As coronavirus spreads across the world some of the impacts of the pandemic on letter of credit (L/C) business are emerging.

In some cases central banks are intervening in the L/C market to help struggling businesses, banks and the wider economy while certain sectors that rely on L/Cs have been hard hit by the crisis.

Central banks

Algeria is intervening in the L/C market as it strives to cope with the double shock of the coronavirus pandemic and plummeting oil prices.

The central bank of Algeria has allowed banks in that country to send and accept scanned documents for L/Cs. Other central banks are also considering similar moves.

Nigeria's central bank has said it will guarantee L/Cs from Nigerian banks during the coronavirus pandemic and has asked correspondent banks and creditors to Nigerian lenders not to panic over L/Cs and other obligations (DC World News, 24 March 2020). In Sri Lanka the central bank is suspending imports of certain goods purchased with L/Cs and other instruments (DC World News, 26 March 2020).

Bangladeshi textile manufacturers

Manufacturers in the Bangladeshi textile sector, which over recent years has relied heavily on Chinese imports that have dried up for the time being, are finding it increasingly hard to obtain the L/Cs they need.

Many of the textile firms are seeing a slump in demand and late payments from customers. As payments are delayed, banks are blocking manufacturers from opening new L/Cs.

If the manufacturers cannot open new L/Cs for fabrics and other raw materials, they will fail to generate new orders with other customers.

Aircraft leases

At the other end of the business spectrum, the aviation industry is profoundly affected in the crisis and some L/Cs may well be called in as the airlines that lease aircraft struggle to pay lessees.

Under most aircraft leasing agreements, the lessee has to provide the lessor with standby L/Cs or guarantees from a reputable bank or other financial institution.

Longer term L/C prospects

Many markets will change as a result of the economic stresses caused by the crisis and some changes in the L/C market can be anticipated.

Many companies will be seriously looking at their creditworthiness review processes to vet new and renewing customers that are considered at risk. Some firms would do well to consider requiring L/Cs from customers to secure payment, particularly on larger projects.

Speedier blockchain

Blockchain enabled L/Cs have helped sustain trading despite disruptions caused by the coronavirus outbreak according to HSBC's regional head of global trade and receivables finance for Asia-Pacific, Ajay Sharma (DC World News, 11 March 2020).

If Sharma's view is upheld by the L/C market then the already keen race to develop blockchain enabled L/Cs may become faster still.

This article represents the views of the author and not necessarily those of the ICC or Coastline Solutions.