The Bangladesh Bank has announced a policy framework aimed at easing the export process and keeping exporters free from risks of payment realisation.
Under the policy, payment undertakers or insurers will arrange export payments in case of default by importers, thus mitigating the risks faced by exporters under the existing process for letters of credit (LCs).
In a circular issued on Tuesday, the central bank allowed authorised dealer (ADs) banks to permit exporters to ship goods on sales contracts under open account credit terms within the statutory period, if otherwise not extended, from the date of shipment.
An official of the central bank said the country's export trade depends on the wishes of foreign importers, and export, as per their desires, is carried out under sales contracts without any assurance of payment. This results in a risky game on the part of exporters in the event of payment defaults by importers.
From now on, exports will, under the authorisation, be executed against payment undertaking or payment risk coverage for settlement of export bills or receivables within the permissible statutory period by international factoring companies, foreign banks or foreign financial institutions, trade financiers and insurance entities arranged in association with importers and/or exporters, the circular stated.
Early payment option is allowed to be included in the payment undertaking or payment risk coverage for which exporters can receive payments on non-recourse basis.
Costs for exporters against payment undertakings or payment risk coverage, and interest with relevant charges for early payment shall not exceed a six-month London Interbank Offer Rate (LIBOR) plus 3.50 percent annually, according to the circular.
The Business Standard ran an article, titled "Exporting without LCs – arisky game," by its regular columnist Mehdi Rahman on June 18 this year, suggesting immediate policy support with regards to payment undertaking for exports on credit terms under sales contracts, including early payment arrangement without recourse, based on actual working capital needs of exporters.
Mohammad Hatem, first vice president of the Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA), said the policy will help keep exporters free from risks of payment realisation, if properly applied.
"We are doing export in buyers' markets. We are bound to export on sales contracts without any payment assurance though we cannot import raw materials without back-to-back LCs," he added.
Foreign buyers will also benefit because, under the policy, they will not need to invest money before receiving products. And the factoring process is easier than the process of LC, Hatem said.
The Bangladesh Bank official said the policy is a modified version of financing under factoring and supply chain for exporters against their exports with external payment undertaking.
The policy will provide exporters access to appropriate finance up to the extent of value addition. Back-to-back payment will be settled on receipt of final payment on maturity, he added.
ADs can extend early payment support to exporters on non-recourse basis out of their own funds against payment undertaking or payment risk coverage from external sources, the circular added.
Dr Shah Md Ahsan Habib, professor and director (training) of the Bangladesh Institute of Bank Management, said it is a modern product and risk-free way for payment. But it has to be monitored properly in order to prevent any risk of money laundering.
He said LC is yet more popular worldwide. According to statistics from the International Chamber of Commerce, traditional trade financing covers 85 percent of banks' products, of which LC is 40 percent. Of the rest 15 percent non-traditional trade financing products, only 17 percent relates to sales contract exports.