The Financial Express

Safeguarding exporters and importers

| Updated: December 03, 2020 21:21:34

Evaly and Fianancial Express Evaly and Fianancial Express
Safeguarding exporters and importers

There prevails a dilemma between exporters and importers. Exporters want cash payment, while importers want to make delayed payments. There are, inter alia, two markets -- sellers' market and buyers' market. In case of import, it is sellers' market, and in case of export sellers' market. It is observed that we need bankers' commitments like letters of credit to import goods from abroad. But we are taking payment risk in exporting goods through sales contracts, particularly on usance terms, Exporters need to wait for payment. During the waiting period, they need working capital finance to meet recurring office expenses like salary, utilities. Longer cash flow operating cycle leads exporters to leave out of business.

Trade finance is a financing support by financial institutions. There are two types of post shipments export financing-- payable finance and receivable finance. Payable finance is extended by external financial institutions, known as supply chain finance (SFC) or factoring. Receivable finance is extended by local financial institutions like banks, known as foreign bill purchase (FBP), bill discounting, export bill factoring with or without recourse to exporters.

Selling bills to banks by exporters is not cost effective since it works as loan in case of non-recourse finance. Exporters are subject to make payment in case of delayed/non-payment by importers. In this situation, seeking SFC/factoring from financial institutions abroad is better since they extend finance with recourse to importers. Exporters receive payment as export settlement, net of financing charges. Financial institutions abroad take exposure on buyers based on their credit rating within counterparty arrangement. This type of exposure may be termed as invisible recourse, buyers do not provide any collateral against the exposures taken by financing institutions on them. Financing by banks with exposure to importers under counterparty set limit is reported to have been brought under regulatory framework for which they need to maintain high provision. In extending finance to exporters' banks demand collateral against the position. On the other hand, banks abroad presently are found reluctant to extend such type of finance with recourse to importers. Space does not remain empty. It is observed that nonbanks are on rise to fill up the space. Financing from non-banks is more favourable in respect of expenses. They can extend cheap cost financing due to light touch regulations and their operating costs are lower compared to banks. Moreover, they enjoy easy provision requirements in respect of regulatory instructions.

Offshore banking operations are in place to extend short term import financing to importers for importing raw materials. The operation performed by offshore banking in respect of import finance is like payable finance to foreign suppliers. This type of financing can be executed by banks abroad based on the acceptance of banks in Bangladesh; such financing will then be regarded as receivable finance to suppliers. Exposure in this case by banks abroad is easy since the transactions are executed under letters of credits and bankers' accepted bills. Offshore banking operations of Bangladeshi banks can extend payable finance to exporters in Bangladesh on non-recourse basis. But it is not possible for all cases since most of our exports are being executed under sales contracts. Our offshore banking operations cannot take exposure on foreign buyers unless exports are executed on payment guarantees from abroad or on accepted bills under letters of credit. Foreign trade finance entities can support exporters to meet their working capital needs at post shipment stage before maturity of export bills, with exposure to importers abroad.

Banks do not provide payment commitments to exporters against exports on sales contracts under open account without payment guarantees from abroad. They do not feel comfortable to make post shipment financing, rather they extend invoice financing with condition to the effect that exporters will refund in case of nonpayment by importers. As such, financing by banks against export under sales contracts is not comfortable. There is the need for a party between exporters and importers, who will support exporters on behalf of importers regarding payment.

Advance payment for export is risk-free for exporters, export on credit under sales contracts bears high risks. Countries having no strong negotiating capacity may have market access due to existence of bilateral/multilateral trade agreements. But this will not work if the country is not in a highly competitive and advantageous position. Our exporters have access to many countries but do not enjoy sellers' market. They need to do what buyers want, buyers buy goods on terms favourable to them. The same may not be favourable to exporters. To sustain exports, different policy supports like subsidies, low cost financing, undervalued currency, etc. are needed. In case of disadvantaged position, third party payment commitment, at the cost of exporters from abroad may work as a support in between exporters and importers for export to execute on credit without involvement by importers' banks as per recent guideline issued by central bank.

We need to sustain in export trade because of high competition on the ground of slow trade growth having different causes without limiting to COVID-19 and digital commerce. Digital commerce may be a tool for retail exports but not suitable for bulk exports. Within this situation, exporters need different policy supports. Different studies show that depreciation of local currency works as readymade help to exporters. Slow trend in trade results in local currency depreciation in export oriented countries. In this situation, maintaining stability in local currency encourages imports, leaving no benefits to consumers. No price level is found to have changed favourably to consumers in spite of import at depressed prices due to currency depreciation in sourcing countries. Local industries face high competition with low priced imported goods. Hence, without raising high tariff walls, currency depreciation may work as a suitable option for win-win outcome.

With the policy supports as noted above, exporters should be aware and make a payment safeguard against export on credit under sales contracts in accordance with policy support by the central bank in case of export under open account. Commitments of payment on behalf of importers by banks abroad are highly costly, which may not be workable. They look for reasonable cost bearing commitments with safety. In this case, exporters' banks should guide them to source commitments and payment before bill maturity at reasonable price. Foreign buyers may also extend helping hands. In the present global situation of low cost financing, numerous trade financing entities are operating globally. Their charges are competitive and lower compared to financing from banks. Exporters should only need to be ensured of their past performances and quality of credit rating as assessed by credit rating agencies of repute. Exporters need to bear costs of commitment and prepayment extended by external sources. In case of our import on credit terms, such cost should be borne by foreign suppliers in case of imports on usance terms under letters of credit or sales contracts. Arrangement should be in such a way so that importers do not face financing charges against payable finance extended to foreign suppliers by our offshore banking operations with recourse to Bangladeshi exporters. Present practice of imposing charges to Bangladeshi importers should be avoided. Authority concerned should, as deemed fit, impose necessary restrictions to save additional costs.

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