Bangladesh’s $8 billion credit risk from the global retailers and brands
Bangladeshi Ready-Made-Garment (RMG) manufacturers are struggling to survive because of a poor cash flow caused by delays in payments by international retailers and brands despite restoration of some orders, widening the payment default risks only further as increasing number of retailers and brands are filing insolvency proceedings by self-administration or bankruptcy protection.
This development is not only worrisome for the RMG industries of Bangladesh but also for the entire supply chain, most notably the banks and financial institutions with largest exposer to the RMG sector in Bangladesh.
Garment and textile sectors accounted for 19.4 per cent of banking system loans at the end of 2019. In the nine months to September, garment-related exports fell by 19.8 per cent from the year-earlier period, according to Moody’s.
In April last year, the buyers started cancelling or suspending the orders following the spread of the COVID19, which forced shops to shut amid lockdowns in Europe and North America, two major export destinations of Bangladesh.
Some 90 per cent of $3.18 billion worth orders have been restored so far after negotiations by the RMG manufacturers, the Bangladesh Garment Manufacturers and Exporters Association (BGMEA), and the Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA), according to a The Daily Star report.
Buyers have agreed to pay the local manufacturers in different payment modes, which include as high as 50 per cent discount and deferment of payments from six months to one year. Mr. Ahmed F Rahman, Managing Director of Kappa Fashions Ltd, told The Daily Star that nine small and medium-sized garment exporters had together settled with their Hong Kong-based buyer at 43.5 per cent discount (on already fiercely negotiated rock-bottom price) after nearly a year of negotiation.
“The exact date of the export receipt from Asia Today is not finalised yet. We are hopeful that the buyer will complete payment in March this year,” Rahman said. “The companies are borrowing money from banks and near and dear ones to run businesses for the delay in export receipts.”
The current crisis wiped out 357,000 jobs in the RMG industry in Bangladesh in 2020 as factories went for layoffs and closures because of the collapse in demand, showed a survey of the Centre for Policy Dialogue (CPD) and the Mapped in Bangladesh, a project of the Brac University of Bangladesh. More than 300 small and medium factories may shut their units for good as the owners are not interested in reopening them, according to the BGMEA.
Kwun Tong Apparels, a Hong Kong-based garment factory housed inside the Adamjee Export Processing Zone (EPZ), is trying to sell the unit as it had to offer a massive discount to JC Penney, an American treasure in the clothing business. The company had been shut after making a partial payment to the workers.
One of the US-based buyers of Kwun Tong Apparels cancelled orders worth $20 million, and another retailer had to be given a discount of $25 million.
Ha-Meem Group, one of the leading garment manufacturers in Bangladesh, settled the payment issue with JC Penney after negotiations, said AK Azad, Managing Director of the group. “I received $0.5 million out of a total $1.8 million from JC Penney. The company promised a full payment after the final transfer of the ownership to the new owners,” he said.
In December, JC Penney completed the sales, under which Simon Property Group and Brookfield Asset Management acquired all of JC Penney’s retail and operating assets.
Kutubuddin Ahmed, chairman of Envoy Group, said the smaller units were not receiving orders. The indication of the flow of orders is not encouraging either despite the arrival of coronavirus vaccines. Sixty-nine terminated workers of the Dhaka office of the UK-based Debenhams have not received their arrears yet.
“Debenhams does not reply to our emails. It is highly unlikely that we will get the wage from Debenhams,” said Akhter Uddin Ahmed Asad, Country Manager of the liaison office of the brand. The unpaid salaries and allowances of the terminated employees stand at $1 million, he said. Forty local manufacturers to Debenhams have received partial payment. The company owes $60 million.
The factories, which include the manufacturers that have not seen the restoration of the orders, are facing an enormous financial crisis due to the bankruptcy of the buyers, particularly in the form of non-payments and forced loans, said BGMEA President Dr. Rubana Huq to The Daily Star.
The apparel industry has about $8 billion in receivables at any point of time considering the average trade terms of 90 days, she said.
“The second wave has worsened the situation further as it has hit the retail business and demand for clothing, slowing our exports. While factories are already suffering from fund shortage and running on an average of 30 per cent idle capacity, the recovery is challenged further”, Dr. Huq said further.
In most cases, however, the trade terms is double the period of 90 days deferred payment – effectively RMG manufacturers and their banks providing interest-free credit to the global retailers and brands unto 180 days.
At the end of the day the Bangladeshi banks and financial institutions, which are already notoriously in liquidity crunch exposed to the credit default risks. The central bank of Bangladesh skipped publishing the figure of stressed assets first time in it’s annual Financial Stability Report 2019 at a time when default loan outpace recovery rate in Bangladesh.
As of October 2020, there were 334,982 loan defaulters across the country, according to the Finance Minister of Bangladesh Mr. AHM Mustafa Kamal in response to a question in the parliament on January 25th, 2021.
The constant and revolving $8-billion-credit-risk is real. It remains a serious threat to the already stressed economy of Bangladesh, particularly that of the Banking and RMG sectors until such credit terms are revised and adequately secured on a priority basis. It is just a matter of time when the disaster strikes because certain amount the credit is expected to default beyond COVID-crisis, which an economy like Bangladesh is bound to hit hard.
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The full in-depth report may be available upon request from the author.