Assignment on Foreign Exchange Department of Dutch Bangla Bank Ltd

Foreign Exchange Department of Dutch Bangla Bank Ltd:

Foreign Exchange Department is international department of the bank. It deals globally. It facilitates international trade through its various modes of services. It bridges between importers and exporters. If the branch is authorized dealer in foreign exchange market, it can remit foreign exchange from local country to foreign country. This department mainly deals in foreign currency. This is why this department is called foreign exchange department. The term foreign exchange has different connotations in different contexts. Sometimes it is referred to as the process of conversion of one currency into another, some times as the process of transferring money from one country to another. In Bangladesh is has a legal a legal definition too. In terms of section 2(d) of the Foreign Exchange Regulation Act 1947, as adapted in Bangladesh, foreign exchange means foreign currency and includes instruments expressed in foreign exchange, all deposits, credits and balance payable in foreign currency as well as foreign currency instruments such as Draft, TC, Bill of Exchange, promissory note, and Letter of Credit payable in any foreign currency. The business of foreign exchange is getting increasingly complex and intensely competitive. However, in the backdrop of phenomenal growth of Bangladesh’s external sector, foreign exchange business provides a challenge as well as an excellent opportunity to accelerate growth of bank’s own business. This is the Institution that facilitates international trade payment as banking channel is the way of settlements. Besides, banks meet the other need of foreign exchange transactions of the people of the country as they are authorized to deal in foreign exchange upon receipt of permission from Central Bank under Foreign Exchange Regulation Act. All exports and imports are executed through the intervention of banks. They make the way through which exporter can get payment from importer. On the other hand they make the payment for the importer done by the people of Bangladesh. Side by side, they provide funded and non funded credit facility in execution of International Trade.

Legal basis of foreign exchange transactions:

Foreign exchange transactions are performed under some legal regulations, as follows:

Foreign Exchange Regulation Act – 1947

Import and Export Control Act- 1950

Customs Act-1969

The uniform customs and practices for documentary Credit (UCPDC) – 1993 revision & International Chamber of Commerce Publication no – 500, is also an important law for settlement of terms and conditions between exporter and importer in international trade.

Import Policy Issued by Ministry of Commerce

Export Policy Issued By Ministry of Commerce

International Rules Issued by International Chamber of Commerce (ICC)/

Uniform Rules and Practices

Different Foreign Exchange Circulars issued by Bangladesh Bank

Functions of Foreign Exchange Department:

Foreign Exchange Department performs many functions to facilitate the foreign exchange transactions. These are:

Facilitating Import Trade

Facilitating Export Trade

Providing Funded and Non-funded Credit Facility

Provide Non Commercial Remittance

Maintaining Foreign Currency Accounts

Selling of Foreign Currency Bond

Preparation and Submission of Statements

DUTCH-BANGLA BANK FOREIGN EXCHANGE DEALINGS

Foreign Exchange Dealings is known by various names in other banks, e.g. Trade Finance, Foreign Trade etc. However, the functions are the same. As the name suggests, this department is involved in facilitating trade, both international and within Bangladesh. DUTCH-BANGLA BANK LTD is one of the leading providers of Foreign Exchange Dealings and related services to importers and exporters. The various awards it has won from the leading publications of the world acknowledge DUTCH-BANGLA BANK LTD’s excellence in Foreign Exchange Dealings. The Foreign Exchange Services department has two separate subsidiaries: EXPORT and IMPORT Section.

FOREIGN EXCHANGE OPERATION

IMPORT SECTION

Import division basically deals with all the LC opening documentation, processing, administration and disbursement of the import services provided to corporate clients. This department is known to be the heart of DUTCH-BANGLA BANK LTD Foreign Exchange services that administers and manages all the trade tools and facilities provided by DUTCH-BANGLA BANK LTD Corporate Banking. The For-ex division of Foreign Exchange services is solely concerned with the management of Foreign exchange inflow and outflow. The For-ex division of Foreign Exchange Services in relation with NSC and FCD manages the foreign currency traffic of DUTCH-BANGLA BANK LTD that originates from Corporate Banking and Foreign Exchange services.

Letter of Credit or Documentary Credit:

Letter of Credit or Documentary Credit is a conditional bank undertaking of payment provided that all the terms and conditions of the credit are complied with. Elaborately, it is a conditional undertaking given by issuing bank at the request of a customer (Importer) or on its own behalf to pay seller (Exporter) against stipulated documents provided all the terms and conditions of the Credit is complied with.

These stipulated documents are likely to include those required for commercial, regulatory, insurance or transport purposes such as commercial invoice, certificate of origin, insurance policy or certificate and a transport document of a type appropriate to the mode(s) of transport used.

The basic of Foreign Exchange Services operation is to have clear understanding about the Foreign Exchange cycle. A typical scenario of Foreign Exchange cycle is presented below. At first, initial contract and agreement occurs between buyer/importer and seller/exporter. Then seller/exporter asks buyer/importer to open a letter of credit. Importer approaches to a bank and the bank then issues LC and sends the information to exporter’s bank. Exporter’s bank then advices LC to the exporter. Exporter then dispatches the goods according to the terms and conditions to the Importer. Then exporter presents all the documents to the bank. Exporter’s bank then forwards the documents to the importer’s bank. Importer’s bank collects payments from the importer and handovers the documents. Importer’s bank then remits funds to the exporter’s bank and thus exporter receives the payments made by the importer from the exporter’s bank. This is a generalized scenario of trade. Collection and payment mechanism among the involved parties can vary according to different terms and conditions.

