Designtex Group, a Bangladeshi readymade garment (RMG) manufacturer, exported clothes worth around $0.48 million to the British clothing brand Edinburgh Woollen Mill (EWM) during the Covid-19 crisis.
The payment however is still pending as the buyer declared itself bankrupt.
This issue went to court, and a trial is ongoing. However, the EWM is still doing business in Bangladesh using another identity, despite the brand and its subsidiaries owing Bangladeshi apparel suppliers around £27 million.
In such a company, dozens of clothing manufacturers’ payments have been pending for a long time, with some dues spanning decades, as buyers declared bankruptcy or refused to receive goods. As a result, the manufacturers faced big losses.
Bangladesh Garment Manufacturers and Exporters Association (BGMEA) claimed that hundreds of millions of LC payments are yet to be repatriated due to the crises, and RMG makers incurred over a billion USD in losses in the last decade due to order cancellations.
Industry insiders said sometimes brands received goods but did not clear payment, and many times, brands refused to receive finished products, or cancelled orders at a time when the goods were almost ready or raw materials had already been imported.
In that case, the goods get stockpiled in manufacturers’ warehouses, and they are forced to sell at three-four times lower prices. This in turn prevented the manufacturers from paying back-to-back letters of credit (LCs) payments, resulting in forced loans.
Designtex Managing Director Khandoker Rafiqul Islam said, “I do not know if the due payments will clear or not.”
Also the senior vice president of BGMEA, Rafiqul added, “We are regularly receiving such allegations from manufacturers, and most of the time, buyers are not clearing LCs or forcefully imposing a discount.
“If brands announce bankruptcy, the payment never comes.”
Industry insiders believe that if there is an Export Credit Guarantee Scheme (ECGS), they could avoid such incidents as third parties will be liable for payments.
Bangladesh’s competitors, India, Vietnam, China, even the USA, and other Western countries already have taken this policy to protect exporters and payments.
Although Bangladesh’s businesses have been trying to convince the government to take the policy, bureaucratic red tape and local insurance companies are key barriers, they added.
Business leaders, especially the BGMEA members, recently started working on the issue, and trying to convince the respective authorities. They also placed a verbal proposal to the central bank governor, and are in the process of submitting a written copy to a number of authorities.
What's an export credit guarantee?
BGMEA leaders said the export credit guarantee is a type of insurance covering export value.
Currently, Bangladesh’s exporters are enjoying several types of insurance such as on factories, road transportation, inland depots, and vessels.
If the goods or a factory burns, gets damaged or becomes lost, the insurance company concerned takes the liability, and exporters or manufacturers get a return on goods prices under the policy.
But Bangladesh currently has no available policy on export orders. That is why if a buyer declares bankruptcy or does not pay the goods price or cancels an order, the exporter or manufacturer has to shoulder all liabilities alone.
BGMEA President SM Mannan Kochi said, “In such cases, not only do businesses face losses, the country loses foreign currency as well. We imported raw materials under back-to-back LCs, and whether the buyer received the goods or not, we had to pay for the LCs.
“This means, we did not earn a single cent of foreign currency, but we paid up to 70 per cent of LC prices with USD.”
Sparrow Group Managing Director Shovon Islam had worked as chief functional architect of Hewlett-Packard (HP), and as Vice President of Microsoft Compiler Technology. He is currently serving as one of the directors of BGMEA.
Shovon told The Business Post, “Almost all countries adopted the export credit guarantee scheme, and Indian exporters are enjoying up to 90 per cent insurance coverage of their total LC value.
“This is a secured system, and it ensures that an exporter is never deprived of his payment,” Shovon said, adding, “Under this policy, a certain amount of the premium is paid by an exporter, and the rest is paid by the buyer.
“The governments of several countries are paying a certain amount of premium to cover the exporters under micro, cottage, small and medium categories.”
Shovon pointed out, “India adopted the policy in 1957, and formed a corporation named Export Credit Guarantee Corporation of India Ltd (ECGC), with the objective of promoting exports from the country by providing credit risk insurance and related services for exports.
“The ECGC has designed different export credit risk insurance products to suit the requirements of Indian exporters.”
The ECGC is essentially an export promotion organisation, seeking to improve the competitiveness of the Indian exports by providing them with credit insurance covers.
The Indian corporation has introduced various export credit insurance schemes to meet the requirements of commercial banks extending export credit. ECGC keeps its premium rates at the optimal level.
ECGC provides a range of insurance covers to Indian exporters against the risk of non-realisation of export proceeds due to commercial or political risks, different types of credit insurance covers to banks and other financial institutions to enable them to extend credit facilities to exporters.
An Export Factoring facility for MSME sector is a package of financial products consisting of working capital financing, credit risk protection, maintenance of sales ledger and collection of export receivables from the buyer located in an overseas country, as per the ECGC website.
Bangladesh’s businesses said the buyers have agreed to accept the export credit guarantee programme, and exporters are willing as well. However, the Insurance Regulatory and Development Authority (IRDA) have not shown an interest in implementing the policy so far.
Previously, the industry leaders had placed a proposal in this regard to the government, but the IRDA said the domestic insurance companies do not have enough capacity to implement this policy.
BGMEA President Kochi, however, said, “A large number of international insurance companies are working in Bangladesh, and if the policy is accepted, more renowned companies will come here. In the meantime, local companies can work on increasing their capacity.
“But we cannot incur regular losses citing local insurance companies’ inability to cover us as an excuse. We will submit the proposal to the authorities again, and if anyone creates any barriers, we will go directly to the prime minister, as this is a key factor in the country’s economy.”
