Two of Bangladesh's commercial banks have allegedly defaulted on repayments of foreign loans against letters of credit (L/Cs).

The defaults have raised concerns that more defaults may be on the way, which could cause Bangladesh's credit rating to deteriorate and L/C confirmation costs to rise.

Defaults

Two local private commercial banks, Prime Bank and Dutch Bangla Bank, have reportedly failed to repay loans of no more than US$2 million extended by the Islamic Corporation for Insurance of Investment and Export Credit.

Officials are said to be examining the matter against a backdrop of severe strains on Bangladesh's financial system.

One official told local media that some commercial banks are now unable to repay loans against local and foreign L/Cs due to a combination of business failures, political deadlock and civil unrest.

Official warning

But banking regulators last week wrote a letter to banks, urging them to repay loans extended by foreign lenders to protect the image of Bangladesh's financial system.

The letter warned that if banks defaulted on repayments, the ratings agencies could downgrade Bangladesh's rating which in turn would push up L/C confirmation costs.

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