Import Under Sales Contracts: Regulatory Challenges

 

Documentary collection is a method of international trade. This facilitates cross border trade by sales contracts between importers and exporters. Involvement of banks is required, but they do not take exposure on behalf of importers. It means that banks do not extend financing or commitment facilities on behalf of importers in favor of exporters. Imports under sales contracts do not require credit line with banks by importers. It depends on the relationship with suppliers abroad by importers.

Bangladesh is very much dependent on external sector, particularly for import of inputs and capital goods. Despite huge imports since long, our importers are not market makers. They are market takers. They do what suppliers ask. Still now, most of our imports are executed under LC (letters of credit) method. Very few are executed under sales contracts. On the other hand, export trade is executed under sales contracts; LC method is decreasing in this case. Study shows that LC method is decreasing globally. But this is in upward trend in south Asia. Bangladesh is one of them which depends on this method for import trade.

Import trade of the country is guided by Import Policy Order (IPO) in force. The policy permits industrial imports to import under purchases/sales contracts without LCs. It also allows commercial imports up to a set limit for a year. Short term external trade finance on supplier’s/buyer’s credit is permissible for imports of industrial raw materials, capital machinery, etc. as per central bank's policy.

It is reported that central bank issued a notification detailing formalities to be observed for permissible imports under purchases/sales contracts as per IPO in force. The notification authorizes banks to allow eligible importers to import admissible items through contracts on usance basis under supplier’s/buyer’s credit. The notification requires banks to observe some formalities.

Information of imports through the relevant purchases/sales contracts need to be submitted to designated banks for onward submission to central bank online reporting portal. The usance period shall not exceed the limit as prescribed by foreign exchange regulations. Before submission of import information in online reporting platform, banks shall be satisfied about past performances of importers; banks shall obtain credit report of foreign suppliers as per prevailing regulations; an undertaking needs to be collected from the respective importer to the effect that they have necessary financing arrangements/appropriate cash flows for settlement of import liabilities on maturity. The notification restricts banks to facilitate imports by respective importers through purchases/sales contracts in case of any earlier remaining unsettled import payment beyond maturity.

As per the notification, short term external borrowing for imports of permissible goods is permitted within the cost ceiling as prescribed from time to time by central bank. Importers are allowed to arrange short term financing from external sources at such cost. Commercial imports without LCs within the prescribed limit of IPO in force will be executable only on document against payment basis, unless otherwise permitted on usance basis. The circular allowed general permission for usance facilities up to 60 days against commercial imports of admissible goods without LCs within the provision of IPO in force and subsequent notifications.

Banks are instructed to maintain records of relevant information of import under sales contracts including dates of maturity and settlement. This is a self-monitoring system for banks for notifying importers to settle the liabilities before maturity. Despite limited scope for commercial imports, central bank allowed short term credit facilities from external sources to encourage import under contracts. However, import transactions under sales contracts are not increasing. Importers are also facing problems because banks are reportedly showing reluctance in facilitating import under sales contracts.

Import under sales contracts is executed as per arrangements between exporters and importers. Banks facilitate the transactions without financial commitments. Documentary collection under sales contracts is of two types - DP (documents against payments) and DA (documents against acceptance). Under DP, exporters' banks send documents to importers' banks which inform importers and request to place fund against the documents. On receipt of payments, banks handover documents to importers, enabling them to release goods. If banks do not receive payments, they just return the documents to their counterpart banks abroad.

In case of imports under DA basis, banks in Bangladesh receive documents from exporters' banks abroad. The documents are handed over to importers for their acceptance with maturity date. On receipt of such acceptance, banks endorse the documents so that importers can release goods from customs authority. Banks inform their counterpart banks of the acceptance and date of payment to be made by importers. On maturity date, importers will make fund available to banks which will, in turn, remit import payments to exporters abroad. On making payments, the transactions become closed. On the other hand, banks will return the documents to their counterparts abroad if importers do not accept the documents. In the same way, banks are not liable to make payments if they do not receive payments from importers on maturity date. The central bank's regulation in this regard is that banks will not accommodate import transactions in future under sales contracts for importers defaulting import payments. But the regulations do not make them responsible with other duties.

Transactions are subject to the performance of due diligence. Banks need to have experiences for new transactions for which customers face pains for first transactions. It is true since Bangladeshi banks are used to execute import transactions under LC method. Few banks are reported to have experienced of import under documentary collection. These banks facilitate transactions for customers operating in export processing zones in particular. As central bank's regulation is not a new issue, rather it is a guidance note how to execute transactions under sales contracts. Banks having no experience are reported to be reluctant to facilitate import transactions under sales contracts. As per industry insider, they are facing regulatory obstacles.

Import transactions of the country are guided by IPO in force. IPO 2021-2024 waived the requirements of letter of credit authorization (LCA) form. This was a mandatory document for imports under LCs and sales contracts. Banks would make primary report regarding import to central bank through the information of LCA form. With the phase-out of LCA, central bank issued guidelines for banks what to do in place of LCA form. As per the guidelines, banks need to ensure the import payments on maturity against permissible usance imports without LCs in terms of IPO. This seems to be an obstacle to banks, industry insiders indicate. The instructions does not indicate banks are to make payments, rather they will ensure payments. It can be explained that banks should follow up with importers so that they can make import payments on maturity. This is particularly for imports under DA basis.

In case of default in making payment on due date, banks should stop to facilitate such importers for execution of imports under sales contracts. This is the simple explanation. Due to long term relationship with suppliers abroad, importers in Bangladesh can tap the opportunities to import without LCs. This is a cost effective way since it can save LC commission, confirmation charges. Despite, it cannot waive bank charges payable by importers to their banks, including exchange gain for purchase of foreign currency.

Import under sales contracts is an opportunity. We should not miss the train to avail the benefits of long term relationship with suppliers abroad, particularly for input contents. Banks should be encouraged to extend support to importers intending to import under sales contracts. In this case, regulations need to be revisited to find out misconceptions and modify thereof.
 

Mehdi Rahman works in the
development sector. He also 
writes on business phenomena 
and monetary issues.