Typical Scenario of Foreign Exchange Cycle:

Figure 01: Typical Scenario of Foreign Exchange Cycle

Importance of Letter of Credit:

Letter of Credit or Documentary Credit offers some benefit to both importer and exporter. The importance of letter of credit to importer and exporter is presented below-

Importance or Advantages of Letter of Credit to the Beneficiary/Exporter/Seller:

A letter of credit is an instrument which facilitates trade transactions between two parties who are not known to each other. The major advantages derived by the seller or the beneficiary of a letter of credit are as follows:

i) Certainty of Payment and Avoidance of Risk.

Though the exporter may be quite unfamiliar with the importer, the letter of credit provides him an absolute assurance that the bills of exchange drawn under the letter of credit will be honored. The risk of dishonor of the bill is thus totally avoided because the financial standing and reputation of the opening banker (and also of the confirming banker in case of a confirmed letter of credit) stands as an absolute security against any such risk. The exporter may execute the order with greater degree of assurance and certainty.

ii) Immediate Negotiation of Bills is possible under Letter of Credit.

Bills drawn under the letters of credit are readily negotiated by the advising/confirming banker or any other banker, because of the firm undertaking given by the opening banker. The seller (or exporter) is able to realize the amount of the bill immediately by negotiating it with any banker. In the absence of a letter of credit, the bill may not be acceptable to a banker for negotiation or may be negotiated on the basis of the exporter’s standing. If a bill is sent for collection, the exporter has to wait till the amount of the bill is actually realized from the importer.

iii) Security against Exchange Restrictions.

The opening banker issues a letter of credit after having been satisfied that the exchange control regulation of his own country do not impose any restriction on the transfer of money for the purpose in question. The availability of necessary foreign exchange in the importer’s country for honoring the bill is taken for granted. The transfer risks are thus avoided and the exporter need not investigate into the foreign exchange regulation in the importer’s country.

iv) Advance may be obtained.

The exporter may obtain an advance from the bank on the basis of a letter of credit for the purpose of procuring and processing or manufacturing the goods to be exported.

Importance or Advantages of Letter of Credit to the Opener/ Importer/ Seller:

The issuing banker lends the benefit of his own credit to the importer, who is enabled to import the good which is otherwise not possible.
The letter of credit gives an assurance to the importer that the bills of exchange drawn under the credit will be honored only when they are strictly in accordance with the conditions laid down in the letter of credit and the documents required therein are duly enclosed.

Forms of Letter of Credit:

There are many types of Letter of Credits that are used in different countries of the world. But International Chamber of Commerce (ICC) vides their UCPDC- 500, which denotes only two types of LETTER OF Credits; mentioned in the following:

Figure-02: Types of Letter of Credit

Revocable Letter of Credit:

A revocable credit may be amended or cancelled by the issuing bank at any moment and without prior notice to the beneficiary. That is to say, this type of letter of credit can be revoked or cancelled at any time without consent of, or notice to the beneficiary. In case of seller (beneficiary), revocable credit involves risk, as the credit may be amended or cancelled while the goods are in transit and before the documents are presented, or although presented before payments has been made. The seller would then face the problem of obtaining payment on the other hand revocable credit gives the buyer maximum flexibility, as it can be amended or cancelled without prior notice to the seller up to the moment of payment buy the issuing bank at which the issuing bank has made the credit available. In the modern banking the use of revocable credit is not widespread.

In this case the issuing banks must perform the following two rules:

Reimburse another bank with which a revocable Credit has been made available for sight payment, acceptance or negotiation – for any payment, acceptance or negotiation made by such bank – prior to receipt by it of notice f amendment or cancellation, against documents which appear on heir face to be in compliance with the terms and conditions of the Credit

Reimburse another bank with which a revocable Credit has been made available for deferred payment, if such a bank has, prior to receipt by it of notice of amendment or cancellation, take up documents which appear on their face to be in compliance with the terms and conditions of the Credit.

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 Letter of Credit). Irrevocable Credit gives the seller greater assurance of payments, but he/she remains dependent on an undertaking of a foreign bank. In the issuance of Irrevocable Letter of Credit both the Issuing and Conforming Bank have some liability, mentioned bellow, as per UCPDC -500:

Special Types of Letter Of Credit

1. Documentary Letter of Credit and Clean Letter of Credit:

When the banker opening a letter of credit incorporates a clause in the letter of credit that the documents of title to goods, such as bill of lading, insurance policy, invoice, consular invoice, certificate of origin, etc. must be attached with the bill of exchange drawn under the letter of credit, such letter is called a documentary letter of credit. In fact the opening bankers undertaking to honor or pay the bill of exchange is made conditional on the submission of such documents by the beneficiary. The interest of the opening bank is thus safeguarded, because it acquires the property in the goods exported, as soon as the documents of title to goods duly endorsed in its name are handed over to it.

When the letter of credit does not contain any such clause, it is called a clean letter of credit. Documents of title in such a case are not attached with the bill of exchange, but are sent to the consignee directly. As the opening banker does not get possession over the documents, such letter of credit is opened in case of parties of sound financial standing. In case of other parties, the banker may insist on the maintenance of adequate cash margin with it or the guarantee of a third party, or any other security.

2. Fixed Credit and Revolving Credit:

The opening banker specifies in the letter of credit the amount up to which one or more bills may be drawn by the beneficiary within the specified period of time. The letter of credit remains effective until the specified amount is exhausted within the specified time. Such credit is called a fixed credit.

In case of revolving credit, the opening banker specifies not the total amount up to which bills may be drawn, but the total amount up to which bills drawn may remain outstanding at a time. As soon as any of such bills is paid by the importer, the beneficiary may draw another bill/bills under the letter of credit. Revolving credit is thus automatic and does not need renewal within the specified period of time.

