Foreign Exchange Department of Mercantile Bank Ltd

FOREIGN EXCHANGE

Foreign Exchange department is most important part of a bank, because this department proves itself as the better performing department of the bank. This department contributes more than fifty percent of the total earning of a bank and earns most of its revenue as fees, exchange and commission. In most of the cases this is a non-funded business except in some of the cases. Though there is a burden of huge amount of non performing loan, banks operating in Bangladesh could manage to be in existence due to this foreign trade related earnings. The principal business of this foreign exchange department is to help/support international trade. The Major functions of Foreign Exchange department is to help Import, Export, Remittance, Selling of Foreign currency and maintaining of FC accounts of different in nature. The Regulatory framework is the Import-export policy of Bangladesh government, The Guidelines of Foreign Exchange Transactions- 1947 and the circulars of Bangladesh Bank.

Definition of Foreign Exchange: Foreign Exchange means foreign currency and it includes any instrument drawn, accepted, made or issued under clause (13), Article 16 of the Bangladesh Bank Order, 1972. All deposits, credits and balances payable in any foreign currency and draft, travelers cheque, letter of credit and bill of exchange expressed or drawn in Bangladeshi currency but payable in any foreign currencies.

Bangladesh Bank issues Authorized Dealer (AD) license by observing the bank’s performance and also the customers associated with the bank for conducting foreign dealings. MBL, Kawran Bazar branch is an authorized dealer branch.

 Why Bank’s Involvement is Important?

Banks play a vital role by minimizing the risk of two parties, namely buyer and seller. In fact without the help of banks we cannot think about a congenial international trade environment. Now the question comes how banks help international trade. We know that in a local trade there is a chance to know about each other. But in international trade the involved parties stay two distant places. For a buyer the following risks are involved-

  Risk of non-delivery of goods.

  Risk of receiving sub standard goods.

  Risk of fraud in goods.

For the seller the following risk is involved-

  Risk of non-payment.

To reduce the aforesaid risks an independent system is introduced which will safeguard the buyer as well as seller in an international trade. Actually banks play due role by getting into two parties and bind them.

Foreign Exchange Business of MBL, Kawran Bazar Branch

The functions of MBL, Kawran Bazar Branch can be divided into three broad categories for the purpose of discussion. Namely:

   Import

  Export and

  Remittance

The total activities of foreign exchange operation are conducted in six desks. The Foreign exchange in charge looks after the outward remittance, opening of commercial L/C as well as overall foreign exchange of the branch. The other desk opens back to back L/C against master export L/C. There is another desk which issues packing credit of export and purchase the export bills. Another desk is for payment of maturing back to back and import bills, return of Bangladesh Bank, Manages the FC accounts and the remittance. There is also a desk for purchase of local export bills. The last desk gives acceptance to the export documents and also deals with the PAD, Lodgment and retirement of accepted imported bills.

During my stay at the branch I have covered all the desks and try to understand different activities performed at the desk and the underlying significance as well as the accounting treatments of those activities. I started my job in this section at the desk where Import L/C was opened.

Import

Import activity starts from opening of an L/C in favor of the beneficiary/Exporter in a bank. As a result the exporter gets the guarantee for payment of his goods.

What is L/C?

Letter of Credit (L/C) is a payment guarantee to the seller by the buyer’s bank. It is in fact, a Credit Contract whereby the buyer’s bank is committed (on behalf of the buyer) to place an agreed amount of money at the seller’s disposal under some agreed conditions. If the conditions of the credit do not require for presentation of specified documents, it is called Clean Credit. On the contrary, if the presentation of specified documents is obligatory, the credit is called a Documentary Credit.

