Fund (IMF) to manage its debt repayment requirements.
The big concern is that government does not have the policy tools to prevent a financial shock from turning into a freefall, and overall debt levels are higher than during the previous crisis. Analysts say the rupee could further plunge to between Rs.205 to Rs.215 against the US dollar if the crisis persists. However bank dealers said there is an ‘informal agreement’ among banks since April 23 for the rate to be Rs. 200 per dollar for buying purposes and selling at Rs.203.
In the current market, the real kingmakers are the exporters as most do not want to convert their dollars into rupees, an analyst said. Why should they when they get such good rates on their dollar deposits and at the same time can borrow at cheap rupee rates?
However large-scale apparel manufacturers told the Business Times that they need a large percentage of their revenue to meet the big bills. ”Many in the industry are selling at cost or below cost. We are a high labour-intensive industry. The typical apparel exporter value addition is 50 percent and our margins are fairly low at 5 to 6 percent. Our salary payments are 100 per cent. As a result, the moment we get the income, our salary payments are met along with the high utility cost,” one manufacturer told the Business Times.
A senior banker told the Business Times that they cannot borrow money from the CB as they were instructed to find their own funds. “Basically, we need to manage our imports payments with the US dollar proceeds such as the inward remittances.” He said that his bank is managing the importers’ requests, but it is ‘tight’. He added that at some point the new LCs will need to be curtailed.
The least the government can do is either stop exporters from taking rupee loans or reduce the interest rates on dollar deposits. ”This can be done to maybe selected sectors such as the exporters,” the banker said.
Another official at a large bank told the Business Times that many importers’ LCs are not entertained by them. “We need to cut the coat according to the cloth.”
He said that there is a trend of many importers importing more than they used to as they expect the rupee to depreciate. ‘They are trying to stock and hold, to get the benefit in the import costs.”
A senior official at a mid-sized bank told the Business Times that they are taking a chance and opening LCs hoping the situation will sort itself.