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The Financial Express

Financing under export credit scheme

| Updated: January 23, 2022 20:19:40


Financing under export credit scheme

To facilitate export trade, exporting countries arrange payments to exporters against exports before realisation of export proceeds. Basically, exporters' banks extend post shipment finance to exporters. Such finance is common to consumer goods. Intermediate goods and capital goods are different from  consumergoods. Credit in the form of exchange finance is needed for intermediate goods. On the other hand, term finance is required for capital goods.

To promote export, financing is an essential component more  important than access to markets in many cases. In this context, exporting countries arrange pre-shipment finance. This is a common practice. But export of intermediate goods and capital goods needs to ship on credit under sales contracts for which exporter needs payment before maturity. Finance from importers' countries are available; this finance bears cost which sets exporters' countries to receive payments lower than export value. To protect this loss, countries with model on export-led growth arrange financing windows at lower costs. In our country, exporters can discount their usance export bills with banks in foreign currency. Discounting in foreign currency saves exporters in incurring costs compared to post shipment Taka loans. The cost in foreign currency is lower, it is true. But banks finance exporters with recourse basis, meaning that exporters need to pay back the amount in case export proceeds are not received in due course of time. This is basically a traditional loan programme, not trade finance. In true sense, post-export finance needs payment guarantee by banks for extending loan without recourse to exporters. Such guarantees are available from external sources for which cost is required again, as said earlier. In both cases --post-shipment finance and payment guarantee from external sources -- export proceeds are realised less than the actual export value.

To save money, export-led countries operate export credit agencies like Hermesin Germany, Sinosure inChina, EXIM banks in many countries and so on. These agencies extend guarantee to importers based on which financial institutions extend post-shipment funding to exporters.

There are different models for financing under export credit agencies. Bangladesh is found receiving external finance for import payments under guarantees from export credit agencies abroad. Importers need to pay interest payments along with guarantee premiums. In another system, exporters take risk coverage from export credit agencies against their exports on credit terms under sales contracts. Such guarantees help exporters to have access to post shipment finance from financial institutions.

One of the components of economic activities in Bangladesh is export transaction. Readymade garment is one of the products comprising more than 85 percent of the total exports. Readymade garment is a consumer item.

Bangladesh export trade model has changed. In the last century, export was made on cash terms meaning that importers made payments on presentation of export documents. Exporters procured input contents on credit terms. In this model, exporters were in a good position under which export proceeds help them to settle payments for input contents.

The present export model warrants export to be shipped on credit terms under sales contracts. Importers will make payments on maturity. But importers need to make input payments on cash terms, otherwise they need huge payments since import under credit terms is embedded with huge extra cost which is not suitable for exporters to match the pricing of export products. As such, exporters prefer input contents to procure on cash terms. There are different cost-effective financing windows for import on cash basis such as refinancing from export development fund (EDF) managed by the central bank, buyer's credit from external sources, usance letters of credit payments at sight basis, commonly known as UPAS LCs, from offshore banking services of banks operating in Bangladesh. The financing cost is reasonable for exporters since it is capped by the central bank.

Other financing need of export trade is post-shipment financing against exports on credit terms under sales contracts. Exporters require immediate payments to meet payments borrowed for input contents and recurring expenses including staff salary and utilities. But the challenge is that it is not easy to purchase importers' accepted export bills by banks. However, they extend finance just as a loan with recourse on exporters within the working capital loan limit. Banks adjust the loans against export proceeds. In case of default by importers, banks realise the same from exporters or treat it as working capital loans realisable from exporters as per loan agreements. Exporters work in a very competitive environment, post-shipment financing in Taka is not cost effective to them. Hence, they seek finance from external sources against their export bills before maturity at reasonable cost. This is fine for exporters but not so for the economy as a whole since foreign financiers extract money from Bangladesh against export trade. There needs a panacea to plug the hole fully or at least partially for the betterment of the economy. Moreover, exporters in all cases cannot find external financiers to sell their export bills. As such, a domestic financing window needs to be explored to support export trade.

Refinancing windows from the central bank like pre-shipment finance will not be workable for post-shipment cases. Just easy financing from banks is needed, for which a credit guarantee can work as collateral to them. Export credit agency is the best solution but this is not possible to establish overnight.

Guarantee is like an insurance supportfor risk-coverage of buyers. Once upon a time, there was a window known as export credit guarantee scheme run by ShadharanBima Corporation. Such type of scheme needs to be established at non-life insurance companies operating in Bangladesh. In this context, the articulation contained in the Export Policy regarding export credit guarantee scheme can be cited. There are different regulatory authorities for financial systems like the central bank controlling money market, securities exchange commission controlling capital market, insurance regulatory and development authoritycontolling insurance markets. Guarantee scheme is like insurance-type products. Insurance regulator seems to be the right authority to take the lead.

Guarantee from local insurance companies is not free from cost of foreign currency since insurance companies cover the risk by taking reinsurance from external insurance companies. Despite this, all costs will not move abroad. If guarantees are available, local banks will be in a comfortable position to extend post-shipment finance in foreign currency at capped cost to exporters. In this case, banks will not take exposures to exporters, rather to guarantees. As a result, default situation from importers abroad will not make exporters jeopardised. Banks will realise payments against the guarantees from concerned insurers which in turn will lodge claim to foreign insurance companies with which reinsurance coverage has been taken.

Bangladesh is trying to diversify her export basket. New consumer goods may be brought in to the existing export basket but it will take time to bring intermediate goods and capital goods into the same basket. Export of durable products needs support from export credit agencies. But export of consumer goods like readymade garment, frozen foods, agro-products and the like may be supported by guarantees from insurance companies, which can encourage exporters to boost exports.  Only guidance note from concerned authority needs to be framed for non-life insurance companies.

 

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