To take decision of importing of a good or service, the importer seeks offer from different supplies abroad or their agents in Bangladesh is called the Indenters. The offer received directly from Supplier is known as proforma invoice. If the offer is received from his agent, this is known as indents. In that offer  there are many terms and conditions and time limit of accepting the offer. An importer could open an L/C if those terms and conditions conforms with the legal framework and within the time frame. There conditions that may not be mentioned, in those cases if dispute arises UCPDC-500 (Uniform Customs & Practices in the Documentary Credit) will be followed, this term may also mentioned in the offer.  If the importer accepts the offer he signed it and contacted with his banker to open an L/C favoring the exporter, after fulfilling the requirements of the bank branch. Bank may ask for L/C margin and other required documents (IRC, Insurance cover notes, TIN certificate). Then bank provide the L/C application form. Importer filled this up and also signs the charged documents.

The Following Chart shows the  Relation of different parties related to L/C

1. Importer requests his bank to issue the L/C in terms of the arrangement with the seller
2. Issuing Bank is  the importer’s bank which issue the L/C
3. Advising bank is the Seller’s or Exporter’s bank is requested to advice the L/C to the beneficiary
4. Negotiating Bank is the bank where the exporter negotiates his documents. The Advising Bank may be the Negotiating Bank also.
5. Reimbursing Bank is nominated by the issuing bank to pay the Import bill if the Negotiating Bank demands.
6. Sometimes the issuing bank requests another bank to add confirmation to the L/C. This new bank is known as Confirming Bank.

  Types of L/C

BASIC Bank Mirpur branch deals with two types of L/C. These are-

1. Sight L/C
2. Deferred L/C.

 Parties of L/C

The following parties are involved to a letter of credit, namely-

Obligatory Parties are:

a)      Importer/ Buyer/ Applicant

b)      Opening Bank/ Issuing bank

c)      Advising Bank/ Notifying Bank

d)      Exporter/ Seller/ Beneficiary

Optional Parties (In case of need) are:

e)      Negotiating Bank

f)       Confirming Bank

g)      Paying/ Reimbursing bank

An importer can purchase the goods directly up to the limit UD$ 5000 from the exporter without opening a L/C through Bank Draft. For releasing the goods from the custom authority by the importer, bank will certify.

Import Procedure

An importer is required to have the following formalities to import the goods through MBL Bank-

  An account with MBL, Kawran Bazar Branch

  Valid Import Registration Certificate (IRC), annual import figure is mentioned here.

  Tax Paying Identification (TIN) Number

  Proforma Invoice/ Indent

  Membership Certificate

  LCAF (Letter of Credit Authorization form) duly attested

  One set of IMP Form

  Insurance Cover note with money receipt

  DP note, letter of arrangement, etc. are kept and signed by the importer.

Five copies of LCAF form is provided for filling up. LCAF may be of two types commercial (valid for one year) and Industrial (valid for 1.5 years). The amount of import should not exceed the amount mentioned in the LCAF form. LCAF is used by the Bangladesh bank the determine the probable import payments in Bangladesh at a particular period. Original copy of LCAF should be sent to BB after completion of total import, duplicate to customs, triplicate to statistics department of BB, 4^th copy to CCI&E and fifth copy to Bangladesh Bank registration unit, if the import is financed by EDF fund.

IMP form should be issued for releasing every shipment of import (customs requirement). Because we know that the goods that are imported (mentioned in the LCAF) in different period of time. In each shipment there will be separate bill of entry. Original copy of IMP is send to BB and the duplicate copy is used to math IMP with B/E and then again sent to Bangladesh Bank.

Import Mechanism

To import, a person should be competent to be an ‘Importer’. According to Import and Export Control Act, 1950 the Office of Chief Controller of Import and Export provides the registration (IRC) to the importer. In the IRC the name of the AD branch from where L/C would be opened is mentioned in order to control the importer’s import business with the help of an AD branch. Annual amount of import using this IRC is also mentioned there, this amount depend upon the fees paid by the importer during application made to CCI&E. That IRC should be kept with the AD branch. An Importer can import from any other branch he wants, but the IRC should be transferred there through proper channel. After obtaining this, the person has to secure a letter of credit authorization (LCA) from Bangladesh Bank. And then a person becomes a qualified importer. He is the person who requests or instructs the opening bank to open an L/C. He is also called opener or applicant of the credit.

