LC Payment Failures Shake Textile Sector

Textile exporters in Bangladesh are facing prolonged financial strain as a significant volume of overdue payments remains unsettled against local back-to-back letters of credit (LCs), with liabilities estimated at around Tk3,000 crore to Tk4,000 crore accumulated over the past five years.

Industry stakeholders and bankers report that more than a dozen financially distressed commercial banks have failed to honour accepted bills even after maturity. These bills, once accepted by banks, represent binding payment obligations that are generally required to be settled within 120 days under standard LC terms and applicable foreign exchange regulations.

Under the back-to-back LC mechanism, export-oriented garment manufacturers procure raw materials such as yarn and fabric from domestic suppliers based on confirmed export orders from international buyers. The foreign export order serves as collateral for a second LC issued locally. Once a bank accepts the supplier’s bill, it assumes full responsibility for payment on the maturity date. However, in multiple documented cases, settlement has been delayed for several years.

A senior official of Bangladesh Bank, Mohammad Shahriar Siddiqui, assistant spokesperson and director, stated that there is no regulatory provision allowing non-payment of accepted bills. He noted that the central bank typically recovers overdue amounts by debiting the concerned commercial bank’s account maintained with it. In cases involving disputes, resolution is carried out on a case-by-case basis. He also confirmed that banks have been instructed to clear outstanding liabilities without delay.

An earlier directive issued by Bangladesh Bank on 26 October 2022 reinforced that all banks must settle both local and foreign LC obligations at maturity, warning that failure to comply could result in cancellation of Authorised Dealer licences and disciplinary measures against responsible officials.

Selected outstanding LC obligations

Managing Director of Bank Asia, Sohail RK Hussain, said that delayed settlement of accepted bills has become increasingly frequent. He noted that in the case of foreign LCs, the central bank intervenes promptly to settle dues by deducting funds from banks’ accounts held with it. He added that a similar mechanism is necessary for local LCs, particularly as around 15 distressed banks are currently unable to meet obligations.

He further stated that the bank has issued reminder letters to defaulting institutions and is considering legal measures where delays persist.

Data from the Bangladesh Textile Mills Association indicates that, based on its most recent available figures, approximately $90 million remains tied up in unpaid LC-related transactions.

Exporters have reported significant operational disruption due to delayed receipts. Md Mosharaf Hossain, Managing Director of Mosharaf Composite Textile Mills, stated that delayed payments have affected loan servicing, working capital cycles, and wage payments. He noted that although contractual settlement is required within 120 days, some dues remain unpaid for up to five years.

Officials of Agrani Bank stated that banks are not expected to leave accepted bills unsettled for extended periods and indicated that individual cases would be reviewed where necessary.

Several exporters have also initiated legal proceedings and issued formal notices against defaulting buyers and associated banking officials, citing continued non-payment and resulting financial pressure on export-oriented operations.