3. Confirmed and Unconfirmed Letters of Credit:

When the opening bank requests the advising bank in the exporter’s country to add its confirmation to an irrevocable credit and the latter does so, it is called ‘irrevocable and confirmed letter of credit’. The advising banker, after he adds his name to the undertaking, is called the ‘confirming banker’. Such confirmation constitutes a definite undertaking on the part of the confirming bank either-

That the provisions for the payment or acceptance will be duly fulfilled or

That in case of a credit available by negotiation of draft, the confirming will be negotiate drafts without recourse to the drawer.

Such undertaking cannot be cancelled or modified without the agreement of all concerned. A confirmed irrevocable letter of credit provides absolute security to the beneficiary. The opener asks the issuing banker, at the request of the beneficiary, to arrange a confirmed credit. The confirming banker takes upon himself the liability similar to that of the opening banker.

If the advising banker does not add his confirmation, the letter of credit remains an unconfirmed one. In such a case there will be no such obligation on the advising bank.

4. ‘With’ and ‘Without Recourse’ Credits:

Bills of exchange may be drawn under the letter of credit ‘with recourse to the drawer’ or without such recourse. In case of ‘with recourse’ bills, the banker, as the holder of the bill, can recover the amount of the bill from its drawer, in case the drawee of the bill fails to honor it. In order to avoid such liability, the exporter may ask the importer to arrange credit ‘without recourse’ to the drawer. Under this type of credit, the issuing banker will have recourse to the drawee only and if he fails to honor the bill, the banker can realize the amount by deposing of the goods (if it is a documentary credit and documents have not been handed over to the importer). The liability of the drawer of such a bill of exchange ends as soon as it is negotiated.

5. Transferable and Non-Transferable Letters of Credit:

Ordinarily, the beneficiary is authorized to draw bills of exchange under a letter of credit. But if the beneficiary is an intermediary in the transaction and the goods are actually to be supplied by someone else, the beneficiary may request the opener to arrange a transferable letter of credit. Under a transferable letter of credit the beneficiary can transfer his right to draw a bill to somebody else. The Uniform Customs and Practice for Documentary Credits define a transferable credit as “a credit under which the beneficiary has the right to give instructions to the bank called upon to effect payment of acceptance or to any bank entitled to effect negotiation to make the credit available in whole or in part to one or more third parties (second beneficiaries).” Thus the credit may be transferred to one or more persons. But it can be done only if the credit is expressly designated as “transferable” by the issuing bank. The rules regarding transferable credit are as follows (Article 46, Uniform Customs):

A transferable credit can be transferred only once.
Fraction of transferable credit can be transferred separately, provided partial shipments are not prohibited and the aggregate of such transfers does not exceed the amount of the credit.
The credit can be transferred only on the terms and conditions specified in the original credit, with the exception of the amount of the credit, of any unit price stated therein, and of period of validity or period of shipment. Any or all of these may be reduced or curtailed.
The name of the first beneficiary can be substituted for that of the applicant for the credit. But if the name of the applicant for the credit is specially required by the original credit to appear in any document other than the invoice, such requirement must be fulfilled.
The first beneficiary of a transferable credit can transfer the credit to a second beneficiary in the same country, but if he is to be permitted to transfer the credit to a second beneficiary in another country, this must be expressly stated in the credit.
The credit may be divisible also. The total amount may be split into more than one part and each part may be transferred to different persons.

6. Back to Back Letter of Credit:

When a beneficiary receives a non-transferable letter of credit, he may request a bank to open a new letter of credit in favor of some other person on the security of the letter of credit issued in his favor. Such letter of credit is called Back to Back Letter of Credit.

7. Red Clause Letter of Credit:

Often the seller of the exporter needs credit for the purchase of raw materials, processing them into final product, packing and dispatching them to the port town. Such credit is called ‘packing credit’. A letter of credit which includes a clause printed in red ink and known as “red clause” enables him to secure such packing credit from the banker advising such credit. A Red Clause Letter of Credit contains an authority from the issuing banker to the advising/negotiating banker to grant advances to the beneficiary up to a specified amount at the responsibility of the former. The advance made under this letter of credit is for short period and is recovered from the amount, payable by the negotiating banker to the beneficiary when the letter negotiates the required documents under the letter of credit.

Types of Letter of Credit In terms of Payment:

The following types of Letter of Credits are used in terms of Payment.

Figure-03: Types of Letter of credit in terms of Payment

Cash Letter of Credit:

Payment made form cash foreign exchange not from export proceeds; there is not export L. C. that backs the import Letter of Credit Payment term is at sight.

Deferred Letter of Credit:

The only difference between cash Letter of Credit and deferred Letter of Credit lied in the terms of payment. Payment under deferred Letter of Credit is made after certain days of presentation of the export bill. Letter of Credit the differed payment basis may be opened for the following cases:

Items

Period

Industrial Raw Materials

Maximum 180 days

Back to Back Imports

Maximum 180 days

Agricultural Implements & Chemical Fertilizer

Maximum 180 days

Capital Machinery

Maximum 360 days

Table -01: Period for different types of deferred Letter of Credits

Back-to-back Letter of Credit:

Some Instructions Issued by Bangladesh Bank for Opening and Operation of Letter of Credit for Import of Goods

The ADs should establish Letter of Credit against specific authorization on behalf of their own customers who maintain accounts with them with and know to be participated in the Foreign Exchange Dealings.

