Promoting RMG trade: Regulatory and incentive framework of banks

Shah Md. Ahsan Habib | Published: September 14, 2018 21:09:07 | Updated: September 18, 2018 20:52:13

The second of a three-part series titled 'The role of banking in RMG trade '.

Regulatory framework for the trade services in general is relevant for the readymade garment (RMG) sector although a few provisions are specifically applicable for the RMG traders. As the regulatory and supervisory authority, Bangladesh Bank (BB) controls and guides all trade services activities offered to RMG and others. Practically, ADs (authorised dealers) offer services as the agents or dealers of the central bank. BB has also been playing a role in ensuring coordination among stakeholders for greater efficiency. Banks are required to follow both a set of domestic regulations and international rules/guidelines while offering trade services. In this connection, the exchange control regulation i.e., Foreign Exchange Regulations (Amendment) Act 1947 (FERA 1947) of Bangladesh is the key domestic law in regulating cross-border trading activities. Banks are also required to follow the trade policies of the Ministry of Commerce. Among the international rules and guidelines, the International Chamber of Commerce (ICC) publications are the most relevant ones.

Trade finance and RMG industry-related regulatory and incentive structure are crucial for moulding trade services related to the RMG sector. With continued growth, Bangladesh has become the world's second largest garment exporter that has been made possible through extensive support covering duty-free import of inputs, bonded warehousing facilities, back-to-back letter of credit (LC) supports etc. 'High Value-added Readymade Garment and Garment Accessories' is amongst the highest priority sector in the Export Policy 2015-18. Benefits and facilities to be provided to the highest priority sectors include: project loan at reduced interest rates on a priority basis; income tax rebate; export credit at lower interest rates and on soft terms; air transportation facilities on priority basis; duty draw-back/bond facilities; duty-free import of equipment for setting up compliant industry; assistance in production and marketing of products; assistance in exploring markets abroad; and necessary initiatives to attract foreign investments. To increase our export to $60 billion has been targeted by 2021, of which 50 billion will come from RMG while the rest will come from ICT and other sectors. Export policy kept provisions to reduce the 'lead-time' for export of RMG by means of improvement of port management, simplification of procedure for clearance and shipment of products ; setting up single window service centre to facilitate international trade. As per the policy document, deemed exporters, like the direct exporters, enjoy export facilities including duty-drawback.

To support import for facilitating RMG exports, certain provisions of Import Policy Order (2015-18) are particularly relevant. Export-oriented RMG industries are allowed to send maximum 700 samples with not more than 12 in each category; and  in case of old garments manufacturer and exporter, import facility for 2.0 per cent of the cloth used in making garments in the preceding year shall be available. The provision of 'Country of origin' is also not applicable to export-oriented garment industries and industrial raw materials. Recognised RMG industries operating under the bonded warehouse system are permitted to import raw and packing materials, the approved quantity as per the Utilisation Declaration (UD) issued by the Bangladesh Garment Manufacturers and Exporters Association (BGMEA) in accordance with the policy formulated by the National Board of revenue (NBR) on the basis of confirmed and irrevocable LC for export of RMG against back-to-back LC subject to some conditions. RMG is also permitted to import raw materials on `No Cost Basis' for execution of export orders following certain conditions.

Cash incentive is a key supportive instrument for the RMG. During the FY2017-18, to encourage the country's export trade, export subsidies or cash incentives were given for some export items (to be effective from July 2017 to June 2018). Such as: 4.0 per cent, 4.0 per cent and 3.0 per cent cash incentives were fixed respectively for export-oriented garment sector, small & medium industry of garment sector and for expanding new market or new items of garment sector (USA, Canada, UAE excluded). Besides, 2.0 per cent cash incentive was given for RMG exports to the Eurozone.

BB is contributing to the process of attaining compliance requirement of RMG through GTF (green transformation fund) facility. In order to encourage ADs to use loan under the GTF, BB reduced the interest rate and allowed the ADs to determine their own loan interest rates to the borrowers covering their cost of borrowing from the fund and operational expenses, plus a reasonable risk-adjusted spread and profit margin. In line with the trade policy documents, Guidelines for Foreign Exchange Transactions (GFET) noted, recognised export-oriented garment industrial units operating under bonded warehouse system are allowed to use the back-to-back LC facility. However, back-to-back LC (both local and foreign) has to be issued only in foreign currency.

At the operational level, purchase/sale agreement or contract is the starting point where certain compliance issues like using the permitted trade payment methods, right incoterms, documents as  per requirements are supposed to be ensured. For the RMG and other traders, a legally enforceable contact is crucial for minimising several legal and commercial risks. Practically, for the three methods (cash in advance, open account, and documentary collection) banking system needs a standard format for purchase/sale agreement, considering the risks to protect the interests of the clients in a better manner. In case of LC, the contract may be considered as relatively less important as the terms and conditions of the contract are expected to be in the LC itself. However, traders may get protection only through a legally enforceable contract when LC does not work. In Bangladesh, the use of standard sales/purchase contract is not prominent. In regard to uniform rules for the contract, the major trading partners of Bangladesh like the US, UK, EU member countries, China are among the signatory countries of UN Vienna Convention. However, Bangladesh is yet to sign the treaty, and the country also does not have any national regulation/guideline to cover cross-border purchase/sale contracts.

Knowing your customers (KYC) is important both for bankers and traders of RMG in cross-border trading. Obtaining credit report is a clear requirement in importation of any product including garment items in the country. According to GFET, the ADs should obtain confidential report on the foreign exporters from their branches or correspondents abroad or in their discretion, satisfy themselves as to the standing of the exporter by consulting standard books of reference issued by international credit rating agencies acceptable to the ADs.

In case of exports from Bangladesh, the ADs are required to obtain information on foreign buyers, consignee and their credentials before issuance of foreign exchange policy (EXP). A commercial credit report may also be extremely helpful in meeting the KYC due diligence requirements of the Anti-Money Laundering and Countering Financing of Terrorism (AML/CFT) of Bangladesh Financial Intelligence Unit (BFIU). In addition, determining right prices of RMG exportable or importable in contract is crucial for traders, bankers and also for the country. Determining right and competitive pricing is connected with addressing under- and over- invoicing practices of Trade-Based Money Laundering (TBML). Ensuring due KYC requirements of BB and BFIU is particularly crucial for the safe and sound operation of both the banks and RMG traders.

Dr. Shah Md. Ahsan Habib is Professor and Director (Training), Bangladesh Institute of Bank Management (BIBM).


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