An apparel industry owner met me the other day and expressed his desperateness to get some foreign currency (FCY) loan for a period ranging from three to five years. He is under tremendous pressure to relocate his factory to an independent building outside Dhaka city, procure more plant machinery as well as invest in safety and security equipment. Courtesy Rana Plaza building collapse, the good buyers are reportedly cancelling orders right and left to import apparels from the direct exporters from Bangladesh, not to talk about their increasing reservation to pick up clothes stitched by a sub-contracted factory, he mentioned. According to him, investment in new compliant factories and production lines has become a necessity for many apparel producers in Bangladesh now. Such investment is also seen as 'survival kit' for the factory owners to maintain their price competitiveness. But locally borrowed fund is far more expensive than that sourced from abroad. The interest rate of local bank loans is 15 to 17 per cent against that of foreign currency loans at 6.0 to 7.0 per cent. He also thought steady export receipts in foreign currency should provide him a natural hedge against exchange rate fluctuations or even tenor mismatches.
Bangladesh has seen increasing foreign currency borrowing by the locally incorporated private commercial firms in recent years. The figure was USD 1.58 billion as of June 2011 and little over USD 1.6 billion as of June 2012. The amount has reportedly exceeded USD 2.0 billion as of June 2013. Most of the borrowing entities are telecom, pharmaceuticals, fast moving consumer goods and infrastructure building companies with least of them coming from country's leading apparel export sector. The Bangladesh Bank (BB) stipulation reveals that the borrowing cost in this regard can't cross LIBOR (London interbank offer rate) plus 4 per cent. On the other hand Bangladesh exporters were seen discounting their 'Usance' or more than short term letters of credit at the offshore banking counter of the local commercial banks. While the stipulation says it could be 'as per' the L/C terms or tenor of the L/C, many importers are getting this extended through special approval from the watchdog agency. However, average tenor of the Usance L/C discounting or negotiation (popularly known as U-Pass) is around one year or so. All inclusive cost stipulation in this regard is 6.0 per cent. Bangladesh Bank has also been providing 'export development fund' or EDF for the exporters through their banks for the last several years. However the fund has limitation with regard to its size and could not become very popular among the banks and its export clients due to associated bureaucratic bottlenecks.
As mentioned above the Bangladesh apparel exporters coming under pressure from home and abroad are now exploring cheap funding source to support their compelling capital investment. However, intending lenders list seems to be very limited for them. Rate of interest, appropriate security and collateral and even risk appetite by the foreign lenders, is deemed to be also the significant barriers here. Though government has declared all out support for up-gradation of our apparel producing plants, there is no specific programme or guideline for supporting them with low interest rate FCY funds. Less than one year term FCY borrowing in the form of U-Pass is not helping them much. They need three to five years, if not more funding supported by their internal cash generation or aligned with their capital expenditure plan. Local commercial banks through their offshore banking wing is trying to help them but up to a certain time or not exceeding one year. Many times these offshore banking units suffer from fund or deposit crisis. The foreign banks operating in Bangladesh or the correspondent banking service providing banks are not able to lend them money for more than seven days. Interbank FCY lending and borrowing is almost non- existent other than short-dated currency SWAPs. Local banks here can't keep their 'Nostro' or overseas account overdrawn for more than a week. On the other hand, most of the competing countries of Bangladesh do have very easy bankers' acceptance financing or long-term import financing scheme for the exporters. Foreign banks also do need extra or incremental lines for the local banks based on their credit standing.
In order to support our apparel sector modernisation plan, we not only need buyers' commitment and regulatory support but also a medium term capital expenditure financing plan. While existing Bangladesh Bank guidelines do not provide much leeway, the central bank in consultation with finance ministry can always come up with special programmes for supporting apparel industry modernisation and try to liberalize the banking norms in this regard. High foreign exchange reserve and compelling situation to continuously buy FCY from the market, should work as buffer for them.
In view of falling exchange rate in the competing countries including India, increasing buyers' commitment to only work with compliant factories and very high local currency interest rate; any support to the exporters would primarily mean medium term financing support. We need to support our exporters; we need to facilitate them in every need.
Source: The Financial Express
