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Exclusive – India’s largest lender asks exporters to trade with Bangladesh in rupees and taka

Exclusive – India’s largest lender asks exporters to trade with Bangladesh in rupees and taka
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By Nidhi Verma and Nupur Anand

NEW DELHI (Reuters) – State Bank of India, the largest lender, has asked issuers to avoid settling deals with Bangladesh in dollars and other major currencies as it looks to limit exposure to declining Dhaka reserves, according to an internal document and a source.

Bangladesh’s $416 billion economy is grappling with rising energy and food prices as the conflict between Russia and Ukraine widens its current account deficit, and dwindling foreign exchange is forced to turn to global lenders like the International Monetary Fund (IMF).

“The country is facing a shortage of foreign currency due to the high import bills and the recent weakness of the Bangladeshi taka against the dollar,” the authority said in a letter dated Aug. 24 sent to its branches and seen by Reuters.

The message and its contents have not been previously reported.

The SBI did not immediately respond to an email requesting comment.

In its circular, the bank said that the decision not to increase exposure to the dollar and other foreign currencies in relation to Bangladesh stems from the current economic situation and the shortage of foreign currency in the neighboring country.

“But exposure to the Indian rupee and the taka will continue,” she added.

Bangladesh’s foreign exchange reserves fell to $37 billion by Friday from $48 billion a year earlier, according to data from the central bank, which provides import cover for just five months.

Finance Ministry officials said Bangladesh is seeking a $4.5 billion loan from the International Monetary Fund, exceeding its maximum maturity of $1 billion under the IMF’s Resilience and Sustainability Fund.

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A source familiar with the matter said the SBI did not want to increase its exposure to Bangladesh.

The source, who spoke on condition of anonymity, added, “We have an approximate exposure of $500 million to Bangladesh and have taken the decision not to increase its growth further, perhaps even reduce it as needed, with the news surrounding the economy.” .

Bangladesh is just one of India’s cash-strapped neighbors.

The island nation of Sri Lanka is grappling with a financial crisis with its central bank reserves standing at just $1.7 billion at a time of accelerating inflation and severe food and fuel shortages sparking protests and a change of government.

Pakistan’s central bank reserves of $8.6 billion are enough for about a month of imports.

Trade in local currency

Commerce Minister Tipu Munshi said last week that Bangladesh wants to reduce dependence on the dollar, and that it sees no problem in dealing with local currencies.

Speaking at an event in Dhaka, he was responding to a question about the increasing focus on local currency trading, and added that the Ministry of Finance is looking into ways to do so.

However, Bangladesh central bank executive director Sirajul Islam told Reuters, “No such decision has been taken yet,” referring to trade in local currencies with India.

Last week, the Central Bank of Bangladesh freed banks to conduct transactions in them, in order to enable trade with China.

Last month, rating agency Standard & Poors affirmed its theoretical stable rating for Bangladesh, saying it expects its external position to stabilize within a year.

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However, the agency said it may downgrade Bangladesh’s credit rating if net external debt or financing metrics worsen further as higher commodity prices and robust imports could weaken the taka and drain foreign exchange reserves.

“Despite the moderate net debt position, the interest burden on the Bangladesh government is significant,” the agency added.

“Its debt denominated in foreign currency, though borrowed mostly from multilateral and bilateral sources, is subject to exchange rate risk.”

An Indian textile exporter, who asked not to be named, said that banks and importers in Bangladesh were not willing to trade in rupees, preferring the taka instead.

He said India had not yet clarified whether exports in rupees would get the same benefits as they would in dollars.

The source added, “The circular issued by the SBI is very worrying, as they said they will not be exposed to exposure to Bangladesh’s exports.”

“Bangladesh is a major trading partner and if a major bank like SBI is not exposed, how will trade grow? It will decline.”

Government data showed that India’s exports to Bangladesh rose 17.5% to $4.94 billion in the April-July period, or the first four months of the fiscal year to March 31, 2023, while imports rose about 11% to $580.7 million.

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