Blacklisting of People’s Bank and impact on international business

When a bank is blacklisted or declared as bankrupt, it spreads like a virus among the international banking community and has a negative impact, forcing them to take immediate steps to refuse international transactions with such a bank

It was very hot news, during the last couple of weeks, which is now gradually diminishing, the blacklisting of People’s Bank, one of the leading State banks, by the Economic and Commercial Office of the Chinese Embassy in Sri Lanka. 

The reason that has been highlighted for this blacklisting was “Not complying with the terms and conditions of a Letter of Credit (LC)” that has been opened by People’s Bank for its customer State Fertiliser Corporation.

In the meantime, complaints are made by various authorities confirming that this shipment contains fertiliser that are inferior and not as per the specimens submitted. 

Many raise the question; if the goods sent by the exporter are inferior or not to the agreed standard, is the LC opening bank under any obligation to make the payment just because of the bank has opened the LC?

ICC Rules on Documentary Credits have governed Documentary Credits which are also commonly known as Letter of Credits. As per Uniform Customs and Practice for Documentary Credits – ICC Publication No. 600, which is rather popular among international bankers as UCP 600, when a LC is opened, it is the sole responsibility and obligation of the LC opening bank to honour or make the payment of the LC to the beneficiary, that is to the exporter, provided that the stipulated terms and conditions are complied with by the exporter. 

As per Article 2 of UCP 600, Letter of Credit means any arrangement, however named or described that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honour a ‘complying presentation’. Complying presentation means the exporter should present all the stipulated documents that is “Shipping Documents” to the Importer’s Bank, in accordance with,

• The terms and conditions of the letter of credit 
• The applicable provisions of these rules (UCP 600) 
• International Standard Banking Practices

So that in a simple language, a LC means a method of payment in international trade which gives an irrevocable guarantee of payment to the exporter, provided that the exporter complies with all the terms and conditions stipulated by the importer in the letter of credit subject to applicable provisions of UCP 600 and International Standard Banking Practice (ISBP).  

More to the point, as per Article 5 of the UCP 600, banks deal only with documents and not with goods, services or performance to which the documents may relate. Therefore, it is not the responsibility or obligation of the LC opening bank to check the goods, to ensure that the goods sent are perfectly accurate and fully meet the requirements of the importer, before making the payment. 

If the documents related to the LC are complying presentation then the bank should make the payment to the exporter irrespective of the nature and conditions of the goods. Bank cannot hold the payment until the goods are cleared by the importer and confirms the quality of the goods.

As reported, in this case, the documents presented were fully complied with the requirements of “Complying Presentation”. However, as per the media briefing of the CEO of People’s Bank, the bank has not made the payment due to the Court Order issued by the Colombo Commercial High Court and no sooner the order is revoked, the payment would be made.

When an Order has been issued by a court of the importer’s country, the importer’s bank has to comply with that order, and under such circumstances can the exporter’s country ethically blacklist the bank which did not make the payment in complying with the Court Order? This appears to be a power struggle and a political issue and the governments of the two countries should resolve this issue ethically and amicably without incurring financial losses to a bank which opened the LC.

However, the grave issue is who comes forward to compensate or to rectify the damage done as a result of this blacklisting done with whatever intention to the People’s Bank? Though the Economic and Commercial Office of China Embassy in Sri Lanka has imposed this blacklisting applicable to banks in China, does it end there? What would be the reaction of other leading international banks with whom People’s Bank now deals?

The immediate consequences of blacklisting

When a bank is blacklisted or declared as bankrupt, it spreads like a virus among the international banking community and has a negative impact, forcing them to take immediate steps to refuse international transactions with such a bank. 

They are not worried to find out the reasons for blacklisting, whether it was done authentically or disputably. The immediate reaction is to avoid dealings with such a bank in order to safeguard the interest of their customers.

