October 18, 2001	Thursday	Rajab 30, 1422

KARACHI, Oct 17: The State Bank told banks on Wednesday that the Asian Development Bank facility to finance confirmation of letters of credit would cover up to 100 per cent of the LC value.

Earlier this year the Asian Development had established a $100 million facility for this purpose.

In a circular issued to all banks SBP said that the facility was negotiated between Pakistan and ADB keeping in view that some international banks want confirmation of LCs opened by the banks operating in Pakistan “for a variety of reasons.” Bankers say the main reason is the country risk that first increased after the 1997 East Asian crisis and then reached its peak after Pakistan went nuclear in 1998.

They say the risk has again increased after the September 11 terrorist attacks on the US soil followed by the US retaliatory air strikes on Kabul.

The SBP circular said the facility shall be used to guarantee payment to international banks confirming eligible LCs. The guarantee so provided will effectively transfer Pakistan country risk into ADB risk.

The facility shall be administered through a facility agent. The ADB with the concurrence of the government of Pakistan has appointed Standard Chartered Bank in Dubai as its agent. The bank on behalf of ADB will enter into a master risk participation agreement with each international bank that wants to obtain LC confirmation guarantee.

Each guarantee under the facility may cover up to 100 per cent of the face value of the LC, but it will not cover any risk associated with the performance of the issuing bank. The circular has laid down several eligibility criteria for the LCs. One criterion is that its validity term should be 360 days. The validity may exceed 360 days and may extend up to three years on case-to-case basis. Another criterion is that the LC should not be of less than $5000 and not be more than $1 million in value.

The ADB facility for financing LC confirmation shall cover the LCs that are opened to import goods, services, spare parts and capital equipment from ADB member countries.

It will not cover the LCs that are opened for import of goods, services, spare parts or capital equipment from countries that are not ADB members. Similarly the facility will not cover the LCs opened for the import of luxury goods, consumer goods or other imports that are on SBP’s negative list.

The facility will also not cover the LCs opened for import of arms, ammunition and other military materials; radioactive and associated materials, nuclear reactors and components thereof, fuel elements (cartridges) non-irradiated for nuclear reactors.

Following is the list of the international banks that have agreed to provide guarantee for LC confirmation under the ADB facility:

(i) Credit Agricole Indusuez (ii) Deutsche Bank AG (iii) HSBC Investment Bank (iv) ING Bank NV (v) Societe Generale (vi) Standard Chartered (vii) Sumitomo Mitsui Banking Corporation (viii) Wells Fargo Bank NV.

All local and foreign commercial banks operating in Pakistan can avail of the facility.

Senior bankers say the issuance of the SBP circular regarding ADB facility for confirmation of LCs would help importers open LCs more frequently than in the last one month.