Spinners bleed as troubled banks flout over Tk3,000cr LC obligations

Textile millers are suffering mounting losses as more than a dozen troubled banks have failed to settle overdue payments against local back-to-back letters of credit (LCs), leaving thousands of crores of taka in accepted bills unpaid for years.

Infographics: TBS

Around Tk3,000 crore to Tk4,000 crore in overdue payments has accumulated over the past five years as banks failed to honour accepted bills after maturity, according to bankers, despite clear obligations under the Guidelines for Foreign Exchange Transactions 2018.

The unpaid bills relate to local back-to-back LCs, under which garment exporters buy yarn, fabric and other raw materials from local suppliers on the strength of export orders received from foreign buyers. Once a bank accepts a bill submitted by the local supplier, it becomes legally bound to settle the payment on the maturity date, usually within 120 days.

However, many banks have failed to do so even years after accepting the bills.

A back-to-back LC, also known as a local LC, is a financing mechanism where a master LC from a foreign buyer acts as collateral for a second, separate LC issued to a local supplier. Local LCs specifically facilitate sourcing raw materials from domestic suppliers for export-oriented industries, crucial in Bangladesh for garment manufacturing, often settled in local currency rather than dollars.

Banks' obligation

Speaking to The Business Standard, Mohammad Shahriar Siddiqui, Bangladesh Bank assistant spokesperson and director, said there is no provision for non-payment against accepted bills.

He explained that the central bank typically clears overdue payments by deducting the relevant amount from the commercial bank's account maintained with the Bangladesh Bank. However, in cases where document disputes arise, the central bank resolves them on a case-by-case basis upon appeal, he said.

"While some overdue payments exist with troubled banks, the central bank has explicitly instructed them to settle these liabilities immediately," Shahriar said.

This follows an earlier circular issued on 26 October 2022, in which the Bangladesh Bank noted that some banks were failing to follow settlement instructions, thereby disrupting foreign exchange operations.

Under that directive, banks were strictly ordered to settle all payments for both local and foreign LCs upon maturity. The circular also warned that failure to comply would lead to the cancellation of Authorised Dealer (AD) licences and disciplinary action against the officers responsible.

Overdue for years

TBS found numerous cases in which banks accepted documents from suppliers, including invoices and bills of lading, but then failed to make payment years after the maturity date.

Prosanta Kumer Das, manager of Ahmed Group, said the group has around $15 million, equivalent to nearly Tk200 crore, outstanding against accepted bills with several banks.

"When a bank accepts the bill, the liability shifts entirely to the lender," he said.

"In the case of foreign LCs, banks never delay payment. Even if the customer fails to pay, the bank settles the bill from its own funds. But they are not following the same practice for local LCs."

Prosanta said banks are supposed to create forced loans in the name of their exporter clients and use those funds to settle accepted local LC bills.

"Our operations have been suffering because of the long delays. We cannot repay the loans that we took to import raw materials, and our daily operations have been disrupted," he added.

Bank Asia has more than 400 such overdue cases with different banks, involving nearly $16 million, according to the bank.

Sohail RK Hussain, managing director of Bank Asia, said delayed payment against accepted bills has become common in recent years.

"In the case of foreign LC payments, the Bangladesh Bank immediately intervenes and settles the dues by deducting money from the banks' accounts held with the central bank," he said.

"The same intervention is needed for local LCs because at least 15 troubled banks are unable to make payments."

He said Bank Asia had recently sent reminder letters to two troubled banks to settle overdue accepted bills of their clients and was considering legal action against banks that continued to default.

The Bangladesh Textile Mills Association, the representative body for the country's textile entrepreneurs, does not have recent statistics on the total amount of funds currently stuck in this manner.

However, an official from the organisation noted that as of the last available data in November, the amount pending with banks stood at approximately $90 million.

How textile millers suffer

Industry leaders said the growing defaults have weakened Bangladesh's backward linkage industry for the garment sector, with textile mills struggling to repay loans, pay workers and continue operations.

Md Mosharaf Hossain, managing director of Mosharaf Composite Textile Mills, said around $2 million owed to his company remained unpaid, with some payments overdue for as long as five years. "Those payments should have been settled within 120 days of acceptance."

Most of the money is stuck with Islami Bank Bangladesh, Premier Bank, Agrani Bank and Exim Bank, he said.

Md Anwarul Islam, managing director and CEO of Agrani Bank, said banks have no scope to leave overdue payments unsettled for an extended period. "However, we will look into the matter if any such case persists," he added.

Despite repeated attempts, officials from Islami Bank Bangladesh, Exim Bank, and Premier Bank could not be reached for comment.

Documents seen by TBS show that one supplier delivered yarn worth around $1,92,000 in mid-2021 against six separate LCs opened by New Town Knitwear Company Limited. Four of the LCs were issued through Islami Bank Bangladesh and two through Exim Bank, yet the supplier has still not received the money nearly five years after the maturity date.

Similarly, payment for goods worth about $1,20,000 supplied to Optimum Fashions Wear Limited against three LCs has remained overdue with two banks for about 18 months.

Two other firms based in Narayanganj – Abanti Colour Tex Limited and Crony Apparels Limited – have failed to receive payment worth $4,72,000 and $35,000, respectively, even after two years.

Officials of the company said legal notices had already been served on the institutions concerned and on the relevant bank officials.

Furthermore, after repeated reminders over the past few years went unheeded, the firm has filed lawsuits against nine companies, to which raw materials were supplied, as well as the relevant bank officials.

TBS has obtained several documents related to the lawsuits and legal notices issued by the institution.

Mosharaf Hossain said, "Because we are not receiving payment on time, we cannot repay our bank loans," he said. "As a result, we have to pay additional interest. At the same time, a shortage of working capital is making it difficult to pay workers' wages and allowances."

"The same bank that cannot pay what it owes us is charging interest on our loans," he added.

Mosharaf said his company had always paid wages on time in the past, but had still not fully paid workers' salaries for March this year.

"Without support from the banks, we are disappearing from business," he said.

Saleudh Zaman Khan, managing director of NZ Apparels Limited, said his company had around $8,00,000 in unpaid bills for goods supplied to garment factories.

Some of the payments under Islami Bank LCs are now more than a year overdue, he said.

Besides Islami Bank, EXIM Bank, and Premier Bank, some other banks controlled by the S Alam Group are also failing to make payment, Saleudh said. "Because of this, we have to pay extra interest on our loans and divert funds from other businesses to avoid our loans becoming classified."

He added that LC agreements require banks to pay interest to suppliers if payment is delayed by more than five days after maturity. "But even after months of delay, we are not receiving that interest."