At-Sight LC vs B2B LC: Impact on Bangladesh’s RMG exporters
In Bangladesh’s Ready-Made Garment (RMG) industry, a critical issue has emerged regarding payment practices between RMG exporters and their local suppliers. While garment owners often receive swift “At-Sight LC” (Letter of Credit) payments from international buyers, local suppliers of fabric, accessories, polybags, and cartons are left waiting under “Back-to-Back LC” payment terms, sometimes stretching over 90 to 120 days. Despite frequent talk from RMG exporters about ethical sourcing from global brands, they are failing to ensure fair financial practices within their local supply chains.
The core issue
Garment factory owners typically receive payments from international buyers within 7 to 10 business days after shipment through At-Sight LC. This ensures their business liquidity is maintained. However, when it comes to paying their local suppliers, these owners delay the payments for 3 to 4 months under Back-to-Back LC terms. This delay becomes even more problematic when suppliers, having invested in producing the materials, do not receive acceptance before shipment, forcing them to wait without clarity.
One such supplier, with the condition of anonymity, highlights his frustrations, “Garment owners are not only opening Back-to-Back LCs with long delays, but they’re also modifying Purchase Invoice (PI) terms without consulting us. They calculate from the date of negotiation instead of delivery, creating financial pressure on us.”
This practice of delayed payments imposes a severe financial burden on local suppliers. Since most of these suppliers are smaller businesses, the lengthy waiting period causes cash flow problems, forcing many to take loans to sustain their operations. The additional interest payments further erode their already thin profit margins.
The power imbalance
At the heart of this problem lies the power imbalance between RMG exporters and local suppliers. Garment owners, being the pivotal connection between international buyers and local suppliers, wield considerable influence. Local suppliers, needing the business to stay afloat in a competitive industry, are often left with little choice but to accept these unfavorable terms.
RMG exporters, meanwhile, use the funds from one project to cover the costs of another, benefiting from both sides. Local suppliers, on the other hand, have to take out loans to finance their operations while waiting for payments that should have been made much earlier.
The ethical and economic impact
The consequences of these delayed payments ripple throughout the supply chain. Local suppliers facing financial difficulties struggle to invest in new technologies, pay their workers, or maintain consistent production quality.
Moreover, this harms Bangladesh’s reputation as a global garment supplier, particularly at a time when ethical sourcing is becoming increasingly important to international buyers. These unfair practices could lead to long-term damage to the country’s RMG sector, as global brands and consumers may question the ethical standards of the entire supply chain.
Solutions for a fairer supply chain
To correct these injustices, a few steps could be taken:
- Regulatory oversight: The government, in collaboration with trade associations, could enforce regulations that limit the maximum number of days suppliers can be kept waiting for payment. Setting a standard for payment terms would create a more balanced relationship between garment owners and local suppliers.
- Supply chain financing: Another solution lies in supply chain financing. Garment owners can collaborate with banks to offer short-term credit to suppliers, allowing them to access payments earlier, while garment owners settle their obligations later.
- Buyer intervention: International buyers can also play a role by setting ethical standards for how their suppliers treat local businesses. Brands could require factory owners to adhere to fair payment practices and incentivize those who maintain ethical supply chains.
As Hassan, General Manager of Montrims, puts it, “If you get paid after shipping your garments, why hold my payment when I’ve already delivered my materials? Fairness should extend to the whole supply chain.”
Conclusion
Bangladesh’s RMG exporters must align their practices with the ethical standards they claim to uphold. While they push for fairness from international brands, they need to treat their local suppliers with the same respect. By fostering transparency and adopting fair payment practices, the industry can ensure its long-term sustainability and maintain its reputation on the global stage. Implementing these changes will help build a more just, resilient, and competitive supply chain for all stakeholders.
