In the modern world no country is self-sufficient; one country is to depend on other countries and from this point of view there arises the question of foreign trade and foreign currency transactions. In terms of section 2(d) of the Foreign Exchange Regulations-1947, as adopted in Bangladesh foreign exchange – means foreign currency and includes any instrument drawn, accepted, made or issued under clause 13 of article 16 of the Bangladesh Bank Order, 1972, all deposits, credits and balances payable in any foreign currency and draft, travelers cheques, letter of credit and bill of exchange expressed or drawn in Bangladesh currency but payable in any foreign currencies. United Commercial Bank Ltd is playing a very important role in foreign trade financing.
Legal Basis of Foreign Exchange Transaction:
- Foreign Exchange Regulations Act-1947
- Import and Export Control Act-1950
- Customers Act-1969
- The Uniform Customs and Practices for Documentary Credit (UCPDC)-1933
- Import Policy Issued by the Ministry of Commerce
- Export policy issued by the Ministry of Commerce
- International Rules issued by the International Chamber of Commerce
- Different foreign Exchange circulations issued by Bangladesh Bank
Foreign Exchange Regulations Act-1947:
Foreign Exchange Regulation (FER) Act, 1947 (Act No. VH of 1947) enacted on 11th March, 1947 in the then British India provides the legal basis for regulating certain payments, dealings in foreign exchange and securities and the import and export of currency and bullion. This Act was first adapted in Pakistan and then, in Bangladesh. Bangladesh Bank is responsible for administration of regulations under the Act. Bangladesh Bank’s offices and their jurisdictions provide a list. Basic regulations under the PER Act are issued by the Government as well as by the Bangladesh Bank in the form of Notifications, which are published in the Bangladesh Gazette. Notifications issued by the Bangladesh Government and the erstwhile Government of Pakistan and the Bangladesh Bank and the erstwhile State Bank of Pakistan is reproduced. Directions having general application are issued by the Bangladesh Bank in the form of notifications, foreign exchange circulars and circular letters. The major objectives of the act are to conserve the limited foreign exchange resources and to ensure that the available foreign exchange is utilized only for priority requirements the economic and financial interests of Bangladesh and the maintenance of the proper accounting of foreign exchange receipt and payments. Bangladesh Bank is responsible for administration of regulations under the Act. Bangladesh Bank reviews the exchange control measures from time to time and revises the instructions on policy and measures, whenever necessary through different Foreign Exchange (FE) circulars.
In exercise of the powers conferred by of the Foreign exchange regulation act 1947 certain schedule banks authorized by the Bangladesh bank to deal in Foreign exchange; the selected branches of the bank can transact such business. Authorized dealers are required to bring the Foreign exchange regulation to the notice to their customers and ensure compliance with the regulations by the customer in their day-to-day dealing. Bank branch should be authorized dealer, with due approval from Bangladesh Bank to run foreign exchange transactions.
For many years, the International Chamber of Commerce has been providing rules for the use of letters of credit. These rules affect all parties involved in transactions covered by documentary credits including:
- Banks and other institutions that issue confirm or otherwise process them
- Buyers (applicants) who cause them to be issued
- Sellers (beneficiaries) who look to them for payment
- Service providers such as forwarders, carriers, customs brokers who provide or use the documents that the credits stipulate
UCPDC rules are regularly reviewed and updated when necessary to reflect current banking and trade practice. The current revision process started when the ICC Banking Commission authorized work to begin in 2003. A nine-person drafting group and a forty-one person-consulting group were formed to develop proposed revisions for the ICC national committees worldwide. Based on national committee feedback, successive meetings provided revised drafts, repeating the cycle over a three-year period. Bankers and commercial parties in more than 175 countries utilize the UCP. Historically, the commercial parties, particularly banks, have developed the techniques and methods for handling letters of credit in international trade finance. This practice has been standardized by the ICC (International Chamber of Commerce) by publishing the UCP in 1933 and subsequently updating it throughout the years. The ICC has developed and molded the UCP by regular revisions. The result is the most successful international attempt at unifying rules ever, as the UCP has substantially universal effect. The latest revision was approved by the Banking Commission of the ICC at its meeting in Paris on 25 October 2006. This latest version, called the UCP600, will have a commencement date of 1 July 2007.
