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The Financial Express

Market power of private banks in trade services growing

| Updated: October 23, 2017 15:25:23


Market power of private banks in trade services growing

Commercial banks in Bangladesh offer trade services mainly in the forms of trade payment and trade financing. Export proceeds and import payments flow in and out respectively through banking channels. Though there were variations in growth, both the volumes of export proceeds and import payments increased over the years.
However, the BIBM (Bangladesh Institute of Bank Management) Review 2016 reveals that there was a declining trend in trade services volumes due to sluggish growth in the global economy in recent times. With regard to facilitation of trade process, the private commercial banks contributed the most during the last five years. The BIBM Review noted that four-fifths of export proceeds entered the country and three-fourths import payments were made from the country through private commercial banks in 2015. The data also revealed increased market share of the private commercial banks as compared to the other broad bank groups - state-owned commercial banks and foreign commercial banks operating in the country.
The extensive use of Documentary Credit in import transactions in Bangladesh is apparent in the available data like in previous years. In terms of volume, over 90 per cent import payments from the country were made using letters of credit in 2015. As in the case of import payments, letter of credit (LC) has also been very popular in receiving export payments. In the year 2015, Documentary Credit was used for close to three-fifth volumes of total export proceeds.  The figures are in a sharp contrast to the global figures in general where payment transactions mainly take the form of Open Account. Of the other forms of payment, due to some regulatory relaxation, use of Cash in Advance increased a bit in the country in recent times. In the export processing zones, however, Documentary Collection and Open Account are most commonly facilitated trade payment techniques by the banks.
Though the volume of trade finance of the banking sector increased over the years till 2014, the overall growth of trade finance decreased in 2015 due to sluggish global economy. The BIBM survey revealed that as a bank group, private commercial banks were holding close to two-thirds of the trade finance market in the country in 2015, followed by state-controlled banks with close to one-third of the total trade finance facilitations by the commercial banks. The data also reveal growing market power of the private commercial banks whereas market share of the foreign commercial banks have gone down in recent time. In 2015, private commercial banks were the major contributors in export finance market in Bangladesh with over 55 per cent of the total followed by the state-controlled commercial banks. The contribution of the foreign commercial banks in export finance was insignificant. Of the pre-shipment finance, Packing Credit was not the main component. Rather it has been observed that banks are interested to offer Export Cash Credit or Over Draft facilities in place of Packing Credit to obtain relatively better interest returns. It is to be mentioned that the Bangladesh Bank directed commercial banks not to charge more than 7.0 per cent interest in Packing Credits. Foreign Bill Purchase has been the core component in the post-shipment credit. However, new financing products like Invoice Discounting and Forfeiting are coming up in the trade finance market.
Commercial banks offer import financing mainly in the form of payment against documents, loan against imported merchandise, and loan against Trust Receipt. In terms of volume, over two-third import financing of the country is offered by the private commercial banks followed by the state- controlled commercial banks. As of 2015, most of the import financing were in the form of loan against Trust Receipt as most banks do not have or avail warehousing facilities.
One important observation in connection with import financing was the huge increase in the buyers' credit (discounting through Offshore Banking Units or OBUs/Correspondent Banks) under deferred payment credit, popularly known as Usance Pay at Sight or UPAS as of end 2015. The  Bangladesh Bank addressed the issue by allocating the liabilities on quarterly basis to minimise the potential impact of sudden high outflows of foreign currency and apparently the initiatives by the central bank worked.
About trade financing by offshore units, the BIBM survey found that the major source of fund of the offshore units were borrowing from either foreign correspondent, IFC, ADB or bank's own onshore unit. Offshore lending is discounted by the deferred bill against Letter of Credit issued by the on-shore unit of the same entity. Moreover, in the beginning of 2013, the Bangladesh Bank issued a circular to permit discounting of direct and deemed export bills through offshore. Consequently, OBU contributed heavily in discounting of bills - both import and export. But OBU's direct loan to the permitted customer (especially type A industry) remained very insignificant). Offshore banking activities of the country are dominated and controlled by a few offshore banking units of foreign commercial banks.
With regard to international bank guarantees, most guarantees received in Bangladesh are indirect or counter guarantees. The government sector is the main recipient of international bank guarantees in Bangladesh mainly in areas of infrastructure and public procurement. Of the other areas, readymade garments receive bank guarantees as securities against export under Documentary Collection.  From Bangladesh, most of the bank guarantees issued are direct guarantees and are performance guarantees. Other major type of bank guarantees is Advance Payment Guarantee for trade purposes. Bank guarantees issued to obtain foreign loans is a relatively recent development in the country.
As a bank group, private commercial banks played the most prominent role in workers' remittance flows into the country during the last five years. As of 2015, these banks were holding more than two-third market share of the banking sector. In spite of huge branch network of the state-controlled banks, use of technology and linkages with other entities made it possible for some private commercial banks to expand their remittance services remarkably in rural Bangladesh. Private commercial banks have also been controlling the market for maintenance of Foreign Currency Accounts.
The above picture clearly indicates that private commercial banks, as a group, are the major market share holders in trade facilitation by banks in Bangladesh. The private banks are dominating all the broad categories- trade payments, trade financing, remittance services, and maintenance of foreign currency accounts. And very importantly, the market shares of the private commercial banks are expanding further.
The writer is Professor and Director (training), Bangladesh Institute of Bank Management (BIBM).  
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