 L/C Application

MBL, Kawran Bazar Branch provides a printed form for opening a L/C to the importer. A special adhesive stamp is affixed on the form.  While opening, the stamp is cancelled. Usually the importer expresses his desire to open a L/C quoting the amount of margin in percentage. The importer gives the following details-

  Full name and address of the applicant.

  Date and place of expiry of the credit

  Applicant’s A/C number

  Amount (both in figure and word)

  The mode of transmission of document (SWIFT/ Courier/ Telex)

  Confirmation of credit to the beneficiary (requested or not requested)

  Partial shipment is allowed or not

  The type of loading (loading on board)

  Brief description of the goods to be imported with HS code no.

  Credit available with by sight payment/ by acceptance/ by negotiation/ by deferred payment at against the documents detailed herein/ and beneficiaries draft at on.

  The time bar within which the document should be presented.

  Sales terms (FOB/ C &F/ CIF)

  Shipping Mark

  IRC Number and LCA Number

  Insurance cover note with money receipt

  Country of origin

Additional Instructions are like-

1.               i.        Shipment by South African, Taiwanese, and Israeli flag vessels/ carriers or any vessel/ carrier calling at any port of South Africa and Israel is prohibited.
2.              ii.        Radiation certificate is required in case of food items.
3.             iii.        All charges outside Bangladesh are of account of (importer/ beneficiary).

 The above information is provided along with the following documents-

1. Proforma Invoice/ Indent stating the description of the goods including quantity, unit price, etc.
2. Insurance cover notes with money receipt, name and address of issuing company and the policy number.
3. Four set of IMP (Import) Form

Scrutiny of L/C Application

The MBL Official scrutinizes the application in the following manner-

  The terms and conditions of the L/C must be complied with UCPDC 500 and Exchange Control & Import Trade Regulation;

  Eligibility of the goods to import;

  The L/C must not be opened in favor of the importer or his agent;

  L/C must be signed by the importer agreeing all terms and conditions mentioned in the application;

  IMP form duly filled in and signed;

  Validity of IRC;

  HS code of the goods;

  Insurance cover note with date of shipment;

  Radioactivity report in case of food items;

  Survey reports or certificate in case of old machinery (ies).;

  Carrying vessel is not from Israel;

  Certificate declaring that the item is in operation not more than 5 years in case of car.

 Accounting Entries for L/C Opening

When the officer thinks fit the application to open a L/C, giving the following entries- creates the following charges-

Table-5.1: Showing accounting treatment at the time of L/C opening

 After that, L/C number and the above entries are given in the L/C Register. L/C opening register has the following details-

  Date, L/C No., Name of the customer, Foreign currency amount, Exchange rate, Taka equivalent and source of import;

  Goods, Country of origin, Advising bank, Expiry date, Tenor and Margin;

  Charges: commission, postage, SWIFT, FCC and total;

  Initial with date and remarks.

The contra entries stating the liability of the bank and the client are as follows-

Client’s Liability………………………….Debit.

Banker’s Liability………………………………Credit.

Then the transmission of L/C is done through SWIFT to advise the L/C to the beneficiary. MBL, Kawran Bazar Branch has the SWIFT arrangement for transmission of L/C. Bank could only transmit L/C to those banks with which they have the correspondent relationship. If there is no relationship with beneficiaries bank, MBL take the help of one of its correspondent bank to advise the L/C to the beneficiaries bank. The beneficiary’s bank ultimately advice the L/C to beneficiary.

 Amendment of L/C

Involved parties in a L/C, particularly the seller and the buyer cannot always satisfy the terms and conditions in full as expected due to some obvious and genuine reason. In such a situation, the credit should be amended. Kawran Bazar Branch transmits the amendment by SWIFT to the advising bank. In case of irrevocable letter of credit, it can not be revoked, amended or cancelled without the agreement of the issuing bank, the confirming bank (if any) and the beneficiary. On the other hand, revocable credit can be amended or cancelled by the issuing bank at any moment and without prior notice to the beneficiary. According to UCPDC 500 L/C must be an irrevocable one. For amended L/C’s, service charge ($ 50/-) and telex charge is debited from the party’s account accordingly.