Functions of Foreign Exchange Department-UCB:
United Commercial Bank Ltd- plays a vital role in foreign exchange department through the following activities:
- Opening of L/C & Settlement of Payment
- Make arrangement with Foreign Correspondent.
- Buying & Selling Foreign currencies.
- Handling of Inward & Outward Remittance
- Local/foreign Bill Purchase.
- Investment in Foreign Trade.
- Opening & Maintenance of Accounts with Foreign Banks under intimation to BB
- Export Documents handling.
The Foreign Exchange Department of United Commercial Bank Ltd.-Narayanganj Branch is playing an important role in enhancing export earning, which aids economic growth and in turn it helps for the economic development. On the other hand, it also helps to meet those goods and service which are more demandable and not adequate in our country.
Foreign Exchange Control in Bangladesh:
Foreign exchange controls are various forms of controls imposed by a government on the/sale purchase of foreign currencies by residents or on the sale/purchase of local currency by nonresidents.
Bangladesh Bank, the central bank of the country, is the legal authority for exchange control system. Commercial banks deal in foreign exchange as per guidelines given by the central bank from time to time. A good number of commercial banks, both in public and in private sectors, are operating in Bangladesh. Common foreign exchange controls include:
- Banning the use of foreign currency within the country
- Banning locals from possessing foreign currency
- Restricting currency exchange to government-approved exchangers
- Restrictions on the amount of currency that may be imported or exported
- Fixed exchange rates
The Objectives of Foreign Exchange Control:
As a legal authority, Bangladesh Bank controls the foreign exchange system with a view to achieve the following objectives:
- Protection of balance of payment
- Stability of exchange rate
- Prevention of the flight of capital
- To protect home industry
- Overvaluation or Under-valuation of currency
- Economic planning
Methods of Foreign Exchange Control System:
- Exchange Intervention or Pegging refers to the buying & selling of Foreign Exchange in the market by the Government or its Agency (Central Bank) with a view to influencing the exchange rate.
- Exchange Restriction or Rationing refers to the policy of the Government whereby the supply of domestic currency in the exchange market is restricted.
- Blocked Account is an account held in a bank by a non-resident that is subject to restrictions regarding withdrawals from the account & transfer of funds.
- Multiple Currency Rates refers to the policy of employing different rates of exchange for transactions involving different commodities & also for different currencies.
- Clearing & Payment Agreement is an agreement between two countries of relatively equal strength by which each country undertakes to make payment to its own currency out of the payment that it receives from its own importers.
- Transfer Moratorium is a temporary device of solving payments problem when payments to foreign creditors or exporters remain suspended. Once the foreign exchange problem is solved, the payment is made to exporter & creditors.
- The Interest Rate Change is the outcome of the forces of demand & supply relating to each other’s currencies.
- Import Duties are imposed to encourage the domestic industries & serving as protection to home industries against foreign competition.
- Export Subsidy indicates the system under which Government contributes a part of the cost of production of the export-
Letter of Credit (L/C) can be defined as a “Credit Contract” whereby the buyer’s bank is committed (on behalf of the buyers) to place an agreed amount of money at the seller’s disposal under some agreed conditions. The Uniform Customs and Practices for Documentary Credit (UCPDC) published by International Chamber of Commerce (1993) publication no 500 define Documentary Credit:
Any arrangement however named or described whereby a bank (the issuing bank) acting at the request and on the instructions of a customs (the Applicant) or on it’s own behalf, Is to make a payment to or to the order of a third party(the beneficiary) or is to accept and pay bills of exchange(Drafts)drawn by the beneficiary or Authorize another bank to effect such payment or to accept and pay such bills of exchange (Drafts) Authorize another bank to negotiate against stipulated documents provide that terms and conditions are complied with.