The AD must ensure that they deal only with known customers having a place of business in Bangladesh and can be traced easily if any occasion arise for this purpose;

ADs are allowed to open divisible, transferable Letter of Credits for import into Bangladesh under cash LCAF;

It is not permissible to open Letter of Credits in favor of beneficiaries in countries from which import into are banned by the component authority;

It is not permissible to open to clean or revolving credits;

Letter of Credits to be opened only against firm contract between the Applicant and beneficiary. The AD should see documentary evidence, before opening Letter of Credit, that a firm order for the goods to be imported has been placed and accepted;

The full description of goods to be imported along with unit price and quantity to be given in the Letter of Credit;

Confidential report of the exporter to be obtained by the AD himself where the amount of Letter of Credit exceeds TK. 2,00,00 in case of import against Proforma invoices issued direct by foreign supplier and TK. 5,00,000 against indent issued by local agents of the suppliers;

Payments against discrepant documents may be made after the goods have been cleared from the customs on the basis of the locative LCAF;

Advanced remittance against import may be made after getting prior permission from Bangladesh Bank where the goods are of specialized or capital nature.

All Letter of Credits and similar undertakings covering imports into Bangladesh must be documentary Letter of Credits and should provide for payment to be made against full sets of onboard (shipped) transport documents (BL, AIB, TR etc.) showing dispatch of goods covered by Credit to a destination in Bangladesh.

Parties to a Letter of Credit:

A letter of credit is a legal instrument, which binds all parties according to the terms and conditions incorporated in the credit. There are four principal parties in a Letter of Credit:

The Importer/Buyer/Opener

The purchaser of the goods is called importer. Once the buyer and the seller have agreed to the sales transactions, it is the buyers’ responsibility to initiate the opening of the letter of credit.

Issuing Bank/Opening Bank

The Bank which at the request of its customer (importer) opens a Letter of Credit is called issuing Bank. The Issuing Bank is the buyer’s bank/opening bank of the credit.

The Seller/Exporter/Beneficiary

The supplier of the goods is called as seller or exporter or the beneficiary. The seller after shipping the goods as per terms of the credit presents the documents to the negotiating bank.

Advising Bank

It is the correspondent bank of the issuing bank of the credit through which the credit issued by the opening bank is advised at seller’s country. Advising bank may also be a negotiating bank.

Conforming Bank:

If the advising bank also adds its own undertaking to honor the credit while advising the same to the beneficiary, it becomes the conforming bank. The conforming bank, in addition, becomes liable to pay for documents in conformity with the Letter of Credit terms and conditions

Negotiating Bank

The bank who negotiates/purchases/discounts the documents tendered by the exporter as per terms of the credit is known as negotiating bank.

Accepting Bank

A bank that (as specified in the Letter of Credit) accepts time or Usance drafts on behalf of the importer is called the accepting bank. The Letter of Credit issuing bank can also take on the responsibility of an accepting bank.

Paying Bank

The bank that effects payment to the beneficiary (as named in the Letter of Credit) is known as paying bank/drawee bank.

Reimbursing Bank

If the issuing bank does not maintain any account with THE NEGOTIATING bank an alternate arrangement is made to reimburse it for the amount payable under a credit form some other bank. The later bank is termed as reimbursing bank. An authority to debit his account is sent to the bank with whom the account is maintained to honor the claims placed by a negotiating bank.

Opening of Import Letter of Credit:

The import of goods into Bangladesh is regulated by the Ministry of Commerce in accordance with the imports and exports (control) Act 1950 and notifications issued there under while Bangladesh Bank control the financial aspects such as method of payments, rates of exchange, remittances against imports through its exchange control department under the provisions of foreign exchange regulation Act 1947. The Customs Authorities physically supervised the goods to ensure that the items imported are permissible under import trade control regulations before release of the same for consumption in the country.

Pre-Requisite for Opening a Letter of Credit

a) Must be a client/account holder.

b) Request letter from the client to open L/C.

c) Original IRC (Import Registration Certificate) duly renewed up to current date should also be produced to the bank for verification and return.

d) Valid Membership Certificate from a registered Chamber of Commerce and Industries/Trade Association. .

e) Trade License.

f) Income Tax declaration in triplicate/TIN Certificate.

g) INDENT issued by the local indenting agent or PROFORMA INVOICE issued by the foreign supplier/contract/purchase order/sale order (duly accepted by the importer).

h) Fixing up of margin of L/C on mutual basis.

Documents Required from the Importer:

a) Documentary Credit Application (supplied by the Bank –duly filled in by the importer or his authorized Agent. This application is an agreement between the importer and the Bank. This form is to be affixed with Tk. 150/- adhesive stamp.

b) Insurance Cover Note (Marine/Air/Post) in favor of the bank.

c) One set of IMP Form (4 copies) duly signed by the importer. 3 (three) copies are to be left blank and are to be filled in after the documents arrive from the negotiating bank. The remaining one copy is kept for bill of entry purpose, which is signed by the bank for submission to Bangladesh Bank along with the monthly return for sale of foreign exchange for the import covered under the L/C.

d) Undertaking for fluctuation of foreign currency duly signed.

e) LC Authorization Form in lieu of import license duly signed by the importer and permission from Bangladesh Bank (may be taken by the client and/or by the Bank on behalf of the importer).

Import Procedures:

1. Procurement of IRC from the concerned authority.

2. Signing purchase contract with the seller.

3. Requesting the concerned bank (importer’s bank to open an L/C (irrevocable) on behalf of the importer favoring the exporter/ seller/ beneficiary.

4. The issuing bank opens/ issues the L/C in accordance with the instruction/ request of the importer and request another bank (advising bank) located in seller’s /exporter’s country to advise the L’C to the beneficiary. The issuing may also request the advising bank to confirm the credit, if necessary.

