FORCE INVESTMENT (DEMAND LOAN)

FORCE INVESTMENT (DEMAND LOAN)

Causes, Effect, Prevention Thereof: Action to be taken to regularize/ adjustment of force loan (Baim Wes Bill)

Lecture Note

Ihsanul Aziz

Additional Managing Director

Social Islami Bank Limited.

FORCE DEMAND LOAN/INVESTMENT IS CREATED IN THE FOLLOWING CIRCUMSTANCE:

1.      For payment of Import Bills as per credit terms: Specially in Garments sector Bank opens Letter of credits on deferred payment basis to import fabrics and other raw materials against Export LC’S/contracts to execute the export orders. On receipt of fabrics/raw materials Bank provides acceptance to pay the bill informing a date of maturity. If the exporter fails to pay the bill amount on maturity from export proceeds Bank is obliged to pay the accepted bill value by creating force loan/investment.

2.      For payment of guarantee encashment : Besides , if the beneficiary of a Guarantee place for encashment of Guarantee given by the Bank on behalf of the applicant client Bank is obliged to pay the guaranteed amount by creating force loan/investment.

CAUSES OF FORCED DEMAND LOAN/INVESTMENT:

i.           Export failure by the exporter.

ii.         Non-repatriation of export proceeds

iii.       Repatriation of less / partial export proceeds which becomes insufficient to pay the import bill.

iv.       Repatriation  of  export  proceed  at  discounted  value  leading  to shortfall  to  meet  import payment.

v.         Forgery in non-repatriation of export proceeds

vi.       Short shipment of export orders.

vii.     Enhancement of guarantee due to failure to perform as competition.

CAUSES OF EXPORT FAILURE

Export failure takes place broadly for three reasons:

1.   Natural /circumstantial causes beyond the control of the exporter.

2.  Lack of proper experience & prudence of both exporter and banker.

3.  Willful failure or forgery by the exporter.

1. NATURAL/CIRCUMSTANTIAL CAUSES:

Natural /circumstantial causes of export failure are the unfortunate circumstances which are generally beyond the control of the exporter. Some of these are :

i.     Delay in delivery or receipt of raw   materials, fabrics accessories, in the factory to produce garments products.

ii.      Below quality of imported goods: The quality of the imported goods with which the finished export goods will be prepared is very much crucial. If it falls below quality, export will be hampered invariably.

iii.    Non-cooperation or delay by the Buying Agent to provide inspection certificate.

iv.    Non-cooperation of Shipping Agent during shipment.

v.      Due to Socio Political unrest, Hartal, Load shading natural calamities for which the exporter’s smooth production  hampers  and  exporter  fails  to  make  shipment on time for  which  repatriation of  export  proceeds  is delayed  beyond  the  maturity of  import  bill     payment.

vi.    For delay in shipment for the above reasons the exporter occasionally refuses to accept the exported goods & goods become stock lot. Forced investment is created to pay the accepted import Bill.

vii.     Due to some sudden accidental events like break out of fire or natural calamities which destroys all the raw materials and damages the factory, the exporter fails to perform the export order.

viii.   Buyer becomes Bankrupt and fails to take delivery of exported goods or make payment of exported goods.

ix.    Some unscrupulous buyers sometimes take resort to forgery by refusing to take delivery of exported goods on this or that plea and subsequently buy the goods through auction sale of the Port Authority.

3.    LACK OF EXPERIENCE & PRUDENCE OF BOTH EXPORTER & BANKER.

Sometimes export failure causes due to -

(i)           Opening of Back to Back L/C without proper assessment of production capacity of the factory. It is always hazardous for exporter to accept orders beyond production capacity which will ultimately lead to late or less shipment or even non-shipment.

(ii)         Lack of efficiency of the exporter to execute export order. Due to in efficiency, the exporter fails to deliver quality goods,      acceptable to the buyer and consequently the buyer refuses to take delivery of the goods.

(iii)       Management problem: Sometime there arises conflict and confusion among the Management for which management fails to work in a team. Consequently smooth work is hampered in the factory and quality and timely shipment of exportable goods is disturbed which in turn may lead to late, less and even non-shipment. Consequently force investment is created to pay import bill.

(iv)       Accepting the export L/C without proper scrutiny of conditions/defective clauses                   for which export proceeds are repatriated short or at discount and very often repatriation of proceeds does not take place.

(v)         Accepting order from new buyers: Export against orders from relatively new buyers always poses risk of non repatriation since the performance/ repayment history of the buyer remains unknown. 