Forms & Types of Documentary Letter of Credit:
Revocable Letter of Credit:
This type of letter of credit can be revoked or cancelled at any time without consent of, or notice to the beneficiary. As per article 8 (a) of UCPDC-500 “A revocable credit may be amended or cancelled by the issuing bank at any moment and without prior notice to the beneficiary”
Irrevocable Letter of Credit:
An irrevocable credit is a documentary credit, which cannot be revoked, varied or changed/amended or cancelled without the consent of all parties- buyer (Applicant), seller (Beneficiary), Issuing Bank, and Confirming Bank (in case of confirmed L/C). As per Article 9(a) of UCPDC 500, an irrevocable credit constitutes a definite undertaking of the Issuing Bank, provided that the stipulated documents are presented to the Nominated Bank or to the Issuing Bank and that the terms and conditions of the credit are complied with. Irrevocable Credit gives the seller greater assurance of payments, but he/she remains dependent on an undertaking of a foreign bank.
Represents the obligation of the confirming bank in the exporter’s locality, usually the advising bank. It means a seller who has little confidence in or does not know the financial strength of the foreign opening bank often requests the confirming bank guarantees payment if the issuing bank in exporter’s country is often.
Means that the L/C doesn’t have any payment guarantee by a bank in the exporter’s country. It contains the obligation of the issuing bank only. This type is usually used when the opening bank of the undoubted reputation and financial strength or the transaction is small.
Means payment is immediately made to the beneficiary on presentation of the stipulated documents and on condition that all the terms of the credit have been complied with. It is advantageous to the exporter as he can get the payment quickly.
Usance L/C or Time L/C:
Implies that the seller is paid in a specified number of days after the presentation of the stipulated documents. It can be further divvied into:
- Banker’s acceptance credit and
- Deferred payment credit.
Banker’s Acceptance Credit:
Calls for Usance drafts to be drawn on and accepted by the opening-paying bank. Under this type, the paying bank guarantees to make payment in a specified number of days after its acceptance of the time draft.
Deferred Payment Credit:
Doesn’t call for a time draft drawn on and accepted by the paying or opening bank. Under this type, buyer and seller agree a period of credit. It is similar to banker’s acceptance credit except that under deferred payment credit the seller cannot make use of discounting facilities and therefore cannot get payment in advance.
Arise where the exporter is obtaining the goods form a third party, does not have the resources to buy outright and await payment from his overseas customer No letter of credit is transferred unless specifically authorized in the credit and this kind of credit can be transferred only for one.
Is one that cannot be transferred? If a letter of credit is not indicated with “Transferable”, it is a non-transferable credit.
Back to Back Credit:
Arises in circumstances similar to those of the transferable credit. It means that the middlemen receives a credit in his favor from the buyer and ask his bank (usually the advising bank of the primary credit) to establish a second credit in favor of his supplier against the security of the credit in his own favor.
Red Clause Credits:
Are also called anticipatory credits. This instrument similar to a normal letter of credit accepts that it contains a clause (originally typed or printed in red) authorize the negotiating bank to make clean advances of a certain percentage or the total amount of the L/C to the exporter. The clean advances are based on the guarantee of the opening bank and the importer, which means that the opening bank or the importer is liable for repayment plus interest in cases where no shipment is made under the letter of credit or when the loan is not repaid by the beneficiary.
These types of L/C are often used as a kind of “back up” in the event of the buyer not paying for the goods. They normally require the issuing bank to make payment to the seller upon presentation of documents evidencing non-payment by the importer.