Advising the Import L/C

Advising depicts the proof of authenticity of the credit to the seller/ beneficiary. The advising process consists of forwarding the original credit to the beneficiary. Before forwarding the advising bank has to verify the signature (s) of the L/C opening bank (BASIC Bank, Mirpur Branch). In addition, it ensures that the terms and conditions of the L/C are not inconsistent with the existing regulations. In such a case, advising bank does not undertake any liability.

Adding Confirmation

The confirming bank does adding confirmation. Confirming bank is a bank, which adds its confirmation to the credit, and it is done at the request of the issuing bank. The confirming bank may or may not be the advising bank. By being involved as a confirming agent the bank undertakes to negotiate beneficiary’s bill without recourse to him.

 Presentation of the Documents

The seller being satisfied with the terms and the conditions of the credit proceeds to dispatch the required goods to the buyer. Then he has to present the documents evidencing dispatching of goods to the negotiating bank on or before the stipulated expiry date of the credit. After receiving all the documents, the negotiating bank then checks the documents against the credit. If the documents are found in order, the bank will pay, accept or negotiate to MBL bank.

The usual documents are-

  Invoice

  Bill of lading

  Certificate of origin

  Packing list

  Shipping advice

  Non negotiable copy of bill of lading

  Bill of exchange

  Pre-shipment inspection report

  Shipment certificate.

Scrutiny of Documents

First of all it must be ensured that full set of documents as mentioned in the L/C has been received. Some Key Check Points for the documents are as follows-

1.   Letter Of Credit

  Whether the documents have been negotiated or presented before expiry of the credit

  Whether the amount drawn exceeded the amount available under the credit

2.   The Commercial Invoice

  Whether the invoice made out in the name currency as the credit indicates

  Whether the invoice made out in the name of the buyer with the same address specified in the credit

  Whether the invoice agree exactly with the credit as regards description of goods, value of goods, unit prices & delivery terms

  Any special notation, confirmation & attestation were specified in the credit and those have been complied with on the invoice and if required duly signed.

  Whether the invoice evidence the following; shipping marks/terms of delivery/weight data &import license number etc.

 3.   Bill Of Exchange

  Whether the Bill of Exchange drawn in the language of the credit

  Whether the bill of exchange properly prepared according to the credit conditions (on a sight or time basis) and drawn on the specified bank

  Whether it properly dated and signed

  Whether the amount in figures corresponded exactly with the amount in word

  Does it contain all the prescribed notations and clauses?

 4.   Bill Of Lading

First of all it has to be cleared that the Bill of Lading is showing “Shipped on Board” and it has to be properly endorsed to the bank.

  The B/L should include the description of the merchandise according to invoice.

  The port of shipment and destination, date of shipment and the name of the consignee are in agreement with those mentioned in the L/C.

  The shipping company or their authorized agents properly sign the B/L.

  The date on the B/L is not ‘stale’ which means it is not dated in unreasonably long time prior to negotiation.

 5.   The Insurance Cover Note

  Is the insurance documents specified in the credit submitted?

  Does the insurance cover the risks mentioned in the credit in the currency of the credit and for the prescribed amount but not less than CIF value?

  Is the insurance documents dated not later than the shipping documents?

  Does the insurance policy/Certificate agree with other document as regards description, weight & marks of the goods, mode of transport & the route?

  Does the insurance company attached and so far as necessary, endorsed issue all the copies?

 6.   Certificate Of Origin

  Is the certificate of origin of goods is given as stipulated?

7.   Others

  Other documents called for in the credit if any such as packing list, weight certificate, consular invoice, inspection certificate etc. to be checked whether drawn and issued in accordance with the terms of the credit.

Lodgment of Shipping Documents

During scrutiny, if the documents are in order, the branch then lodges the documents in PAD. The following steps are involved in lodgment-

  First all the particulars of the documents are entered in the PAD (Payment against Document) register and PAD No. Seal is given on all the copies of the received documents.

  Convert the foreign currency into Bangladeshi currency.

