RMG: Regulatory and Incentive Framework

April 25, 2020

Regulatory and Incentive Framework to Promote RMG

Trade by Banks

(Published in the Financial Express in 2018)

Dr. Shah Md Ahsan Habib[1]

Regulatory framework for the trade services in general is relevant equally for the RMG sector of the country though a few provisions are specifically applicable for RMG traders of the country.  As the regulatory and supervisory authority, Bangladesh Bank controls and guides all trade services activities offered to RMG and others. Practically, ADs offer services as the agents or dealers of the central bank. BB has also been playing 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 regulation in regulating cross-border trading activities. Banks are also required to follow the trade policies issued by the Ministry of Commerce of Bangladesh. Among the international rules and guidelines, International Chamber of Commerce (ICC) publications are the most relevant.

Trade finance and RMG industry related regulatory and incentive structure are crucial for molding trade services to the RMG sector of Bangladesh. 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 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 USD60 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 readymade garment by means of improvement of port management, simplification of procedure for the clearance and shipment of a products ; setting up single window service center to facilitate international trade. As per the policy document, deemed exporters, like direct exporters, enjoys 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 readymade garments 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 percent 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 garments industries and industrial raw materials.  Recognized readymade garment industries operating under the bonded warehouse system, they are permitted to import raw and packing materials, the approved quantity as per Utilization Declaration (UD) issued by the BGMEA in accordance with the policy formulated by the NBR on the basis of confirmed and irrevocable LC for export of readymade garments 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 key supportive instruments for the RMG. During the FY2017-18, to encourage the country’s export trade, export subsidies or cash incentives have given for some export items to be effective from July 2017 to June 2018. Such as: 4 percent, 4 percent and 3 percent cash incentives have fixed for export oriented garments sector, small & medium industry of garments sector and to help for expand the new market or new items of garments sector (excluded USA, Canada, UAE) respectively and 2 percent cash incentive determined for the exporters of garments sector of EURO zones etc. BB is contributing in the process of attaining compliance requirement of RMG through GTF Facility. In order to encourage ADs to use the loan under the Green Transformation Fund, BB reduced the interest rate and allowed 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, GFET noted, recognized export oriented garments 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 RMG and other traders, a legally enforceable contact is crucial for minimizing 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, when LC does not work, traders may get protection only through a legally enforceable contract. 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 United States, UK, members of EU, 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 customers (KYC) are important both for bankers and traders of RMG in cross-border trading. In the context of the country, obtaining credit report is a clear requirement in importation of any including garments 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, ADs are required to obtain information on foreign buyers, consignee and their credentials before issuance of EXP. A commercial credit report may also be extremely helpful in meeting the KYC due diligence requirements of 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 banks and RMG traders of the country.  

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

Leave a Reply

Your email address will not be published. Required fields are marked *