Home ›› 01 Sep 2021 ›› Opinion
Imports under supplier’s/buyer’s credit are permissible for a maximum tenure of 360 days under foreign exchange regulatory framework. The permissible items are capital machinery, industrial raw material and the like including few commercial goods. Extension of tenure beyond the period is required approval from Bangladesh Investment Development Authority (BIDA) as per recent notification issued by central bank. The credit exposure for the extension by foreign suppliers or lenders would be directly to importers in Bangladesh, the notification stated. The situation to extend the credit tenure may arise when payment is not possible to be settled on maturity due to cash flow mismatch with repayment schedule for import finance.
Whether the new procedure will ease the business process is a question. How approval can be a part in ease of doing business is another question. As per notification of BIDA (the then BOI) issued in 1998, short term credit, inter alia, up to one year duration from suppliers or buyers abroad is to be accommodated by central bank. Accordingly, foreign exchange regulations of central bank specifies goods like industrial inputs, capital machinery, etc. to be permissible for usance basis up to 360 days under supplier’s/buyer’s credit. It is learnt that central bank would consider time extension beyond 360 days against import of capital machinery on case to case basis under legitimate grounds. As new regulation is formulated, importers will seek permission for external borrowing for the extended period. Under the changed situation, exposure of banks against their accepted bills needs to be phased out, external suppliers or lenders will extend time or lend to importers for extended time for which they may warrant inventories or receivables of importers to be assigned to them against the extended facilities.
Whatever the economic development model – export oriented or import substitution - is, capital goods need to be imported. Financing comes either from equity or from debt. In case of equity, importers will arrange payments for the imports on sight terms. Sight payment is also possible for import under debt finance from local sources. Industries look for low cost import financing in foreign currency. As such, external financing is preferable to importers. In case of external financing, there are two methods available in the market – supplier’s credit and buyer’s credit. Foreign suppliers extend trade credit under supplier’s credit. In this case, they supply goods under bilateral sales contracts. Banks just provide transactional services, in sales contracts, without bearing responsibilities to make payments on maturity. Foreign suppliers take exposure on importers. Banks are not liable to settle the payments, their role is to facilitate the transactions as mediators in communicating between local importers and foreign exporters. Banks abroad play such roles in case of exports from Bangladesh under sales contracts, they do not take exposure on their importers for payments to exporters in Bangladesh. There comes a question whether importers’ liabilities are countries’ liabilities. It is said that these are liabilities of a country in macro perspective. But it is not a sovereign debt since Government is not involved in the transactions. These are not repayable by depositors’ money since banks’ position is not involved through commitment like letters of credit. However, many say that nonpayment against imports by importers may jeopardize country’s credit rating. This seems to be a perception since the transactions are bilateral. Import under sales contracts is possible only if there prevail good relations between importers and foreign suppliers. Otherwise, importers need to arrange usance letters of credit through their banks for which they take exposure on importers by bankers’ acceptance of import bills.
Import under buyer’s credit is a way of trade financing for which external lenders settle payments to suppliers aboard. Bangladeshi offshore banking operations can also provide such import financing. Same instruments as required for supplier’s credit are necessary – sales contracts or letters of credit - under buyer’s credit. In sales contracts, external lenders take exposure on importers for the payments against imports they make directly to importers abroad. As said earlier, banks work as facilitators without bearing obligations to make payments on maturity. The transactions may be executed under sight letters of credit for which external lenders settle payments against compliant documents at the instructions of banks in Bangladesh. Here responsibilities of banks end on settlement of payments by external lenders. On the other hand, the obligations on banks will continue if external lenders make payments to suppliers abroad on the basis of import bills accepted by banks under relative usance letters of credit. Same situation will prevail in case of payment guarantees issued by banks instead of traditional letters of credit. Banks will bear responsibility to make payments on maturity or as per understanding of the guarantees.
In view of above situation in transactional modalities, import financing from external sources extended either to importers in case of import under sales contracts or to banks of importers in case of imports under usance letters of credit. It is known that central bank allows banks to avail overdraft facilities only for 7 days from their counterparts abroad, as per foreign exchange regulations. The new regulation of central bank requires approval from BIDA for extension of usance period beyond 360 days, extended by external sources directly to importers. Under letters of credit, banks need to make settlement of payments on maturity without fail based on the underlying arrangements with importers. Central bank deems to keep banks, as per new regulation, out of external exposure through settlement of payments on maturity or by termination of acceptance without extension.
The other side for extended period of external financing at banks-transition from the exposure is that external lenders/suppliers will make supplementary contracts with importers in Bangladesh. What to happen if external lenders/suppliers do not go for such arrangements and want to remain strict to bankers’ acceptance is a pertinent question. If external parties do not agree, approval from the authority concerned will bear no significance. Again importers will require issuance of guarantees by their banks with approval from central bank. Issuance of such guarantees, importers will have to maintain required cash collaterals as per the very recent notification from central bank. Same thing is also applicable for imports of items other than capital machinery under sales contracts, where banks will do nothing in case of non-payment by importers on maturity. Central bank should think what to be the modus operandi in such case against import trade under sales contracts. Basically none will be responsible for the deals other than importers themselves. So, again there comes the same question with regards to safeguards, in case of non-payment, to suppliers or lenders.
Bangladesh is already on the road to be graduated from LDC status for which level playing fields need to be smooth for the stakeholders without keeping them under approval route. Authority concerned should look into the issue of approval route. Central bank should also formulate operational procedures for banks how to handle permissible imports under sales contracts so as to enable establishment of credibility by importers. In addition, procedures need to be devised how to terminate bankers’ exposure in case of time extension by external suppliers or lenders beyond 360 days to importers.
The writer specializes in international trade and finance