5. The advising bank advises/informs the seller that the L/C has been issued.

6. As soon as the exporter/seller receives the L/C and is satisfied that he can meet L/C terms and conditions, he is in a position to make shipment of the goods.

7. After making shipment of goods in favor of the importer the exporter/s submits the documents to the negotiating bank for negotiation.

8. The negotiating bank scrutinizes the documents and if found satisfactory then negotiates documents and sends the said documents to the L/C issuing bank.

9. After receiving the documents the L/C issuing bank also examines the document and if found complete, then makes payment to the negotiating bank.

10. The L/C opening bank then requests the importer to receive the document payments.

Import Procedure: Flow Chart

EXPORT SECTION

Export division basically deals with all the documentation, processing, administration and disbursement of the export services provided to corporate clients. Some important aspects of this department are documentation, OD facilities, guarantees, etc. Exporter has to follow the following procedure:

Obtaining Export Registration Certificate (ERC)

Securing the Order

Obtaining EXP

Signing of the Contract

Receiving the Letter of Credit

Verification and Genuineness of the Letter of Credit

Advising the LC to the Exporter

Realization of Advising/Conformation Charges

Procuring the Materials

Endorsement of Exp

Shipment of Goods

Presentation of Export Documents for Negotiation

Examination of Document

Negotiation of Export Document

Export Procedure

FOREIGN EXCHANGE DOCUMENTS

Documentation provides tangible evidence that the goods ordered have been produced and dispatched in accordance with the buyer’s requirement.

Consignment details need to be communicated accurately to various parties, so both importers and exporters need to be familiar with the principal documents used. Documentation is also used to satisfy government regulations and has become an increasingly important factor in obtaining finance for international trade.

It is normally the responsibility of the exporter to make sure that documents for the transportation of goods are complete, accurate and properly and promptly processed. Failure to do so may result in additional costs being incurred.

The importer has the responsibility for completing accurately the necessary forms for the goods to be licensed for import and cleared through Customs. Incorrect documentation can cause delay in the clearance of goods at their destination. Goods can be impounded, warehoused or left on the quayside, with the risk of damage or loss and consequent expenses. The use of a forwarding agent can help reduce administrative and documentation pressures on importers and exporters. The Document are:

Financial Document
Other International Trade Document

Financial Document

The principal financial documents used in international trade are described below-

Bill of exchange

The bill of exchange is the most important and most widely used instrument in international trade by which sellers can obtain the payment from their buyers for the invoiced value of goods. It provides a convenient mechanism for the giving or receiving or receiving of a period of credit.

According to bill of exchange Act, 1882, bill of exchange is defined as “An unconditional order in addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at fixed or determinate future time a certain sum of money to or to the order of a specified person, or to bearer.”

A ‘sight’ bill payable on demand, or at sight.

A ‘term’ bill or ‘usance’ bill is payable at a fixed or determinable future time. The drawee agrees to pay on the due date by writing an acceptance across the face of the bill.

Promissory Note

A promissory note is a promise to pay issued by the buyer (the maker) in favor of the seller (the payee or beneficiary). Although it is similar to a bill of exchange it does not always carry the same legal rights. Promissory noted are popular in forfeiting arrangement and with countries where there is some fiscal reason not issuing a bill of exchange.

Other Foreign Exchange Documents

Commercial Invoice

A commercial invoice is a claim for payment for the goods under the terms of the commercial contract. It is addressed to the importer by the exporter. It serves as a checklist so that a particular consignment can be identified and is the main evidence in any assessment for customs duty. A commercial invoice normally includes the following information-

Date.

Invoice number.

Name and address of seller and buyer.

Order or contact number, quantity and description of the goods, unit price and the total price.

Weight of the goods, number of packages, and shipping marks and numbers.

Terms of delivery and payment.

Shipment details.

Bills of Lading

Still the most important commercial document in international trade, the bill of lading (B/L) is used to control delivery of goods transported by sea. In negotiable form, title to the goods may be transferred by endorsement of the B/L. The details of the bill of lading should include-

A description of the goods in general terms not inconsistent with in the credit.

Identify marks and numbers, if any.

The name of the carrying vessel.

Evidence that the goods have been loaded on board.

The ports of shipment and discharge.

The names of shipper, consignee and name & address of notifying party.

Whether freight has been paid or is payable at destination.

The number of original bills of lading issued.

The date of issuance.

Packing List

The exporter must prepare a packing list showing item by item, the contents of the containers, or cases to enable the importer of the goods to check the shipment. It should give description of the goods, net weight and gross weight, measurement etc. this helps in identifying the contents of specific packages and thus may facilitate assessment by the customs. Bank may require such list when they have financial interest in the merchandise.

Sea Waybill

Like a B/L, a waybill provides a receipt for goods and evidence of a contract for their carriage by sea. However, it is not a negotiable document and cannot be used to convey title to the goods. The shipper can vary the consignee and delivery instructions at any time prior to delivery. It is a simple alternative where the transferable nature of a B/L is not required.

Insurance Policy or Certificate

The terms of a contract between the importer and the exporter should define the responsibilities for arranging insurance cover whilst the goods are in transit and what risks are to be covered. The insured risks will be detailed under Institute Cargo Clauses, and those applicable to a particular transaction will be noted on the certificate/policy.

The insurance certificate document must-

Be that specified in the credit.

Cover the risks specified in the credit.

Be consistent with the other documents in its identification of the voyage and description of the goods.

Air Waybill

An air waybill is a receipt for goods carried by air and is often referred to as an ‘air consignment note’. Like the sea waybill, it is non-transferable and not a document of title. It is usually produced as ‘house air waybill’ where cargo consolidation is involved.

Road Consignment Note

This is used for international transport by road. It is not a document of title and is not transferable. It is more commonly known as certificate of movement by road (CMR) or ‘truck waybill’.