Can only be used when the applicant fails to fulfill it payment obligation
Mechanism of L/C Operation:
|Importer||Who applies for L/C|
|Issuing Bank||It is the bank which opens/issues a L/C on behalf of the importer.|
|Confirming Bank||It is the bank, which adds its confirmation to the credit and it, is done at the request of issuing bank. Confirming bank may or may not be advising bank.|
|Advising orNotifying Bank||It is the bank through which the L/C is advised to the exporters.This bank is actually situated in exporter’s country. It may also|
assume the role of confirming and / or negotiating bank depending
upon the condition of the credit
|Negotiating Bank||It is the bank, which negotiates the bill and pays the amount of the beneficiary. The advising bank and the negotiating bank may or may not be the same. Sometimes it can also be confirming bank.|
|Accepting Bank||It is the bank on which the bill will be drawn (as per condition of the credit). Usually it is the issuing bank|
|ReimbursingBank||It is the bank, which would reimburse the negotiating bank after getting payment – instructions from issuing bank.|
Accounting procedure of L/C opening in UCBL:
When the officer thinks fit the application to open a L/C, giving the following entries creates the following charges-
|Particulars||Dr.||Cr.||Charge in tk|
|SD Margin on l/c||–||Xxx||10%|
|I/A commission A/C||–||Xxx||0.5%|
|SD VAT on L/C||–||Xxx||1.5%|
|I/A SWIFT Charge||–||Xxx||Tk 3000|
|I/A Data Max||–||Xxx||Tk 1000|
|I/A Stamp||–||Xxx||Tk 150|
|I/A Postage||–||Xxx||Tk 300|
|I/A Courier Charge||–||Xxx||Tk 1500|
|I/A miscellaneous||–||Xxx||Tk 500|
Imports are foreign goods and services purchased by consumers, firms, & Governments in Bangladesh. The importers are asked by their exporters to open letter of credits so that their payment against goods is ensured.
Goods are being imported for personal use, commercial purpose or industrial use. So, there are three kinds of importers such as:
- Personal importer (who imports for his personal need)
- Commercial importer (who imports for commercial purpose)
- Industrial importer (who imports for industrial purpose)
The following documents are required to be submitted to the licensing authority for registration as importers:
- The LCA Form properly filled in quintuplicate signed by the importer
- Questionnaire from duly filled in and signed
- Insurance cover note with money receipt
- TIN certificate
- Trade license from the Municipal or Local Authority
- Bank Certificate
- National ID Card
- Partnership deed where applicable
- Certificate of Registration with the Registrar of Joint Stock Companies & memorandum and articles of the association in case of Private & Public Limited Company
- Proof of having VAT registration certificate
- Certificate from the Chamber of Commerce/ Registered trade Association
- Ownership documents of rent receipts of the place of business
- Any other documents required under the relevant import policy
Step 1 – Registration with CCI & E:
- For engaging in international trade, even trader must be first registered with the Chief Controller of Import and Export (CCI & E).
- By paying specified registration fees to the CCI & E- the trader will get IRC/ERC (Import/Export Registration Certificate), to open L/C with bank, this IRC is must.
Step 2 – Determination terms of credit:
The terms of the letter of credit are depending upon the contract between the importer and exporter
Step 3 – Proposal for Opening of L/C:
To have an import L/C limit an importer submits an application to department to EXIM Bank. The proposal contains the following particulars:
- Full particulars of the bank account
- Nature of business
- Required amount of limit
- Payment terms and conditions
- Goods to be imported
- Offered security
- Repayment schedule
Step 4 – Submission of documents by importer to the banker:
For opening L/C, the importer is required to fill up a prescribed application form provided by the banker along with the following documents:
- L/C Application form
- Filled up LCA form
- Pay Order for insurance
- Pro-forma invoice
- Tax Identification number
- Import registration certificate
- Beneficiaries credit report
- Filled up amendment request Form
- IMP form
- Insurance cover note and money receipt
- No Objection Certificate (NOC)
- VAT certificate
Step 5 – Opening of L/C by the bank for the opener:
- Taking filled up application form from the importer.
- Collects credit report of exporter from exporter’s country through his foreign correspondence there.
- Opening bank then issues credit by air mail/TELEX/SWIFT followed by L/C advice as asked by the opener through his foreign correspondent or branch as the case may be, at the place of beneficiary. The advising bank advises the L/C to the beneficiary on his own form where it is addressed to him or merely hand over the original L/C to the beneficiary if it is so addressed.