  Reverse the contingent liability and entry made in the liability register.

  Prepare lodgment voucher

  Liability reversal vouchers

Banker’s liability on L/C………..……Debit

Customer’s liability on  L/C…….………….Credit.

  Prepare other voucher (s)

PAD A/C………………………………Debit (BC Selling rate)

HO ID A/C…………………………..…………Credit ( TT & OD rate)

Interest on PAD…………………..…………Credit

Exchange gain…………..…………..………Credit. (Arise from difference of rates)

  Send an IBCA to the head office.

  Make intimation to the importer.

After realizing the charges, the shipping documents are then stamped with PAD number & entered in the PAD register. Intimation is given to the customer calling on the bank’s counter requesting retirement of the shipping documents.

 Retirement of Documents

The importer receives the intimation and gives necessary instruction to the bank for retirement of the bills or for the disposal of the shipping documents to release 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 loan. Loan is of two types, namely Loan against Imported Merchandise (LIM) and Loan against Trust Receipt (LTR). MBL, Kawran Bazar Branch does not allow LIM facility. But they offer LTR facility. Following steps are involvement for retirement of documents-

  Calculation of interest.

  Calculation of other charges.

  Passing vouchers.

  Entry in the register.

  Endorsement made on the back of the bill of exchange as ‘Received Payment’ and bill of lading or other transport document is endorsed to the effect ‘Please deliver to the order of M/S——-’, under two authorized signatures of the bank’s officers (P.A. Holder).

  Finally, documents are delivered to the Importer.

Accounting Effect

The Customer’s account and Margin on L/C is debited and PAD and Head office and other income A/C are credited.

Payment Procedure of 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-

a)       Date of Payment: Usually payment is made within seven days after the documents have been received. If the payment is become deferred, the negotiating bank may claim interest for making delay.

b)       Preparing Sale Memo: A sale memo is made at B.C. selling rate to the customer. As the T.T & O.D 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.

c)       Requisition for the Foreign Currency: For arranging necessary fund for payment, a requisition is sent to the International Department.

d)       Transmission of Message: Message is transmitted to the correspondent bank ensuring that payment is being made.

 Loan Against Trust Receipt (LTR)

LTR is post import finance, offered by MBL Kawran Bazar Branch. From bank’s point of view, it is risky because usually no security is taken. When customer’s commitment is as good as cash, LTR is then issued. Loan is sanctioned based on trust receipt (prescribed form) only. It is allowed for retirement of shipping documents and release of goods imported through L/C. So, in this case title and possession of goods both lies with the customer. Bank officials can exercise hypothecation of raw materials. Time period is fixed based on the nature of the goods. The goods are handed over to the importer under trust with the arrangement that sale proceeds should be deposited to liquidate the advances within the specified period.

 Shipping Guarantee

This usually is needed when shipment is made through air and to release the goods. The goods arrived at the airport before documents reached to the bank branch. Importer generally wants to release his goods soon, then they apply for shipping guarantee from bank. Bank branch issues shipping gurantee only after getting the payment from party, may be by using the composite limit, or by debiting party account.

 EXPORT

Foreign Exchange Regulation Act, 1947 nobody can export by post and otherwise than by post any goods either directly or indirectly to any place outside Bangladesh, unless a declaration is furnished by the exporter to the collector of customs or to such other person as the Bangladesh Bank (BB) may specify in this behalf that foreign exchange representing the full export value of the goods has been or will be disposed of in a manner and within a period specified by BB.

Bangladesh exports a large quantity of goods and services to foreign households. Readymade textile garments (both knitted and woven), jute, jute-made products, frozen shrimps, tea are the main goods that Bangladeshi exporters exports to foreign countries. Garments Sector is the largest sector that exports the lion share of the country’s export. Bangladesh exports most of its readymade garments products to USA and European Community (EC) countries.

