Credit facilities to the exporters in Bangladesh

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Credit facilities to the exporters in Bangladesh

What types of credit facilities are provided by the banks to the exporters in Bangladesh?

Identify the steps a financial bank should take to address those risks:

Export plays a dominant role in the economy of our country. In the export trade, the exporter needs the finance at different stages right from the stage he gets an export order to supply the goods from an overseas buyer. The finance is required for procuring, processing, manufacturing, assembling and packaging the goods for export in the pre-shipment stage. After the shipment is made, exporters sometimes will have to give credit to the importer for an agreed period and he has to wait for the value till the expiry of the credit period (maturity of the export bill). Thus the post-shipment credit is required during the intervening period between the shipments of goods till receipt of payment there against. Therefore, these are two stages of export financing:

1) Pre-shipment Export Credit
2) Post -Shipment Export Finance

1. Pre-shipment Export Credit:

Pre Shipment finance is a short term working capital finance specially provided to an exporter against the documentary evidence of having entered into export commitment. Pre Shipment Finance is granted at the stage prior to the shipment of goods and such finance is given to procure raw material, for paying to manufacture and packing charges and payment of insurance premium and freight.

The Pre Shipment finance is categorized broadly as per following:

1) Back to Back LC (Inland and Foreign)
2) Export Cash Credit (ECC)
3) Packing Credit (PC)

1. Back to Back L/C:

This type of facility is allowed to the exporter for procuring and processing of goods. For export of traditional item like jute, tea, and leather the facility can be extended up to 90% of the value of export L/C as a contract. For the garments industry, this can be allowed between 10% – 15% based on the category of the unit because the main raw material is procured through Back to Back L/C.

2. Export Cash Credit:
This type of facility is allowed to the exporter for procuring and processing of goods. For export of traditional item like jute, tea, and leather the facility can be extended up to 90% of the value of export L/C as a contract. For the garments industry, this can be allowed between 10% – 15% based on the category of the unit because the main raw material is procured through Back to Back L/C.

3. Packing Credit:

Packing Credit is allowed for making necessary preparation for shipment of goods. This finance generally covers the cost of packing, transportation from godown to the port for shipment warehousing, insurance, etc. For a traditional item like Jute, Tea, Leather, etc. packing credit may be allowed up to 90% of invoice value against rail receipt/steamer receipt/Barge receipt.

2. Post Shipment Credit: 

This type of credit refers to the credit facilities extended to the exporters by the bank after shipment of the goods against export documents. The necessity for such credit arises as the exporter cannot afford to wait for a long time for payment to local manufacturers/suppliers. Banks in our country extended post-shipment credit to the exporters through:

1) Negotiation of Documents under L/C
2) Purchase of DP & DA Bills
3) Advance against bills for Collection

  1. Negotiation of Documents under L/C
    Under this arrangement, after the goods are shipped, the exporter submits the concerned documents to the negotiating bank for negotiation. The documents should be negotiated strictly in accordance with the terms and conditions and within the period mentioned in the letter of credit.
  2. Purchase of DP & DA Bills
    In such a case, the bank’s purchase/discount the DP (Documents against payment) and DA (Documents against Acceptance) bills at the rate published by the Exchange Rate Committee of authorized dealers. While doing so, the banks should scrutinize all the export documents separately and minutely and clear instructions are to be obtained from the drawer of the bill in regard to all important issues related to the negotiation of the bills.
  3. Advance against bills for Collection 
    Banks generally accept export bills for the collection of proceeds when they are not drawn under an L/C or when the documents, even though drawn against an L/C contain some discrepancies. Bills drawn under L/C, without any discrepancy in the documents, are generally negotiated by the bank and the exporter gets the money from the bank immediately. However, if the bill is not eligible for negotiation, he may obtain an advance from the banks against the security of export bills.

The step should a bank takes to ensure pre-shipment and post-shipment export financing:
1. The bank must check whether the exporter makes export against the Letter of Credit or Contract.
2. If the Exporter export against Letter of credit than the bank must check the term and condition of the credit. The bank should also confirm that the exporter is capable to execute the export LC.
3. The bank must collect the Buyers Credit report against export under contract.
4. The bank must collect the buyer’s credit report to minimize risks under contract. Otherwise, the following risk may occur:

I) Non-Acceptance of Documents Risk: Non-acceptance of documents is one of the major risk factors in a documentary collection. Under current documentary collection rules which are called URC 522 importers are not obligated to collect documents from their banks.

II) Non-Payment Risk: Non-payment risk is another risk factor in documentary collections. In most cases, we would expect to see a nonpayment risk in a documentary collection that is available by Documents against Acceptance (D/A). Nonpayment risk would happen if the importer accepts a time draft but not be paying on maturity.
III) Risk of Delivery of Goods to the Importer without Original Shipment Documents may happen under contract.
1. Banks also ensure business exposure to the exporter.
2. Ensure sufficient collateral against export credit.
3. Bank also monitor/follow up shipment schedule of export LC/contract to timely execute the export.