Railway Consignment Note

This is used for international transport by rail. It is not a document of title and is not transferable.

Parcel Post Receipt

A post office receipt for goods dispatched by mail. The receipt is evidence of dispatch only.

Certificate of Origin

This is a declaration which states the country (or countries) of origin of the goods and is common place in countries wishing to identify the origin of all imported goods (or their components) or where there are quotas or other import restriction in force. It should be completed by the supplier and may have to be authenticated by a chamber of commerce or other authorized body in the exporter’s country. In some instances, the certificate must also be legalized by the embassy or other representative of the concerned. The certificate should include the name and address of the exporter, the manufacturer (if different), the importer, a description of the goods and, if required, the signatures and seals of the authorizing organization.

Certificate of Inspection

Importers can safeguard their interests, and ensure that the goods comply with the specifications stated in the contract of sale by arranging for the goods to be inspected by an independent body before they are dispatched. The certificate of inspection will give details such as weights, numbers and quality, packaging and identifying marks, shipping details and the signatures and seals of the inspecting organization. In some countries exporters may be required to obtain certificate of inspection from a specific inspection agency, such as SGS, for exports to certain countries.

Certificate of Health

Agricultural and animal products may require a certificate stating that they comply with the importing country’s health regulations. This certificate must be authorize and signed by the health authority in the exporter’s country.

EXPORT COLLECTION:

Exporters need funded and non-funded facility at pre-shipment and post-shipment states that can be proved by bank with which they maintain relations by opening account and dealing in international trade like export and import. At different states (pre-shipment and post shipment) DBBL – Motijheel Foreign Exchange Branch offers the following Funded and Non-funded facility to their exporters:

Payment in Advance

Open Account Trading

Facility

Payment In Advance

Open Account Trading

Non-funded

Back to Back Letter of Credit

O.D. (Hypothecation)

Foreign Documentary Bill

Funded

O.D. (Pledge)

O.D. (Trust Receipt)

Packing Credit

Export Development Fund (EDF)

Purchase (FDP)

SOD (Export)

SOD (Cash-Incentive)

Payment in Advance or Pre Shipment Credit:

Pre-shipment Credit, as the Name Suggests, gives to finance the activities of an exporter prior to the actual shipment of goods for export. The purpose of such credit is to meet working capital needs starting from the point of purchasing of raw materials to transportation of goods for export to foreign country.

An Exporter can obtain this credit in following ways:

O.D. (Hypothecation)

Under this arrangements limit is sanctioned against firm export contract/irrevocable Letter of Credit on hypothecation or raw materials or finished goods meant for export. The exporters create a chare in favor of the Bank on the goods hypothecated by signing a duly stamped letter of hypothecation. Both the process and ownership of the goods as well as control remain with the borrower.

O.D. (pledge):

In this case, O.D limit is sanctioned against the pledge of the goods meant for export. The borrower signs the stamp letter of pledge surrendering physical possession of the goods under the bank’s effective control. The ownership, however, remains with the borrower.

O.D. against Trust Receipt:

Under this type of credit facility, the exporter is required to execute a stamped Trust Receipt in favor of the Bank undertaking to hold the goods or sale proceeds thereof in trust in behalf of the bank, till the loan is liquidated. As the goods remain under the custody of the exporter, it may be necessary to ask the customer to provide collateral security acceptable to the Bank.

Packaging Credit (PC):

Packaging Credit is essentially a short-term advance granted by Bank to an exporter for assisting him to buy, process, manufacturing, and pack and ship the goods. Packing Credit limit is sanctioned to the exporter against the security of Master Export Letter of Credit Received from Foreign Importer. This type of credit is given for transit period starting from receiving export order to till the negotiation/purchase of export bills.

Advance against Red-Clause LC:

Before discussing anything about Red-Clause Letter of Credit it is to be informed that this type of practice is not available in Bangladesh. However, Under Red clause letter of credit, the opening bank authorizes the Advising Bank/Negotiating Bank to make advance to the beneficiary prior to shipment to enable him to procure and store the exportable goods in anticipation of his effecting the shipment and submitting a bill under the Letter of Credit. As the clause containing such authority is printed in red ink, the Letter of Credit is called Red clause and Green clause respectively.

Back –To-Back Letter of Credit:

Open Account Trading or Post-Shipment Finance

Favor the buyer/importer that usually pays after he receives the goods, reducing the debit balance of his account with the seller/ exporter according to arrangements established between them. Banks in our country extend Post-Shipment Finance to the Exporter through the following ways:

Negotiation of documents Under LC
Purchase of DP and DA bills
Advance against Export bills surrendered for collection

Advance against Export bills surrendered for collection

It is a request for payment which can be put forward in different ways – Clean Collection or Documentary Collection:

a) Clean Collection: Bills of Exchange/Draft with no commercial documents attached. The amount of the bill may be:

i) the cost of goods, in which case the documents of title would have been sent direct to the importer

ii) the cost of a service, such as the use of a tugboat to bring into harbor, when no documents are required

b) Documentary Collection: Bill of Exchange/Draft with Shipping Documents etc. The attachment documents include the document(s) of the title (Bill of Lading) which the importer needs to clear the goods.

Whichever documents the exporter presents to his bank, he always attaches his instructions on a Collection Order. These instructions are passed on to the importer telling him how and when to pay. The exporter will ask the importer to settle the bill in one of two ways:

D/P (Document against Payment):

Payable at sight (on demand) – the collecting bank hands over the shipping documents only when the importer has paid the bill. The drawee is usually expected to pay within 3 working days of presentation.