There is an important point to be highlighted at this juncture. When a LC is opened, especially for large amounts, the LC preferably but not mandatorily should be a “Confirmed LC”. That means, in addition to the already existing conditional guarantee of the importer’s bank, the advising bank or the exporter’s bank also undertakes to guarantee the payment of the LC. 

Then the LC becomes a Confirmed Letter of Credit which has conditional guarantee of two banks, preferably one is the importer’s bank and the other is the exporter’s bank. It may be either the exporter’s bank or another bank as per the agreement between importer and exporter. 

Although no evidences are available to prove whether this subject LC is a Confirmed LC or not, normal international banking practice demonstrates that this type of LC should be a Confirmed LC. If we presume so, then if the LC opening bank does not pay the due amount of this LC, it should be paid by the exporter’s bank or confirming bank without putting the exporter in to an embarrassing situation. 

If so, it would have been an issue of bank-to-bank, that is with exporter’s bank and importer’s bank which should have been settled in a more amicable and friendly manner since it is a deal with two reputed banks.

This is also an issue to be considered in this regard as to why it has not been a Confirmed LC.

At this moment, an incident which happened two or three decades ago can be easily recalled. People’s Bank had been declared as bankrupt by the then Minister of Finance, a onetime President of Sri Lanka, at our Parliament. 

When a bank is declared as bankrupt, the immediate reaction is gathering of depositors who are panicking in front of the banks demanding their deposits. This has happened to Northern Rock Bank in England when the authorities announced the liquidity issue of this bank in the latter part of 2007. 

For whatever reason, at the time when this declaration pertaining to People’s Bank was made by the then Minister of Finance, our depositors did not queue up in front of the banks/branches. It may be that they were very sure that the politicians in our country make various statements and undertake promises that have never been fulfilled or true and therefore had no need to panic. 

However, it had a very bad impact among the international banking community and all these international banks stopped dealings with People’s Bank immediately. No LC opened by People’s Bank was accepted and the bank was unable to open a LC and to involve in other similar international transactions. 

At that time, the top management of People’s Bank had to send a few teams of bankers with financial statements of the bank to almost all these international banks to indoctrinate them on the financial healthiness and the financial stability of the bank and to prove that the bank was not bankrupt. Fortunately, People’s Bank was able to accomplish this task after a couple of months.

Likewise, when this blacklisting was declared, it will be taken seriously by all the international banks and they may stop dealing with People’s Bank which may negatively impact the financial healthiness of the bank. People’s Bank would not be able to open any LC until this matter is favourably sorted out (fortunately now bank can’t open LCs due to non-availability of dollars). 

Further, it is a practice that when parents seek visas for their children to go to abroad for higher studies, the visa authorities request to prove that they have adequate funds in a bank account to meet the expenses to be incurred for these higher studies. The consequence of this blacklisting is that these visa authorities may refuse to accept the deposits in People’s Bank and may request to have the deposits in a bank other than People’s Bank. 

Therefore, the negative impact of this blacklisting is not limited only to the banks in China; it will affect the dealings with other international banks as well.

As reported, giving a verdict on this Order has been postponed by the court and therefore it may take a few more times to settle either favourably or unfavourably. The negative impact that may be caused to People’s Bank on its international business transactions during this interim period may be immense and the financial loss may be colossal.

The political and Government authorities without making futile statements should take immediate remedial effective actions to rectify the damage done to a leading State bank immediately, and it should be a settlement between the two countries of which one is powerful and the other is powerless.

The political and Government authorities without making futile statements should take immediate remedial effective actions to rectify the damage done to a leading State bank immediately, and it should be a settlement between the two countries of which one is powerful and the other is powerless

(The writer is a former banker who has served for People’s Bank for nearly 34 years and National Savings Bank for nearly six years. He retired from People’s Bank as an Assistant General Manger – Core Banking and worked for NSB as an Advisor Banking. He is currently serving as a Visiting (online) Lecturer of the Institute of Credit Management, Sri Lanka. He can be reached via [email protected].)