HSBC has carried out the first receivables finance transaction in Bangladesh, after the country’s regulator approved the use of the instrument.
In a circular published on June 30, Bangladesh Bank says it will now allow “export under open account credit terms against payment undertaking or payment risk coverage with the option of early payment arrangement on a non-recourse basis”, with the margin on early payment set at no higher than the six-month US dollar Libor plus 3.5% annually.
The HSBC programme will allow ready-made garment exporter M&J Group, which supplies clothing retailers including H&M, Gap and Zara, to receive payment upon invoice acceptance, down from 90 days previously, under the buyer’s default risk coverage from HSBC. The name of the buyer has not been disclosed.
“We are extremely pleased to partner with HSBC on this first transaction under the proposition which will help us to get the benefit at both ends by catering to buyers’ increased credit terms but with early payment on a non-recourse basis,” says Salahuddin Ahmed, managing director of M&J Group.
The garment industry has been hard hit by the Covid-19 crisis. According to a recent report by consulting firm McKinsey, revenues for the sector will drop by as much as 30% in 2020 due to dramatic falls in sales. Bangladesh, the world’s second-largest garment exporter, has been particularly impacted.
Allowing for the use of receivables finance will enable the country’s exporters to seek out new markets and unlock much-needed working capital, says Ajay Sharma, regional head of global trade and receivables finance, Asia Pacific, at HSBC. He tells GTR: “This opens up an interesting market and the possibility to replace letters of credit with open account, using a financing solution. This will redefine what we can do in that market for our clients, allowing them to extend the number of buyers and counterparties they can deal with. Receivables finance is one more tool for our customers to have in their selling armoury and therefore helps them do more business.”
The move by the regulator in Bangladesh to allow the use of receivables finance comes after engagement with the private sector, says Sharma. “Our initial engagement with the regulator in Bangladesh was three years ago,” he says. “We presented best practices of what happens in other markets. This is something we do in every market, and not just necessarily with regard to receivables finance.”
HSBC is not the only entity to be engaging with regulators across Asia to open up the use of working capital optimisation tools. This week, the Asian Development Bank (ADB) said it plans to work with governments to implement regulatory changes in order to overcome barriers to the use of supply chain finance across the markets in which it operates.
The next market to watch is likely to be India, according to HSBC’s Sharma, who expects to see “some progress” in the coming months around that country’s regulatory acceptance of receivables finance for its exporters.