Step 6 – Shipment of goods and lodgment of documents by exporter:
- Ships the goods to the destination of the importer country.
- Sends the documents to the L/C opening bank through his negotiating bank
.Generally the following documents are sent to the opening banker with L/C:
- Bill of Exchange
- Bill of Lading
- Commercial Invoice
- Certificate of Origin
- A certificate stating that each packet contains the description of goods over the packet.
- Packing List
- Advice Details of Shipment
- Pre-shipment Inspection Certificate
- Vessel Particular
- Shipment Certificate
Step 7 – Lodgment of Documents by the opening Bank from the negotiating bank:
After receiving the documents, the opening banker scrutinizes the documents. If any discrepancy found, it informs the importer. If importer accepts the fault, then opening bankers call importer retiring the document. At this time many thing can happen. These are indicated in the following:
- Discrepancy found but the importer accepts – no problem occurs in lodgment.
- Discrepancy found and importer not agreed to accept – In this case, importer protest and send back all the documents to the exporter and request his to make in the specified manner. Here banker is not bound to pay because the documents send by exporter is not in accordance with the terms of L/C.
- Documents are OK but importer is willing to retire the documents – In this case bank is obligated to pay the price of exported goods. Since importer did not pay for bill of exchange, this payment by bank is one kind of credit to the importer and this credit in banking is known as PAD.
- Everything is O.K. but importer fails to clear goods from the port and request bank to clear – In this case banks clear the goods and takes delivery of the same by paying customs duty and sales tax etc. So, this expenditure is debited to the importer’s account and in banking it is called LIM.
Step 8 – Retirement:
The importer receives the intimation and gives necessary instruction to the bank for retirement of the import bills or for the disposal of the shipping document to clear the imported goods from the customs authority. The importer may instruct the bank to retire the documents by debiting his account with the bank or may ask for LTR (Loan against Trust Receipt).
Import financing by the UCBL:
Loan against Trust Receipts (LTR):
Advance against a “Trust Receipt” obtained from the customers are allowed to only first class tested parties when the documents covering an import shipment or other goods pledged to the bank as security are given without payment. However, for such advances prior permission/sanction from head office must be obtained.
The trust receipt is a document that creates the banker’s lien on the goods and practically amounts to hypothecation of the proceeds of sale in discharge of the lien.
Loan against Imported Merchandise (LIM):
Advance (Loan) against the security of merchandise imported through the bank may be allowed either on pledge or hypothecation of goods, retaining margin prescribed on their landed cost, depending on their categories and credit restriction imposed by the Bangladesh Bank. Bank shall also obtain a letter of undertaking and indemnity from the parties, before getting the goods cleared through LIM Account. Loan against Imported Merchandise (LIM) is a facility provided by the Bank to the importers who are in shortage of fund to retire the import bills and thus to clear the goods from the post authority. In other works it may be referred as an advance against merchandise.
LIM Accounts may be created in the following two cases: –
- LIM Account on importer’s request
- Forced LIM Account.
After lodgment of documents, the importers concerned to be intimated for early retirement of the documents by paying outstanding bill amount including other charge. If the importer is not in a position to retire the bill out of his own sources at that moment may request the bank to clear the goods by creating LIM Account. On receipt of the importer request the official of the import bills section will prepare an office note by calculating the total landed cost of the consignment. To ascertain the landed cost the following points to be considered.
Efforts should be taken so that at least 20% to 30% margin of the landed cost may realize from the importer.
Immediately after lodgment of documents the branch incumbent and concerned dealing official shall vigorously pursue importers far retirement of bills. PAD should not remain outstanding fare more than 30 days from the date of lodgment on as per norms.
If the party fails to retire the documents within 30 days or within the date of arrival of ship which ever is earlier the branch should sent the documents for clearance the goods. Other formalities in connection with the forced LIM A/C will be the same as in the case of LIM A/C created on importer’s request.
No further L/C’s of the party for whom the Bank was forced to clean the consignment and the party failed to take delivery of the goods within the time specified below under the head disposal of LIM stocks should be opened without prior approval from Head Office even if the same is within the discretionary power of branch Manager.