  Export L/C

Most of the exporters who export through MBL, Kawran Bazar Branch are readymade garment exporters. They open L/Cs in this branch to export their goods, which they open against the import L/Cs opened by their foreign importers. This L/C is received through SWIFT message by the L/C advising Bank. L/C advising bank makes advice the L/C to the beneficiary’s bank when the advising bank and beneficiary’s bank are different due to absence of BKE arrangement. Bank charges fees for  Advising of export L/C to the beneficiary.

Formalities Required For Export L/C

The export trade of the country is regulated by the Imports & Exports (Control) Act, 1950. There are a number of formalities that an exporter has to fulfill before and after shipment of goods. These formalities or procedures are enumerated as follows –

1. 1.   Export Registration Certificate (ERC): The exports from Bangladesh are subject to export trade control exercised by the Ministry of Commerce through Chief Controller of Imports & Exports (CCI&E). No exporter is allowed to export any commodity permissible for export from Bangladesh unless he is registered with CCI&E and holds valid ERC. The ERC is required to be renewed every year. The ERC number is to be incorporated on EXP (Export) Forms and others documents connected with exports.

1. 2.    The EXP Form: After having the registration, the exporter applies to Mercantile Bank Limited, Kawran Bazar Branch with the Trade License, ERC and the Certificate from the concerned Government Organization to get the EXP Form. If the branch is satisfied, an EXP Form is issued to the exporter. An EXP Form usually contains the following particulars –

i)              Name and address of the Authorized Dealer;

ii)             Particulars of the commodity to be exported with particulars and code no;

iii)            Country of destination;

iv)           Port of destination;

v)            Quantity;

vi)           L/C value in foreign currency;

vii)          Terms of sale;

viii)         Name and address of Importer/ Consignee;

ix)            Bill of Lading/Railway Receipt/Airway Bill/Truck Receipt/Post Parcel Receipt no. and date;

x)             Port of Shipment/Post Office of Dispatch;

xi)            Land Custom Post;

xii)           Shipment Date;

xiii)          Name of the Exporter with address;

xiv)         CCI&E’s registration number and date;

xv)          Sector (public or private) under which the exporter fails.

Four copies of Exp form are issued. Main copy for customs requirement, second copy should be submitted to Bangladesh Bank within 14 days of export, the third copy should be reported to Bangladesh Bank after realization of the proceed (within 04 months of shipment date). The purpose of EXP form is to ensure the payment of goods exported, this is the guarantee of the Bank branch which has taken the responsibility to realize the proceeds of export.

Sometimes exporters fail to export the amount that mentioned in the issued EXP form. In those cases Party submits short shipment certificate, certified by the customs. If the export exceeds amount mentioned in EXP, then the party submits shipping bill certified by the customs authority.

3.   Securing the Order: Upon registration, the exporter may proceed to secure the export order. This can be done by contracting the buyers directly through correspondence.

4.   Signing of the Contract: While making a contract, the following points are to be mentioned: a)  Description of the goods; b)  Quantity of the commodity;  c)  Price of the commodity;  d)  Shipment;  e)  Insurance and marks;  f)  Inspection, and g)  Arbitration.

5.   Procuring the Materials: After making the deal and on having the L/C opened in his favor, the next step for the exporter is set about the task of procuring or manufacturing the contracted merchandise.
6.   Registration of Sale: This is needed when the proposed items to be exported are raw jute and jute-made goods.

7.   Shipment of Goods: The following documents are normally involved at the stage of shipment: (a) EXP From, (b) photocopy of registration certificate, (c) photocopy of contract, (d) photocopy of the L/C, (e) customs copy of ERF Form for shipment of jute-made goods and EPC Form for raw jute, (f) freight certificate from the bank in case of payment of the freight if the port of lading is involved, (g) railway receipt, berg receipt or truck receipt, (h) shipping instructions, and (i) insurance policy.

The following points should be looked carefully for –

  The terms of the L/C are in conformity with those of the contract

  The L/C is an irrevocable one, preferably confirmed by the Advising Bank

  The L/C allows sufficient time for shipment and a reasonable time for registration

  If the exporter wants the L/C to be transferable, advisable, he should ensure those stipulations are specially mentioned in the L/C.

