Overseas banks refuse to honour Sri Lankan LCs
In a new twist to the forex crisis, overseas corresponding banks are refusing letters of credit from local banks.
Importers lament that they faced several instances during the past month where certain banks overseas refused to honour their letters of credit (LCs) but did not give a good reason for doing so. “But we know that they don’t have any confidence in the country’s situation. This is why they are wary of honouring these LCs,” an importer, trying to bring down some goods from a European country, told the Business Times. Another importer confirmed this saying that for starters, Sri Lanka’s exchange rate is not ‘real’ which these overseas banks are well aware of.
A banker said the overseas banks willing to honour the local LCs request a third-party guarantee. An economist pointed out that this was the situation in the ‘70s when all LCs by Sri Lankan banks needed to be guaranteed by a third-party bank based in Singapore. The banker said that certain overseas banks assess the local bank credit rating. “Lately it seems that this credit rating had dropped according to their assessments.”
The local banks are not releasing their US dollars with the recently introduced cap of Rs. 203 per US dollar exchange rate. “They are not making money at this rate – especially when the black-market rate goes beyond Rs. 240. We cannot clear goods from Customs as the banks say they don’t have US dollars,” the importer said.
A Customs official confirmed this saying that many importers’ goods are lying at the Colombo Port without being cleared.
An exporter who needs to import raw materials pointed out that his company has to settle the supplier late which is not good for business. “Usually, we get a 90-day period to settle. We cannot honour this commitment as the banks said they have run out of US dollars.” He added that what is bizarre is the banks tend to delay outward payments from the companies’ own foreign currency accounts despite the accounts having adequate funds.
“They are slow in releasing these funds and because of these delays, the companies suffer an exchange loss,” he added.
An industry source told the Business Times that one state bank has over US$ 3 billion in export proceeds. He said that it is not a matter of ‘not having’ US dollars, but the banks are holding onto the dollars as the exporters don’t want to lose out on the exchange rate.
This also has a lot to do with commercial banks making supernormal profits over the past few months solely on the exchange rate. One bank has made over $3 billion in just three weeks, a banking industry source told the Business Times.
The inward remittances too has dropped by 30 percent which has aggravated the forex crisis in the country. A second economist noted that a thriving black market has many touts mushrooming and buying dollars at Rs. 225 levels and selling them at Rs. 250 – 260. “Those waiting to go overseas are willing to pay even Rs. 1000 (per dollar) to buy dollars. This is creating a large informal market.”