Payment against Documents (PAD):
Payment made by the bank against lodgment of shipping documents of goods imported through L/C falls under this head. It is an interim advanced connected with import and is generally liquidated against payments usually made by the party for retirement of the documents for release of imported goods from the customer’s authority. It falls under the category of “Commercial Loan”.
Payment Procedure of the Import Documents:
This is the most sensitive task of the import department. The officials have to be very much careful while making payment. This task constitutes the following:
Step 1- Date of Payment: Usually payment is made within 7 days after the documents have been received. If the payment is become deferred, the negotiating bank may claim interest for making delay.
Step 2- Preparing Sale Memo: A sale memo is made at BC rate to the customer.
As the TT & DD rate is paid to the ID, the difference between these two rates is exchange trading. Finally, an Inter Branch Exchange Trading Credit Advice is sent to ID.
Step 3- Requisition for the Foreign Currency: For arranging necessary fund for payment, a requisition is sent to the international department.
Step 4- Transmission of Telex: A telex is transmitted to the correspondent Bank ensuring that payment is being made.
Export brings the foreign currency in the economy. Higher the export higher the reserve of foreign currency, the export section of UCBL engaged with various export related activities for the encouraging the exporter. The major function of this section is comprises with purchase, collection and negotiate the export bill, provide the exporter in export financing and helps the exporter in different issues.
United Commercial Bank Ltd-Narayanganj Branch follows the following Export Procedure:
The Exporter has to get Export registration certificate from CCI&E. Making contract with the buyer for securing export order. Exporter asks the buyer for letter of credit clearly starting terms and conditions of export payment: (here the regulatory framework is UCPDC 500). Exporter takes preparation for export and arrange for delivery of goods as per L/C. Exporter prepares and submits shipping documents for payment/acceptance/negotiation.
Document needed for export procedure is as follows:
Export Registration Certificate (ERC) from CCI & E.
- LC Documents.
- EXP form duly signed by the exporter.
- Certificate of origin.
- Shipping documents.
- Inspection Certificate.
- Packing List & Bill of Loading.
- Invoice & Certificate of export form by authorized dealer (Bank).
As soon as a L/C is opened, the following vouchers are passed in the books of the opening bank:
- Customer’s liabilities on L/C – DR
- Banker’s liabilities on L/C – CR
Margin commission postage and SWIFT charges are recovered from the party by the passing entry as follows:
- Party’s A/C – DR
- Margin A/C on L/C – CR
- Commission – CR
- Postage – CR
- SWIFT – CR
Parties involved in L/C, particularly the seller and the buyer cannot always satisfy the terms and conditions in full as expected due to the some obvious and genuine reasons. In such a situation the credit should be amended.
The seller being satisfied with the terms and conditions of the credit proceed to dispatch the required goods to the buyer and after that, have to present the documents evidencing dispatching goods to the negotiating bank on or before the stipulated expiry date of the credit. After receiving all the documents the negotiating bank then cheeks the document against the credit. If the documents are found in order, the bank will pay, accept or negotiate to the issuing bank.
Settlement means fulfillment the commitment of issuing bank in regard to effecting payment subject to satisfying the credit terms fully. This settlement may be done under three separate agreements as stipulated in the credit. These are:
- Settlement by payment
- Settlement by acceptance
- Settlement by negotiation
Here the seller presents the documents to the paying bank and the bank then scrutinizes the documents. If satisfied the paying bank makes payments to the beneficiary and in case of this bank is other than the issuing bank, then sends the documents to the issuing bank. If issuing bank is satisfied with the requirement, payment is obtained from the issuing bank. after being satisfied with the documents, the banks accept the documents and the draft and if it is a bank other than the issuing bank, then sends the documents to the issuing bank stating that it has accept the draft and at maturity the reimbursement will be obtained in pre-agreed manner.
