Export Trade: Factoring Arrangements and Challenges

 

Export is nothing but sales of goods beyond borders. In terms of payments, there are some methods used worldwide. These are - cash in advance, letters of credit (LC) method, documentary collection, and open account method. This is applicable for both exports and imports.

For payments in advance, exporters are in better position. Importers face problems in case of non-performance by exporters. LC is a payment commitment issued by banks on behalf of importers. Banks are to make payments if export documents are submitted in accordance with LC terms. This method is a win-win case both for exporters and importers. Documentary collection is executed under sales-purchases contracts. There are two approaches under it - documents against payments (DP) and documents against acceptance (DA). Under DP, exporters' banks send documents to importers' banks which deliver documents on receipt of payments. In case of DA, importers' banks deliver documents to importers after they receive acceptance thereon by importers. Banks inform the acceptance and maturity date to exporters' banks. Banks remit fund to exporters on receipt of payments from importers. Banks' role is to provide services; they do not take exposure on exporters or importers.

Open account trade is a bilateral agreement between exporters and importers. Banks' involvement is insignificant without financial involvement. Trade formalities are maintained by exporters and importers. Transport documents, title to cargo, are to be issued to the order of importers. As a result, endorsement of such documents is not required. Banks facilitate movement of funds from importers to exporters if they are assigned. However, banks or financial institutions provide financing services in the form of bills factoring. They take credit risk on importers and finance to exporters without recourse on them.

Export under open account is permissible in Bangladesh. As per central bank's notification, banks can allow their exporters to ship goods on sales contracts under open account credit terms within the statutory period from the date of shipment. Exporters need to observe several conditions which include exports to be executed against payment undertaking/payment risk coverage for settlement of export bills/receivables within the permissible statutory period by international factoring companies/foreign banks/foreign financial institutions/trade financiers/insurance entities arranged in association with importers and/or exporters. Payment undertaking/payment risk coverage by designated institutions abroad will be, in case of default by importers, received in a way to ensure payment on priority basis in accordance with appropriate underlying arrangements for settlement on the basis of physical/electronic presentation of export invoices/bills/documents. Payment undertaking/payment risk coverage from designated institutions abroad may contain option for early payment arrangement before maturity against the relative export bills/receivables. Early payment shall be arranged on non-recourse basis from designated institutions or designated financiers based on the payment undertaking/payment risk coverage.

In addition to above conditions, expenses to exporters for guarantee commission against payment undertaking/payment risk coverage, and interest with relevant charges for early payment against export bills/receivables will be within limit prescribed by central bank. Presently it is SOFR (Secured Overnight Financing Rate) plus 4 percent per annum.

The policy allows transport documents to be issued in accordance with underlying arrangements among the parties. In case of issuance of transport documents in the name of importers or other nominated parties as per arrangements, banks will give instruction to carrier companies accordingly. Export invoices/bills/documents can be sent abroad through banking channel/electronic platform/suitable arrangements directly to designated institutions/importers/other relevant parties as per requirement of the underlying arrangements, read in the notification.

Central bank permits exporters to assign export proceeds to designated institutions or designated financiers abroad extending early payments finance.

It is a praiseworthy initiative by central bank to facilitate export trade, without any doubt. Despite the policy framework in place, business insiders indicate that financing through factoring arrangements against post exports is very insignificant. Foreign factoring companies are not so spontaneous to provide financing support to Bangladesh against open account exports. In the present situation, it is found that foreign buyers arrange early finance to exporters. Without buyers' supports, early payments are rarely available from external sector. However, accepted usance bill against export under LCs is found discounted by banks abroad. Such financing is also available from local banks and their offshore banking units.

Trade model is dynamic. It changes over time. Once, exporters would import inputs on credit terms. Exports would be executed under sight terms against LCs. Presently inputs need to be imported on sight basis but export happens on credit terms without LCs. This is a risky game with peculiar equation. Our exporters are not market makers. They are dominated by buyers abroad. We need to depend on buyers with a single product, readymade garments. As a result, smooth cash flow is an inevitable factor for its sustainability.

Open account is a better option for exporters to be on smooth cash flows without depending on high cost working capital finance from banks. The policy is in place as per central bank's notification. But the policy remains inoperative. It is not exercised at full fledge. For its operability, foreign factoring agencies need to be encouraged for early payments to our exporters. Where the bottleneck is needs to be identified.

Business insiders indicate that exporters frequently face different claims on account of late shipment, quality, etc. from buyers abroad. These are settled otherwise, from subsequent shipments in particular. With regards to factoring services, foreign factors take exposure on buyers only for credit risks. Commercial disputes are not covered by their financing. In case of non-payment on due date by buyers for commercial dispute, factors lodge claims against their early financing to exporters as per global best practice. The method is known as financing under limited recourse. As per central bank's rules, banks can remit up to 10 percent of total repatriated export proceeds on account of different claims. This is also applicable for open account export trade. As it is limited to 10 percent, settlement beyond the limit is definitely subject to approval from central bank. Business transaction under approval regime is merely operative. As such, this needs to be avoided for availing early payments against exports under open account. Should not there be a solution to bring the settlement process under automatic route? Definitely, it is needed. Otherwise, it will not be possible to promote early payments finance through factoring arrangements. Where is the solution? It is a question.

As noted earlier, 10 percent of repatriated export proceeds can be refunded as settlement of relevant claims. Beyond the limit, central bank's permission is required. As it is a bonafide claim, central bank cannot reject the application if submitted by respective banks. In this context, cannot central bank devise a method under which banks can make payments to foreign factors against their claims immediately? In this context, central bank can allow banks to execute such transactions from exporters' fund available in their foreign currency accounts. If the fund is not sufficient enough, banks can use their own foreign currency funds on behalf of exporters to effect the settlement. In this case, banks can be allowed to make postfacto intimation to central bank with background details. This may ease settlement process without delay.

The economy is dependent to a greater extent on export trade. Exports proceeds along with wage remittances facilitate to manage external obligations including import payments. As such, exports need to be facilitated by policy supports. Prevailing factoring policy is definitely a support for export trade. But the policy needs to be fine tuned to make it full-fledged operational.

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