(vi)       Accepting order through Agent (Buying House): Export against orders received through Agent is also risky since the terms and conditions of export including period of shipment may be not in favor of the exporter.

(vii)     Dependence on Sub-contract basis factory: Some exporters also accept orders depending on the Sub-contract basis factory which only complicates the total export procedure in a proper and timely way.

4.    WILLFUL FAILURE OR FORGERY OF EXPORTER:

i.        It is observed that some unscrupulous exporters for some speedy money /benefit takes resort to malpractices like sale of duty free imported goods instead of processing those for export as per purpose of import under Back to Back L/C. Thus due to deliberate failure of export Bank becomes compelled to create force loan/investment to meet import obligation.

ii.      Capital flight & act of Money Laundering: Some unscrupulous exporters in a planned way does not bring back the export proceeds in the country thus involved in capital flight & money Laundering. In such case buyer and seller are mostly the same person/firm.

iii.    Some exporters prepare false and fabricated documents of exports but actually does not export anything and thus misappropriate imported goods. Bank has to create force loan/investment to pay import bill.

iv.    Some exporters submit false contact and import raw materials against the same. Thus misappropriates imported goods without executing any export.

  

EFFECT:

a)      Stuck up of bank’s financing: The first and foremost effect of such default is that bank’s financing in the project becomes stuck up

b)      Irregular repayment: An inevitable consequence of such default is irregular repayment against bank’s finance.

c)      Project becomes sick: Since financing stuck up, production falls down, the project gradually becomes sick as a consequence.

d)     Rescheduling of bank’s investment: The situation ultimately forces banks to go for rescheduling of the investment thereof.

e)      Legal action: To the extreme cases banks become bound to go for legal action against such financing which ultimately puts both the bank and the exporter in an undesirable situation.

f)       Bank has to go hard line against the willful and unscrupulous exporter who is criminally liable and Bank has to sue accordingly.

g)      The act of unscrupulous exporter involved in capital flight and money laundering is very dangerous and alarming .Because money so laundered may be used in drug trafficking and terrorists financing in the country and anywhere in the world. This the exporter does for his extreme greed of pecuniary gain.  

h)      Many importers become victim as accomplish by working with business for such exporters. They unfortunately lose their jobs and even sentenced to imprisonment.

PREVENTION:

a)      Buyer’s credit worthiness: To avoid forced investment and its bitter consequences, bank and exporter must know about the credit worthiness of the buyer collecting reliable information from different sources. This will also help to detect fraudulent motive of exporter where buyer and seller are same firm/person and thus can avoid capital flight and money laundering attempt. Buyer’s credit report will also help us to know about credit worthies and thus can avoid a possible Bankrupt client.   

b)      Previous performance of the buyer and exporter: Bank must also collect information about the previous performance of the buyer and also the performance of the exporter to avoid forced investment.

c)      Consider three years’ export performance: It’s a standard practice in the industry to judge the three years performance of the exporter before extending any financing to avoid any defaulter.

d)     Limit Sanction: Sanction of limit should be based on factory capacity, factory land, building etc and limit should be allocated properly based on Export LC/ Contract and other facilities as deem fit.

e)      Before opening B/B L/C desk officer should carefully scrutiny the export L/C and shall ensure that there is no adverse condition and defective clause in the export L/C which may delay or create complicacy in repatriation of export proceeds.

f)       Export against contract: Banker should only entertain firm contract i.e. contract signed by Buyer or his authorized agent. In such case Buyer’s credit report must be satisfactory.

g)      Management: Management efficiency should be evaluated. Unless the Banker is satisfied about the efficiency and capability of management to execute export order no B/B L/C should be opened.

h)      Lead Time: To calculate the lead time to ensure that export is possible within the schedule time.

i)        To avoid opening of B/B L/C of the client that estimated to export on the basis of production under sub-contract.

j)        To ascertain whether L/C issuing Bank is a reputed Bank.

k)      In case transferred L/C genuineness of transfer should be verified from the advising Bank.

ACTION FOR REGULARIZATION:

a)      Stock lot report: A detailed and comprehensive report should be prepared on the stock lot of the factory

b)      Finished goods: Customs’ permission should be obtained for immediate export of readymade goods to alternative buyer

c)      Raw material: To be utilized to new orders

d)     Future LC: Certain percentage to be deducted for adjustment of force investment

e)      Limit to be monitored carefully:

f)       Fresh Security: If required, fresh security may be asked for to cover force investment

g)      Stern action including legal action should be initiated against the willful failure or forgery by the exporter.

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