Financing exports constitutes an important part of a bank’s activities. Exporters require financial services at four different stages of their export operation. During each of these phases exporters need different types of financial assistance depending on the nature of the export contract. Mainly there are following two types of financing:
Pre-shipment credit, as the name suggests, is given to finance the activities of an exporter prior to the actual shipment of the goods for export. The purpose of such credit is to meet working capital needs starting from the point of purchasing of raw materials to final shipment of goods for export to foreign country. Before allowing such credit to the exporters the bank takes into consideration about the credit worthiness, export performance of the exporters, together with all other necessary information required for sanctioning the credit in accordance with the existing rules and regulations An exporter can obtain credit facilities against lien on the irrevocable, confirmed and unrestricted export letter of credit.
Export cash credit (hypothecation):
Under this arrangement, a credit is sanctioned against hypothecation of the raw materials or finished goods intended for export. Such facility is allowed to the first class exporters. As the bank has got no security in this case, except charge documents and lien on exports L/C or contract, bank normally insists on the exporter in furnishing collateral security.
Export Cash Credit against Trust Receipt:
In this case, credit limit is sanctioned against trust receipt (TR). This type of credit is granted when the exporter wants to utilize the credit for processing, packing and rendering the goods in exportable condition and when it seems that exportable goods cannot be taken into bank’s custody. This facility is allowed only to the first class party and collateral security is generally obtained in this case.
Post Shipment Credit:
This type of credit refers to the credit facilities extended to the exporters by the banks after shipment of the goods against export documents. Necessity for such credit arises as the exporter cannot afford to wait for a long time for without paying manufacturers/suppliers. Before extending such credit, it is necessary on the part of banks to look into carefully the financial soundness of exporters and buyers as well as other relevant documents connected with the export in accordance with the rules and regulations in force.
Packing Credit is essentially a short-term advance granted by a Bank to an exporter for assisting him to buy, process, manufacture, pack and ships the goods. Generally for movement of goods from the hinterland areas to the ports of shipment the Banks provide interim facilities by way of Packing Credit. This type of credit is sanctioned for the transitional period starting from dispatch of goods till the negotiation of the export documents.
Back to Back Letter of Credit (BTB):
As Bangladesh is a developing country exporters face problems of scarcity of raw material. Because raw materials are not available in the country. These have to be collected from abroad. In that case, exporter gives lien of export L/C to bank as security and opens an L/C against it for importing raw materials. This L/C is called Back To Back L/C. In back to back L/C, MBL keeps no margin. Sometimes there is provision in the export L/C that the importer can use the certain portion of the export L/C amount for importing accessories that are necessary for the making of the product. Only in that case, BTB is opened.
Payment of Back to Back L/C:
Client gives the payment of the BTB L/C after receiving the payment from the importers. But in some cases, client sells the bills to the MBL. But if there is discrepancy, the MBL sends it for collection. In case of BTB L/C, MBL gives the payment to the beneficiary after receiving the payment from the L/C of the finished product (i.e. exporter). Bank gives the payment from DFC Account (Deposit Foreign Currency Account) where Dollar is deposited in national rate. For BTB L/C, opener has to pay interest at LIBOR rate (London Inter Bank Offering Rate). Generally LIBOR rate fluctuates from 5% to 7%. A schedule named Payment Order; Forwarding Schedule is prepared while making the payment. This schedule is prepared when the payment of L/C is made. This schedule contains the followings:
- Reference number of the beneficiary’s bank and date & beneficiary’s name.
- Bill value.
- Payment order number and date & equivalent amount in Taka.
The international trade can be illustrated by the following diagram:
The export procedures start from the registration of the exporters with necessary documents and end with the submission of documents to the bank. The exporters require achieving ERC certificate, L/C documents. Then he requires procuring the materials to prepare the goods and also require necessary documents for shipment. Sometimes the procuring raw materials become trouble for the exporters and in this stage he needs financing. In this step Mercantile Bank Limited helps the exporters to continue his operation. The export documents are verify and checked by the MBL to find out the discrepancies, if exists.
