RMG: Services by Banks

April 25, 2020

Promoting RMG Trade by the Banking Industry

(Published in the Financial Express in 2018)

Dr. Shah Md Ahsan Habib[1]

In Bangladesh, banks have noteworthy role and involvement in trade facilitation in the readymade garment (RMG) from its initiation. With the help of back-to-back LCs, both the garment and the primary textile sectors or backward linkage industries flourished in Bangladesh. Banking industry of the country has been facilitating payment, finance and risk management services to the traders including RMG and thus contributing in growing global trade integration of Bangladesh. The regulatory provisions for international trade facilitation in the country expedite greater involvement of the trade services departments with greater risks and greater opportunities to earn. With the growing business complexities, technological changes, market expectations and financial crimes, trade services are becoming increasingly challenging to the banks, as in the other trading countries of the globe. However, banks must go on with offering efficient services to the key trading sector of the country, RMG.  For the economic sustainability of Bangladesh, on the one side RMG sector needs due support through adequate, smooth and effective trade services by banks, and on the other side banks must ensure proper risks identification, management and compliance issues in the process of offering the required trade services.

China has been the market leader in the global RMG market. Bangladesh’s share of the global clothing market is improving and is  now the second largest exporter of apparel products – despite sluggish export growth in recent time. Moreover, a recent survey identified Bangladesh as the key sourcing hotspot of RMG for the coming five years. A recent McKinsey report   has identified Bangladesh as the top sourcing hotspot over the next five years. However, there are evidences and indications that competitions are increasingly becoming intense, and alongside a few Asian countries some African economies (like Ethiopia) and coming up very strongly.

RMG is the most important trade item in Bangladesh. The success story of the RMG in the country mainly activated with the origination of the back to back LC practices in the late 1970s. In some literature it is claimed that it is the Desh Garments Ltd that has come up with first big push in this connection. At end of 1990, this sector captured the fifty percent share of total export. Now it holds the lion share of total export volume.

The economy of Bangladesh has large dependence on the RMG sector, and this sector is considered as the lifeline of the Bangladesh`s economy and plays an indispensable role for the social stability of the country. Nearly two million women workers were directly and more than ten million people were indirectly associated with this industry. Today, the RMG export sector consists of multibillion dollar manufacturing and export industries in the country. The overall impact of the readymade garment export is certainly one of the most significant social and economic developments in contemporary Bangladesh. Manufacturing in Bangladesh has for the last 30 years been defined by the RMG industry and for good reason. The nearly 7,000 RMG facilities in Bangladesh produce close to one-fifth of all manufactured goods and employ over half of all workers in the manufacturing sector.

This sector creates about 4 million employment opportunities and contributes significantly to the GDP. The sector is powered by young workers, where most of them are women. Country’s total export earning has increased over the time with continued high share of RMG and the sector of Bangladesh has earned about USD 30,000 million in 2017. Of the total earnings, woven garments and knitwear constituted around 52 and 48 percent respectively. Data on product wise export earnings showed contribution of over 40 percent each in terms of the total volume of export earnings of the country. Currently about 4 million of total manpower is working in about 4500 garments factories of Bangladesh.

RMG exports of the country accounted for over four-fifth of the country’s total exports following 2014. According to BB (2018) data, during the first half of FY18, import price of raw materials stood at USD 3716 million through back-to-back LC, which is around 25 percent of total RMG export value. Thus, the gross value addition from this sector stood at around 75 percent. The yearly data on RMG export and back-to-back raw materials import shows that the average value addition from FY10 to FY17 and the first half of FY18 through export of RMG is almost 75.0 percent. The major importing countries of Bangladeshi RMGs are USA, Germany, UK, France, Spain, Italy, Belgium, Netherlands and Canada. For maintaining the growing trend of the sector and addressing future risks, the country needs to focus on factors such as changes in trade relations, costs and access to shipping and logistical routes, raw material costs, compliance issues and consumer tastes and attitudes etc.

Of total number of trade payment transactions, BIBM survey data clearly indicate the extensive use and growing dominance of documentary credit in import transactions in Bangladesh. Similar trends can be seen in case of RMG sector as well. In case of exportation of RMG, again LC is the most prominent method of payment. However, compared to the overall export figures, use of LC is slightly lower in RMG.  As a whole, LC remained the most widely used method of payment to receive payment by the exporters of Bangladesh. Of the different types of LC, a significant number is back-to-back which is mainly related to RMG trade transactions. More specifically, this is because of the garments sector that imports/procures raw materials from home and abroad for meeting their export orders. In Bangladesh out of the total export letters of credit used in RMG, a significant number is local back-to-back LC; and of the total a certain proportion is transferable letter of credit. In recent time, decrease in transferable LC in recent time indicates the growing trend of receiving direct LC by the ultimate exporters. Existence of a large number of buying houses is one of the reasons for the use of transferable LC. Buying houses (of the garments products) are not the actual manufacturers and therefore, for procuring the goods, they are required to transfer the LCs to the real manufacturers. Moreover, the practice of subcontracting by the garments manufacturers is also very common for which an LC is transferred.

Of the different types of LC, back-to-back is understandably the most commonly used types of LC. However, it is the local back to back that is dominating. In case of export LC, the documentary requirements are almost same. It can be observed from the survey data that insurance documents are less frequently asked in the LCs sent to Bangladesh exporters (not very different from the LC opened by banks located in Bangladesh for foreign exporters). Ocean bill of lading or multimodal has been the most commonly used type of transport document. In exportation of RMG, other than these, a pre-shipment inspection by the buying houses or by a buyer selected party is a very common requirement. Late shipment and late presentation have been the most common discrepancies in both export and import documents  in CY 2017 in the RMG sector. According to the survey observation, in exportation, late shipment and late presentation are the most common discrepancies; these are relatively less in case importation. Sometimes these discrepancies of late shipment and late presentation are evidenced due to non-availability of pre-shipment inspection certificate. In RMG, it is difficult to accurately estimate lead time in exportation, and sometimes cause payment discount. Pre-shipment inspection requirement is also misused in certain instances against the RMG exporter. According to the opinions of the practitioners, the proportion of compliant LC increased; however, banks are coming across increasing number of spurious discrepancies.

[1] Professor and Director (Training), BIBM ([email protected]).

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