D/A (Document against Acceptance):

D/A means that the exporter is allowing credit terms to the importer: the period of credit is the ‘term’ of the bill, also known as ‘usance’. The importer/drawee is required to ACCEPT the bill. When he has signed the bill in acceptance, he can take the documents and clear his goods. The payment date is calculated from the ‘term’ of the bill- the ‘term’ is usually a multiple of 30 i.e. 30 days, 60 days, 90 days, 120 days etc. and starts either from sight or from the date of shipment, whichever is stated on the bill of exchange.

Handling Export Collections:

The role of the Exporter’s bank is to follow the instructions on the method of collecting payment from the Importer. There is no legal obligation for the bank to check documents but it should warn its customer of defects which may cause delay: this is, after all, part of good customer service.

Collection Order:

After shipping the goods, the Exporter prepares the documents and hands them to his bank (the Remitting Bank) to be forwarded to the Collecting Bank. With the documents he submits a COLLECTION ORDER with his instructions.

The Collection Order is a form issued by the bank, to be completed by the Exporter when he submits any trade bill –DC or Non-DC; it is designed to make it simple:

for the Exporter to give bank his instructions clearly and completely

for bank to transfer the instructions to bank’s covering schedule which bank send to the collecting bank

Terms and conditions are printed on the back of the Collection Order- by signing the form, the Exporter agrees:

To be bounded by the provisions of ICC 522, the Uniform Rules for Collections

That the bank is not liable for error made by the Collecting Bank

To be subject to bank TFGA form.

Banks Job on Receipt of Collection

There are several simple tasks to be done- they may be done in a different order in different branches:

check the completeness of the Collection Order details

Names and addresses
Shipment details
Instructions
Payment terms
Disposal of proceeds
Verify the signature(s) on the Collection Order

Confirm TFGA held

Verify that all documents listed on the Collection Order are attached

Assign internal control number (single series for all bills)

Time stamps the Collection Order and return the duplicate to the customer

Check the consistency of the documents

If the Collection Order needs to be amended the amendments must be signed by the customer’s authorized signatory or confirmed in writing.

Checking Documents

There is no legal obligation for banks to check documents sent for collection, but bank should warn its exporting customers of delay that might be caught by incomplete documentation etc.

So Bank Checks:

That the documents are consistent e.g.

That invoice amount equals the draft amount.
All documents mention the same goods.
That vital documents are not missing e.g.

Some countries require certificate of origin certified by an embassy or consulate.
That all documents requiring customer’s signature are signed by an authorized signatory of the customer.

Individual documents:

Bill of exchange
Invoice
Bill of Lading
Insurance Policy (only required for CIF and CIP shipment)
Any documents presented should be examined to ensure they are consistent with each other. All documents received by the Remitting Bank should be as stated on the Exporter’s Collection Order and should mention the number of copies of each document presented.

Any amendments to documents must be made as soon as possible to avoid any delay to the Importer because the goods have already been shipped.

Covering Schedule

If the documents are in order and instructions complete, the Remitting Bank:

Choose the Collecting Bank (if not specified by the Exporter): a branch or correspondent bank in the Importer’s country (in the same city/town if possible).
Prepares the Covering Schedule on the basis of the Collection Order together with instruction on how to send payment to the Remitting Bank (usually by telex unless the amount is small).
Mails the Schedule and Bill by REGISTERED AIR MAIL to the Collecting Bank.
Diaries a date for chasing the bill if payment/advice of acceptance has not been received.
Recording Collections

At this stage the Remitting Bank will have to pass entries covering the transaction regarding the remitting fund to the exporter’s bank. Thus, exporter’s bank realizes the remitted fund by the importer’s bank. Then recognizes the fund and records appropriately.

Mode of Export Payment

As per UCPDC 500, 1993 revision there are four types of credit. These are as follows:

Sight payment
Deferred payment
By acceptance
Negotiation

Sight Payment Credit:

In a Sight Payment Credit, the bank pays the stipulated sum immediately against the exporter’s presentation of the documents.

Deferred payment Credit:

In deferred payment, the bank agrees to pay on a specified future date or event, after presentation of the export documents. No bill of exchange is involved. In Dutch-Bangla Bank, payment is given to the party at the rate of D.A 60-90-120-180 as the case may be. But the Head office is paid at T.T clean rate. The difference between the two rates us the exchange trading for the branch.

Acceptance credit:

In acceptance credit, the exporter presents a bill of exchange payable to himself and drawn at the agreed tenor (that is, on a specified future date or event) on the bank that is to accept it. The bank signs its acceptance on the bill and returns it to the exporter. The exporter can then represent it for payment on maturity. Alternatively he can discount it in order to obtain immediate payment.

Negotiation Credit:

In Negotiation credit, the exporter has to present a bill of exchange payable to him in addition to other documents that the bank negotiates.

IMPORT PAYMENT

Securing payment is a vital consideration in any international trade transaction. In this chapter the payment mechanisms of DUTCH-BANGLA BANK LTD Foreign Exchange Services are discussed. Before the discussions of the payment mechanisms the risks of international trade are briefly discussed-

The Risks

It is important to identify the risks that faced when trading internationally and to be aware of some of the methods available to reduce these risks. In international trade there are generally more risks for the seller of goods than for the buyer.

Many of these risks can be insured against or mitigated through the payment mechanism. However, reducing risks may transfer both risk and cost to trading partner, and impact upon competitiveness.

Some of the main risks in international trade are-

Country risk

Political and economic stability
Transfer risk
War
Import/export regulations

Importer risk

Non-payment of invoices
Delayed payment of invoices
Insolvency of buyer

Foreign exchange risk

Fluctuating exchange rates affect pricing and profit.