Fund transfer from one country to another country goes through a process which is known as remitting process. Suppose a local bank has 200 domestic branches and has the corresponding relationship with a foreign bank say-“X”, maintaining “Nostro Account” in US$ with the bank. Bangladeshi expatriates are sending foreign remittance to their local beneficiary, through that account. Now, when the Bangladeshi expatriates through other banks of different countries remit the fund to their “Nostro Account” with “X”, then the local bank’s Head office international division will receive telex message and the remittance section will record the advice and generate the advice letter to the respective branch of the bank. The branch will first decode the test, verify signature and check the account number and name of the beneficiary. After full satisfaction, the branch transfers the amount to the account of the beneficiary and intimates the beneficiary accordingly. But sometimes complexity arises, if the respective local bank has no branch where the beneficiary maintains his account. Then the local bank has to take help of a third bank who has branch there Export Import Bank of Bangladesh Limited (EXIM) Bank is the Authorized Dealer (AD) to deal in foreign exchange business, as an authorized dealer, bank must provide some services to the clients regarding foreign exchange and this department provides the service of remitting foreign currencies from one country to another country. In the process of providing this remittance service it sells and buys foreign currency, the conversation of one currency into another takes place at an agreed rate of exchange, which than Banker quote one for buying and another for selling.
Requirement to deal with foreign Remittance:
Authorized dealer branches of the bank are those who are permitted by the Bangladesh Bank to deal in foreign exchange business subject to the fulfillment of foreign exchange rules & regulations of the country. Agency arrangement, to facilitate foreign exchange business throughout the world, may be made between local bank and foreign bank. However, in case of agency arrangement accounting relationship may or may not be made. Drawing arrangement is made to facilitate remittances through concluding accounting relationship between a bank & corresponding bank or exchange house. The foreign currency account maintained by the authorized dealers in foreign exchange with the foreign banks /correspondents are called Nostro Accounts. All foreign exchange transactions are routed through nostro accounts. Nostro Account means our account with you. Current accounts of foreign banks with their correspondents in the latter’s currency is called Vostro Accounts. Vostro account means your account with us.
Foreign Currency Remitting Procedure:
Inward remittance covers purchase of foreign currency in the form of foreign Telegraphic Transfer (T.T), Demand Draft (DD) and Bills & Travelers Cheque, Export Bill etc. sent from abroad favoring a beneficiary in Bangladesh, purchase of foreign exchange is to be reported to Exchange Control Department of Bangladesh Bank on form – Letter of Credit (L/C). Basically, these are the formal channels of receiving inward remittance. A local bank also receives indenting commission of local firm also comes under purview of inward remittance.
Documents used in Foreign Exchange:
Foreign trade involves the movements of goods from one country to another, passing of ownership of the goods from the seller to buyer, the payment for the goods & its remittance from the importer’s to exporter’s country. A large number of documents are, therefore, used in foreign trade and the exporter has to tender these documents specified in the contract of sale. These documents are called documents of foreign trade and the negotiating banks in settlement of claims use them. These documents are submitted in sets and are issued and signed by the designated authorities with terms of contract of sale.
These documents can be classified into six categories:
- Commercial Documents
- Official Documents
- Insurance documents
- Transport documents
- Financial & Financing Documents
- Custom Documents.
Books & Articles:
- Ali Syed Ashraf & Howlader R.A, “Banking Law and Practice”.
- Ali Syed Ashraf, “ Foreign Exchange and Financing of Foreign trade” (1995)
- Bangladesh Bank, Guideline for Foreign Exchange Transaction, (vol-2)
- Export Policy’2006-2009
- Foreign Exchange Regulation Act -1947
- Import Policy’2006-2009
- UCBL, Annual Report- 2006
- UCBL, Annual Report-2007
- UCBL, Annual Report- 2008
- UCBL, Monthly Statement, October 31, 2009
- UCBL, Manual for Foreign Exchange Transaction of Foreign Exchange Department.
- UCPDC-600, ICC Publication No.600LF.
- Various Official Records of United Commercial Bank Limited