Trade financing of commercial banks plummeted heavily in August and September this year as compared to the corresponding period of the previous fiscal year as orders for fresh consignments from India and other third countries dropped due to the prolonged protest in the Tarai region.
Normally, trade financing of commercial banks increases during August and September as importers start placing orders for fresh consignments eyeing the festive season. The number of letters of credit (L/C) opened in August and September this year dropped by 63.9 per cent as compared to the same period of the previous fiscal.
A total of 4,325 L/Cs worth $1.04 billion were opened in August and September last year, which saw a significant drop this year. Only, 1,987 L/Cs worth $377.19 million were opened this year, according to the Monitoring Unit under Foreign Exchange Management Department of Nepal Rastra Bank (NRB).
L/C is a mode of payment, which is mandatory for traders while purchasing goods and services worth more than $35,000 from a foreign country.
Due to the uncertainty in the Tarai, where the major trade routes and customs points are located, importers have been hesitant to place orders for fresh consignments from third countries citing high costs of import.
The number of L/Cs opened in September, however increased as compared to August this year. According to NRB, only 410 letters of credit amounting to $81.06 million were opened in August, as compared to 2,099 L/Cs worth $434.85 million in the corresponding period of the previous fiscal.
Likewise, in September this year, a total of 1,577 L/Cs amounting to $296.14 million were opened, which is a drop of 51 per cent as compared to the corresponding period last fiscal. Last year in September, 2,226 L/Cs amounting to $604.94 million were opened to import goods from India and third countries. According to traders, it normally takes one-and-a-half months for cargo to arrive at the Kolkata port from the date the L/C is opened.
As a large volume of freight is stuck at Kolkata port, the Consulate General, in the last week of September, had requested the private sector organisations not to place fresh orders for consignments from third countries. Nepal-bound cargoes have been stuck at the Kolkata port since long due to the obstruction in the movement of vehicles from India to Nepal. This means, importers will not place fresh orders till the problems are resolved.
“This situation will hit trade financing badly,” said Bhuvan Kumar Dahal, CEO of Sanima Bank. Trade financing covers 20 per cent of the total lending portfolio of commercial banks, which is worth Rs 1,100 billion, and it might decline this year due to low import. Industrial production and consumption sector have been affected the most due to the decline in imports.
A version of this article appears in print on October 14, 2015 of The Himalayan Times.