Banks flout crawling peg, maintain higher rates for remittances, imports

The crawling peg regime has been widely flouted, and within a week of the introduction of the dollar exchange rate system, many banks began collecting remittances at higher rates and charging additional costs for import bill settlements, according to bankers.

Bangladesh Bank data shows that commercial banks saw a drop in gross foreign exchange holdings for three consecutive months, decreasing by $1.13 billion over the last seven months. At the end of April, the figure stood at $5.04 billion.

On Tuesday, some banks collected remittances from foreign exchange houses at Tk119. Additionally, they charged Tk120 or more to settle import letters of credit (LCs), according to managing directors at several banks and six treasury department heads who work with foreign currency.

On 8 May, the central bank introduced the crawling peg system for buying and selling foreign currencies, setting the crawling peg mid-rate at Tk117 per US dollar, up from Tk110, following an IMF prescription in line with its $4.7 billion loan to Bangladesh.

This step has been taken to attract remittance inflow in the formal channel and to allow the market to determine the exchange rate within a Tk1 margin above and below the CPMR.

A treasury department official at a private bank told TBS that although the dollar rate had been fixed at Tk110 for a long time, most banks did not follow this rate.

He added, “Those of us who followed the central bank rate had to incur losses because we could not collect dollars at this low rate.

“After the introduction of the crawling peg, we thought everyone would adhere to it, but now many banks are not following the rate. They have been collecting remittances at higher rates since a week after its introduction.”

He said that yesterday, exchange houses offered Tk118.60. “Although we have followed the central bank rate, I have come to know that many banks have collected dollars even at Tk119,” he added.

“As a result, unfair competition will start in the market. When banks start selling dollars, our inflation will increase because banks will want to make a profit accordingly as they buy at higher prices.”

A Treasury head of a state-owned bank told TBS that everyone followed the crawling peg well for two days. Since then, many banks have been collecting dollars at higher rates while also charging higher rates for opening LCs.

He said, “Most Sharia-based banks are not adhering to this crawling peg rate, which is resulting in them receiving more remittances. They collected dollars at high prices even before this crawling peg system was introduced. When a bank collects the dollar at Tk119, it will charge a higher rate for import LC settlement.”

He added that for a few days after the introduction of the crawling peg, the foreign currency interbank market of banks was functioning well. However, now if there are instructions from the central bank regarding any customer, they are being transacted inter-bank. Besides, some banks are conducting transactions for their own needs without instructions.

Banks’ forex holdings decline  

The country’s banks hold dollars in their nostro accounts for payment of import liabilities and loans, but their foreign exchange holdings have been decreasing continuously this year.

However, at the end of the last financial year, banks’ dollar holdings increased by more than 6%.

According to Bangladesh Bank data, banks’ gross foreign exchange holdings were $6.17 billion in September 2023. Bankers attribute this decrease to the central bank collecting dollars from banks through swaps.

The head of the treasury department of a Sharia-based bank told TBS that their foreign currency holdings have decreased due to these swaps. Currently, banks’ dollar holdings for immediate use stand at $500-700 million.

He added that banks’ gross foreign exchange holdings amount to $5.04 billion, including debit balances of banks’ nostro accounts and offshore banking units.