Industry risk

Demands for particular products
Recession in particular industry
Competitive products/pricing
Fashionable or seasonal goods
Exporter risk

Problems in producing correct documentation.
Failure to supply goods in accordance with the sales contract.

Transportation risk

Risks associated with the mode of transport, e.g. marine risks.
Storage facilities in ports.

Settling International Trade Debts:

The four main ways to settle international trade debts are:

Open account
Bill for collection
Documentation credit
Advance payment
The method of payment that customer’s trading partner chooses to adopt depends on a number of factors:

The level of trust between customer
The creditworthiness of partner
Customer’s respective bargaining power
Conditions imposed by a third party, e.g. a credit insurer
Import/export regulations (in certain countries)

A. Open Account

The open account method of payment is probably the most favored, especially in Europe and North America. It saves costs and procedural difficulties, although the risks to the exporter are obviously the highest degree of security for an importer.

Trading on open account terms implies that the exporter trusts the overseas buyer’s business integrity and ability to pay. This could be by having established a long-term relationship with the buyer, through obtaining favorable status reports or credit assessments on the buyer, or it may be that credit insurance provides the confidence to trade on these terms. Alternatively, market forces may simply dictate that open account terms are the only viable option to conduct business.

With open account trade, the goods and relevant documents are sent by the exporter directly to the overseas buyer who will have agreed to pay the exporter upon arrival of the documents or at the end of pre-specified certain period after the invoice or shipment date. The exporter loses all control of the importer in accordance with the original sales contract.

However, an open account arrangement is not entirely without risk to the importer. For example, if the importer is committed to producing goods dependent upon receipt of imported materials, or has already ‘on-sold’ the goods to a third party, losses could occur if the goods or materials fail to arrive on time or are faulty.

B. Bills for Collection

The risk ladder illustrates that the collection of commercial documents through the banking system provides a more secure method of trading than an open account for the exporter. For the importer this method offers a simple and lower cost alternative to settle trade debt because under this method, for the agreement of a period of credit between buyer and seller the buyer is allowed to take time to re-sell the goods before having to make payment.

C. Documentary Credits

Documentary Credits (DCs) are one of the most popular methods for settling international trade transactions because they offer security to both buyer and seller and because they are honored through the banking system. The seller (exporter) wants an assurance that payment will only be made after dispatch of the specified goods. In some countries, settlement by documentary credit is insisted upon by authorities, who may wish to control imports or the associated outflows of foreign exchange.

A documentary credit (DC) may be defined as ‘an undertaking by an issuing bank, on behalf of an importer (the applicant, that payment will be made for goods or services supplied by an exporter (the beneficiary), provided that the exporter complies with all the terms and conditions established by the credit’. DCs are usually issued in irrevocable form, which means that they constitute a definite undertaking and cannot be revoked or amended without the agreement of all parties to the credit.

DCs are completely separate transactions from the underlying commercial contracts and banks are not concerned with, or bound by, the terms of such contracts. An important provision of UCP is that all DC terms and conditions should be covered by the documents called for in the credit. In DC operations, banks deal exclusively with documents and not with the goods, services or other performances to which the documents relate.

DCs are normally sent to the beneficiary (exporter) via an advising bank in the beneficiary’s country. The advising bank may also be requested (by the issuing bank) to ‘confirm’ the credit, i.e. add its own undertaking to that of the issuing bank. In such cases, the confirming bank assumes the credit risk of the overseas issuing bank and the political risk associated with the importing country. On an unconfirmed credit, the advising bank does not make any commitment to honor the DC; the exporter is relying primarily on the undertaking of the overseas issuing bank to make payment.

The importer can gain additional protection through the document definitions (e.g. by calling for the independent inspection or quality certificates) and can control delivery schedules and other aspects of the transaction by stipulating specific conditions such as a latest shipment date. The importer is assured that payment will not be made until the issuing bank has checked that the documents presented are in full conformity with the DC terms and conditions. However, the importer takes the risk that the goods may be of inferior quality.

The DC terms may provide for payment immediately upon presentation of conforming documents (sight credit) or at some future date, taking account of any extended payment terms granted by the seller to the buyer (usance or acceptance credit). For usance or acceptance credits, payment is made (and the importer’s account debited) at the end of the extended term (i.e. at maturity date). However, the shipping documents are usually released to the importer at the time they are presented to the issuing bank, enabling the goods to be collected.

Very few risks arise for the exporter because the potential problem areas of the buyer risk and country risk can be eliminated through the addition of the ‘ confirmation’ of the advising bank, thereby transferring the responsibility from the importer’s bank overseas, to a more familiar bank in the country of the exporter.

By using DCs, the exporter knows, usually before manufacture or shipment, the precise terms and conditions which must be met in order to obtain payment and when that payment will be received. The exporter should carefully check all DC terms and conditions upon receipt. If they include unacceptable conditions or do not reflect the underlying commercial contract, amendment of the DC should be arranged prior to shipment. The exporter must be able to present the correct documents and comply fully with the terms and conditions of the credit to ensure payment. Failure to do so could result in the exporter losing the protection of the DC

D. Advance Payment

There is no risk for the exporter when payment is received in advance of the goods being dispatched. However, if payment is made by cheque it should be remembered that this does not constitute payment until the cheque has been cleared through the banking system. For cheques payable abroad this can be a considerable period. Advance payments need not always be for the full value of the sales contract; it is quite common for a partial advance payment to be made, particularly for contracts involving capital goods.

This method of payment is the latest secure for the importer who, in addition to cash-flow pressure, has to face several risks-

goods may never be shipped
goods may be shipped late
wrong goods may be shipped
problems with documentation