Bangladesh Raises Bank Dollar Limits for Large LCs

For the first time since the 2022 dollar crisis, Bangladesh Bank is increasing foreign currency limits for commercial banks, allowing them to better manage large import letters of credit and meet overseas payment obligations. Several major banks, including BRAC Bank, Uttara Bank, and NCC Bank, have already seen their limits raised, with one bank’s limit increasing from $39 million to $80 million. This move aims to provide lenders with greater flexibility in handling foreign exchange transactions.

New Limits Aim to Reduce Market Pressure

Eastern Bank is seeking to increase its foreign currency limit from $40 million to $70 million, while City Bank, which had its limit reduced from $73 million to $43 million, is also asking for a revision. This move is expected to provide eligible banks with more flexibility in accumulating dollars before large payment deadlines, which is key for fuel and essential commodity imports before Ramadan, as it could help reduce sudden demand in the foreign exchange market.

A senior Bangladesh Bank official said the country’s foreign exchange reserves, which stand at around $36 billion, encouraged the central bank to raise the limits. That amount is equivalent to six months of import payments. Mohammad Ali, managing director of Pubali Bank, said higher limits would allow banks to hold more dollars in their nostro accounts, which they maintain with overseas correspondent banks.

“This will give banks a significant advantage in meeting import obligations,” Ali said. “It will provide additional comfort, particularly for payments related to fuel and large-value LCs.” Ahsan H Mansur, former governor of Bangladesh Bank, welcomed the decision after four years, saying it could send a positive signal to the market.

Managing Large Payments

The net open position (NOP) limit measures the net difference between a bank’s foreign currency assets and liabilities. Before July 2022, the NOP limit was set at 20% of a bank’s regulatory capital. The central bank tightened these limits after that date. For lenders handling large import transactions, a higher limit provides more flexibility to accumulate and retain dollars ahead of payment deadlines.

“In case of large payments – $60-$70 million, we don’t need to buy dollars from the market after raising the limit,” said a senior official at Eastern Bank. Masrur Arefin, managing director of City Bank and chairman of the Association of Bankers, Bangladesh (ABB), said large payments for state-owned importers create pressure on the foreign exchange market.

“City Bank handles LC payments for the state-owned Bangladesh Petroleum Corporation, amounting to approximately $90 million,” Arefin said. “For such large LC payments, we have to buy dollars from the market. This creates a degree of pressure on the dollar rate and the market. An increase in the NOP limit would allow us to collect and hold dollars in advance, reducing pressure when such large payments fall due.”

Industry insiders said large state-owned importers, including the Bangladesh Petroleum Corporation and Petrobangla, require banks to open LCs worth hundreds of millions of dollars for fuel and energy imports. Not all private commercial banks have the capacity to handle payments of this scale. Higher limits for lenders with stronger foreign currency inflows could help them manage large transactions more efficiently.

Risks and Market Considerations

The central bank will need to ensure banks use their expanded limits for genuine payment needs. A higher NOP limit can increase a bank’s exposure to exchange rate movements. Banks with higher limits could retain dollars instead of selling them in the interbank market. This behavior could reduce dollar supply for other lenders, potentially creating new market pressures.

Monitoring and Market Impact

A senior official of a private commercial bank recalled that the central bank reduced the net open position limits for several large banks by $20 million to $30 million in 2022.