In 1978, Noorul Quader Khan, who is also called the father of the country's garment industry, was struggling to start production in his Desh Garments Ltd due to a lack of working capital and apparel accessories although the factory was ready with trained manpower.

A visionary entrepreneur, Khan got 130 men and women trained from the Korean Daewoo Company to take charge of his Desh Garments at Kalurghat in Chittagong. But unfortunately he could not start production when he had seen that out of 35 accessory items 34 were needed to be imported from abroad.

Khan then met the Bangladesh Bank governor and talked about his ideas of obtaining working capital from commercial banks with a back-to-back LC (letters of credit) against the master LC that he received from the buyer. He proposed opening an LC with the commercial bank against the master LC for purchasing yarn, fabrics and other accessories.

This way a unique system of back-to-back LCs came into being in Bangladesh.

Shipping agencies acting as a third party would submit bill of lading (BL) as a proof of transaction of goods between the importers and exporters. This document confirms the importers that they have received the goods from the exporters at the port.

With the help of back-to-back LCs, both the garment and the primary textile sectors or backward linkage industries flourished in Bangladesh.

In case of opening back-to-back LCs for domestic industries, a third party's involvement is not required. As a result, there arises a chance of abuse of the back-to-back LCs which actually happened in Bangladesh. Some dishonest people swindled crores of taka from the banking system by opening fake companies and opening fake back-to-back LCs.

This was the case for a top local company which swindled money from Sonali and other banks. The companies like Hallmark and Bismillah Group followed the same formula and swindled the banks.

Not only this, a group of businessmen have not been paying to the deem exporters in time in the local market by abusing back-to-back LCs. Deem exporters are those who supply accessories from the local markets. They are called deem exports because their supply of accessories from their local factories is counted as imported goods although they were purchased locally.

A section of garment makers buy accessories such as yarn and fabric from backward linkage industries by opening back-to-back LCs. The garment makers do not pay timely to the suppliers as there is no involvement of third party documents like BL by shipping lines in case of international LCs.

In absence of master LCs, in many cases, a section of businessmen abuse this kind of back-to-back LCs under contracts and do not pay to the deem exporters.

The central bank should take special measures to make sure the scheduled banks take the responsibility for their local LC payments in time. 

As such, Bangladesh Bank should introduce third party involvement in local back-to-back LCs.

When a scheduled bank opens local LCs or back-to-back LCs it should appoint reputed national or international inspection companies which will confirm through their certification that goods have been delivered to the LC openers according to LC terms.

The introduction of third party certification can stop manipulation of LCs, like the ones done by Hallmark and Bismillah Group, and ensure deem exporters' payment in time if such certificates are considered as local BL like the ones that the shipping lines provide.

But it has to be kept in mind that small accessory suppliers are not required to be under this procedure.

If any disputes arise on the quality of goods, then it could be resolved following the internationally set standards and rules, although currently such disputes are resolved without involvement of any recognised third party.

If the involvement of the third party is ensured for dispute settlement, the importers of raw materials will also enjoy the benefit of timely delivery of goods.

If the central bank formulates policies paying a good attention to the matter and take measures for involving third party in opening of back-to-back LCs, the companies like Hallmark and Bismillah Group will not have the scope to swindle the banks and the local yarn and raw materials suppliers will get payment in time.

The banking system's default loans dropped 3.91 percent to Tk 52,519 crore in the second quarter of the year, much to the relief of the central bank.

Bad loans accounted for 9.67 percent of the total loans on June 30, compared to 10.47 percent in March.

Bad loans rose slightly during the January-March period due to political turmoil, said a Bangladesh Bank official. At March's end, defaults stood at Tk 54,658 crore.

However, in the following quarter the banks' realisation increased and they succeeded in bringing down the figure thanks to rescheduling facilities.

Between April 1 and June 30, defaults at all local banks, save for the foreign lenders, decreased from the preceding three months.

Specialised banks' soured loans fell 21 percent to Tk 5,827 crore, while that of state-owned commercial banks crore, declined 1.12 percent to Tk 22,400 according to central bank statistics.

The decrease in default loans at BASIC Bank is a major cause for the lower figures of state banks.

By the end of March, BASIC Bank's defaults stood at Tk 5,080 crore, or 57 percent of their outstanding loans. It dropped to Tk 4,308 crore, or 47 percent of outstanding loans, at the end of June.

An official of BASIC Bank said a lot of bad loans were rescheduled and showed as regular ones to make the bank's balance sheet look stronger. It was done as part of the bank's efforts to retrieve loans from bad borrowers.

A lot of BASIC Bank's funds that were later classified into bad loans funnelled out through forgeries during the previous management's regime, so more than Tk 3,000 crore was transferred to a block account to show a healthy balance sheet.

Besides, in continuation of the trend in the first quarter, default loans of most of the state-owned commercial banks increased in the second quarter.

Early this month, Bangladesh Bank also expressed dissatisfaction at the performance of these banks.

A high official of the central bank said the banks have a tendency to sanction large loans in violation of the prudential norms: they do not use the borrower's updated CIB report while granting loans. Also, at the time of rescheduling the loans they do not take down-payment, or even the partial amount, in clear violation of the central bank rules.

Defaults at private banks fell 1.12 percent to Tk 22,350 crore at the end of June. On the other hand, the foreign banks' bad loans increased 5.6 percent to Tk 1,942 crore.

In percentage terms, default loans of private banks were 5.6 percent of their outstanding loans, while that of foreign banks 8.75 percent. This means the overall performance of private banks improved markedly compared to foreign banks in the second quarter of 2015.

While the overall performance of private banks is very good, there are many banks where various irregularities are taking place just like in state banks, the BB official said. The central bank will intensify its monitoring of these banks, he added.

UNB, Dhaka :The Islamic Development Bank (IDB) is likely to sign a host country agreement with Bangladesh by September next to set up a country representative office in Dhaka, aiming to boost the relationship between the two sides.The draft of the host country deal is finalized and now it is with the Law Ministry for vetting, said an official at the Economic Relations Division (ERD).The official told UNB that the government expects to sign the agreement either in Bangladesh or at the IDB headquarters in Jeddah by this September.He said Finance Minister AMA Muhith expects to be invited to the IDB head office in Jeddah to sign the deal on behalf of Bangladesh while IDB Group President Dr Ahmad Mohamed Ali Al Madani on behalf of the Bank. The IDB now has its field representative office operating in Bangladesh.Once the full-fledged country representative office is set up either at the existing IDB Bhaban or near the building in the city's Agargaon area, the relationship between the two sides would reach a new dimension, according to the official.He said the full operations of IDB is now not exposed to Bangladesh and once the full operations of IDB began from the country with the launching of the new country representative office, then IDB Group member institutions like Islamic Research and Training Institute (IRTI), Islamic Corporation for the Development of the Private Sector (ICD) will expand their operations in Bangladesh.Currently, there are some 13 development projects undergoing in Bangladesh with total IDB funding worth $ 898.38 million in power, education, health, telecommunications, marine fisheries and road communication sectors.