Bangladesh: Textile units suffering from financial crunch

According to a report by The Business Standard, Bangladesh’s textile sector is going through a financial crisis as banks are delaying payments amounting to Tk420 crore against letters of credit (LC), even after more than six months of maturity.

The issue has plunged 52 textile mills in a difficult situation, prompting urgent appeals for intervention from the central bank. A letter has been sent to the Bangladesh Bank governor on June 13, 2024 in this regard by the Bangladesh Textile Mills Association (BTMA).

The letter signed by Mohammad Ali Khokon, president of BTMA, cited instances where banks have failed to release payments even six months past the maturity date of an LC. The letter said, “Despite providing goods on back-to-back LCs, some banks are not settling the bills promptly.”

According to BTMA sources, after a meeting with the Bangladesh Bank governor on June 11, a list of affected mills was submitted as per his instructions, highlighting instances where banks failed to clear bills even after the maturity dates of nearly US$36 million dollars in LCs for about 52 mills.

NZ Tex Group, one of the country’s largest textile mills, faced a payment delay of around US$2 million after supplying goods.

Saleudh Zaman Khan, managing director of NZ Tex Group, told The Business Standard, “Some of our LCs against bills are already overdue with banks. LCs are supposed to mitigate risks, yet banks charge commissions without ensuring timely payments.”

He further added, “If banks cannot disburse payments on time, why issue LCs and charge commissions? I can directly supply goods by managing risks myself.”

Basically, when an exporter receives a Letter of Credit (LC) against a foreign order, they can purchase goods from the local market on credit using that LC. This process is known as a back-to-back LC.

Local raw material suppliers are supposed to receive payment from the bank within 90 to 120 days after accepting the back-to-back LC from the local buyer. This period is known as the maturity date. If this time frame is exceeded, it is considered overdue. Currently, in some cases, the maturity date has been surpassed by anywhere from one month to even over a year.

Given the situation, stakeholders have expressed concerns over potential shutdowns if the current crisis persists.

A textile mill entrepreneur, requesting anonymity, told TBS, “Production is severely affected due to a twofold increase in gas prices. Combined with unpaid payments from banks, it’s becoming increasingly difficult to pay employees’ salaries and bonuses before Eid.”

Syed Mahbubur Rahman, managing director of Mutual Trust Bank Limited, told TBS, “This problem has existed for a long time. Often, this happens because the textile millers who supply the products face delays in receiving their payments.”

“While bills from foreign buyers (typically RMG entrepreneurs) for imported raw materials are settled promptly, local textile mills often face delays in LC payments from banks and garment owners,” he added.

Noting that local textile millers are always on the back foot, he said, “Due to payment delays, their loans sometimes become classified as well.”