Import trade under open account 

Different methods are in operation globally for settlement of international trade. They are payment in advance, letters of credit (LCs), documentary collection, and open account. In case of payment in advance, exporters remain safe. No default risk is present because payment is received before shipments. 

LC method is referred to as the most secure method available to international traders. LCs are commitments by banks on behalf of importers to the effect that payment will be made to exporters provided that the terms and conditions stipulated in LCs are complied. 

 Documentary collection is another method of payment for trade, under sales contracts in particular. In this method, exporters entrust the collection of payments to their banks, which send documents to importers’ banks, along with instructions for release of transport documents. There are two types of modes in document presentation under this method. Documents are released on receipt of payments known as document against payment (DP). Documents are released against acceptance on submitted documents for payment in future date against exports on credit terms under sales contracts. This is known as document against acceptance (DA).  In documentary collection, banks work as facilitators without commitment for payments.

Trade under open account is a method of movement of goods under sales contracts on credit terms. Transactions under this method are very risky unless exporters secure payments through arrangements of guarantees from external sources.

In the context of Bangladesh, most imports are executed under LC method. Import policy order (IPO) of the Government permits imports of industrial inputs and capital machinery irrespective of amounts without LCs. Commercial imports are permissible by sales contracts up to the indicative limit. But imports without LCs are very rare.

With regards to exports of our country, exporters are forced to export on sales contracts with credit facilities to importers though they need input imports on LCs from suppliers nominated by importers. Documents are released against acceptance by importers. Payment defaulting by importers on payment due date is not taken care of by banks abroad. Such records of occurrences are many if looked closely in export trade of Bangladesh. While our imports are executed under LCs for which foreign exporters are in safe position. Documentary collections without LCs against import trade are very few.

Central bank has already allowed export under open account with payment undertakings from external sources including early payment options. Under open account export, importers import goods on sales contracts with credit facilities. On payment date, default by importers results in financial loss to exporters since legal procedures to realize payments are not so easy. As such, there need payments guarantees from external sources. The cost for such guarantees need to be borne by exporters. In case of LC method, importers arrange payment guarantees through issuance of LC by their banks. The costs for issuing guarantees in the form of LCs are borne by importers.

Bangladesh is still in export basket with consumer goods, including limited durable items. Consumer goods should be sold on cash. Despite easy market access, our exporters face competition from many countries, leading to execute export on sales contracts under credit (DA) terms with adverse conditions. As per central bank’s rules, exporters should make their payment safe through payment commitments from banks/insurance/ trade financing entities/factoring companies/supply chain financiers abroad, with early payment options before maturity. For the payments guarantees, exporters bear cost to avoid payment default by importers abroad.

Presently, Bangladesh import intermediate goods in different ways. They are - LCs on deferred terms, buyer’s credit by external banks against acceptance of importer’s banks, financing by offshore banking services against deferred LCs. Sales contracts are permissible for imports of intermediate goods and capital machinery. But sales contracts are rarely used. Despite stable country rating and no record of import payment defaults, foreign suppliers are reluctant to supply goods under sales contracts on permissible credit terms. It is ridiculous that foreign suppliers are doing business with Bangladesh but they do not follow what Bangladeshi importers say. On the other hand, we find that our exporters comply with what importers say. Exporters ship goods on credit terms under sales contracts. They import raw materials from suppliers nominated by importers. Exporters arrange payment undertaking with early payments at their own costs. It means that our exporters are working in buyer’s market. Bangladesh is importing huge goods. Being importers in huge amount, we should not work under seller’s market, rather foreign exporters should treat us as buyer’s market. Where the problem lies is a question. But we can try to convert ourselves and do work as seller’s market when we import.

To be in favorable position, we need to have capacity to import goods on FOB basis. In this case, we have appropriate shipping arrangements. Imports under sales contracts are basically executed on FOB basis. Exporters do not bear freight costs as we see in our export under sales contracts. For import under sales contracts, we need to extend supports to exporters abroad to minimize their credit risk. Supporting tools, in this context, are: importers may be required to extend corporate guarantee, personal guarantee, third party guarantee, and the like to foreign exporters as collaterals against their supplies. Policy support from regulatory authorities should be in place so that importers have general authorization to extend such undertakings and guarantees. Exporters may be assigned with inventories, bill receivables, etc. by importers as collaterals for which general authorization should also be in place.

Import under open account is a risky game to exporters abroad unless they get their receivables to be factored by banks in Bangladesh or foreign banks in association with our banks which need to reengineer their business processes. As per prevailing practice of banks, credit limit is set to their customers based on their applied needs. But factoring model is different, banks will have to give payments commitments against importers for which they will not put formal applications. Banks need to assess credit risk of importers and set counter party limits. Banks by themselves will not go for such initiatives unless administrative instructions are issued in this context. For imports of raw materials as a pitot program, authorities concerned should think of it to introduce import trade under open account. 

The writer specialises in international trade