Bangladesh Bank has opened a new route for settling eligible foreign trade payments in Taka, allowing local banks to maintain Taka accounts for foreign correspondent banks without requiring the accounts to be initially funded with dollars or other convertible currencies.
Under the arrangement, Taka paid by a Bangladeshi importer can be credited to a foreign bank’s account in Bangladesh. The accumulated Taka can then be used to pay Bangladeshi exporters, while letters of credit, contracts and invoices will continue to be denominated in freely convertible or other admissible currencies.
The central bank introduced the framework through a circular on Wednesday, expanding the scope for settling eligible cross-border transactions in the local currency.
Previously, authorised dealer banks could open Non-Resident Taka, or vostro, accounts for overseas branches and correspondent banks against inward remittances in freely convertible currencies.
The new rules remove the initial foreign currency funding requirement for correspondent banks in trading-partner countries. Instead, the accounts can be funded with Taka payments received against eligible imports into Bangladesh.
For example, if a Bangladeshi company imports goods from a trading partner, its Taka payment can be deposited into that country’s correspondent bank account in Bangladesh. When an importer from that country buys Bangladeshi goods, the accumulated Taka can be used to pay the Bangladeshi exporter.
The arrangement could reduce the need to move convertible foreign currency separately for each transaction where sufficient Taka is available within the settlement system.
Bangladesh Bank said the invoiced amount will be converted into Taka at the prevailing exchange rate when payment is settled through the vostro account.
The framework also allows advance payments for eligible imports and exports under existing foreign-exchange rules.
Exporters receiving payments through the Taka arrangement may retain eligible foreign currency for permitted purposes, including payments for imported inputs and repayment of Export Development Fund loans.
Foreign correspondent banks will have other options if Taka accumulates in their accounts beyond what is needed to pay for Bangladeshi exports.
Surplus funds can be invested in Bangladesh through foreign direct investment, portfolio investment, alternative investment funds and open-end mutual funds, subject to existing regulations.
The balances can also be used to provide approved loans to resident entities or be remitted abroad on the instruction of the foreign account-holding bank.
Bangladesh Bank has also opened a route for trade settlement involving a partner country’s own currency or another non-freely convertible currency. In such cases, Bangladeshi banks may maintain accounts in that currency with banks in the partner country with prior approval from the central bank.
Banks seeking to establish Taka vostro arrangements with foreign correspondent banks must inform Bangladesh Bank of the partner bank, country and types of transactions to be settled.
They must also conduct due diligence on foreign counterparties and comply with know-your-customer, anti-money laundering and counter-terrorist financing requirements.