At last, the exporter submits all these documents along with a Letter of Indemnity to the branch for negotiation. An officer scrutinizes all the documents. If the documents are clean one, the branch purchases the documents on the basis of banker-customer relationship. This is known as Foreign Documentary Bill Purchase (FDBP).

  Procedure For FDBP

After purchasing the documents, MBL, Kawran Bazar Branch gives the following entries –

Before realization of proceeds

FDBP A/C —————————————-Debit

Customer A/C  —————————————–Credit.

Party’s account credited only after adjusting the back to back L/C liability, packing credit, Reserve Margin (2.5%), courier charge, and handling charge. Bill is purchased at OD sight rate and when export proceed is realized, this is sold to the H/O at TT clean rate. The difference between two rate accounts for the exchange gain for the branch.

Reserve margin is one of the important aspects of MBL policy. This margin is as deposit of the exporters- A kind of cash security for bank for facing any adverse situation. If the customer is in trouble, in such case he can use this fund.

Adjustment after realization of proceeds

Head Office A/C———————————-Debit

FDBP A/C————————————————Credit.

Foreign Documentary Bills For Collection (FDBC)

MBL, Kawran Bazar branch forwards the documents for collection due to the following reasons-

1. If the documents have discrepancies.
2. If the exporter is a new client.
3. The banker is in doubt.

FDBC is a contra assent and liability. FDBC signifies that the exporter will receive payment only when the issuing bank gives payment. An FDBC Register is maintained, where first entry is given when the documents are forwarded to the issuing bank for collection and the second one is done after realization of the proceeds.

Back-to-Back Letter of Credit

Back-to-back L/C is a secondary L/C (New Import L/C) opened by the seller’s bank based on the original L/C (Master L/C) to purchase the raw materials and accessories for manufacturing of the export product (s) required by the seller.

Under the ‘Back to Back’ concept, the seller as the Beneficiary of the master L/C offer it as a ‘security’ to the advising Bank for the issuance of the second L/C. The beneficiary of the Back-to-Back L/C may be located inside or outside the original beneficiary’s country. In case of a Back-to-Back L/C, the bank takes no cash security (margin). Bank liens the Master L/C and the drawn bill is an Usance/ Time bill.

Exporters could make BTB import up to 75% of their export L/C value. They are also allowed to get 10% of their L/C value as packing credit. Packing credit is only allowed only after procurement of raw materials from BTB import. One of the important aspects of packing credit is that the interest rate is only 7%. Bangladesh bank on behalf of the government determines those ratios time to time in order to promote export.

To control BTB import MBL asks the exporter for the budget, what materials need to be procured what quantity and at what rate and what is their cutting. This is another strong point of MBL.

MBL, Kawran Bazar Branch also maintains performance register, which includes the information related to export L/C value, the amount of BTB import, BTB maturity date, proceed realization information, and BTB payment information.

Documents Required for Opening a Back-to-back L/C

The following papers/ documents are required for opening a back-to-back L/C-

  Master L/C

  Valid Import Registration Certificate (IRC) and Export Registration Certificate (ERC)

  L/C Application and LCAF duly filled in and signed

  Proforma Invoice or Indent

  Insurance Cover Note with money receipt

  IMP Form duly signed

In addition to the above documents, the followings are also required to export oriented garment industries while requesting for opening a back-to-back L/C –

  Textile Permission

  Valid Bonded Warehouse License

In case the factory premises is a rented one, Letter of Disclaimer duly executed by the owner of the house/premises to be submitted. A checklist to open back-to-back L/C is as follows –

i)              Applicant is registered with CCI&E and has bonded warehouse license;

ii)             The master L/C has adequate validity period and has no defective clause;

iii)            L/C value shall not exceed the admissible percentage of net FOB value of relative Master L/C;

iv)           Usage Period will be up to 180 days.

Check Points Noted in Master L/C

Following defective points are usually found in the Master L/C. So, these points are so much carefully checked by the bank officials. These are-

i)              Issuing bank is not well known;

ii)             Advising credit by the advising bank without authentication;

iii)            Port of destination absent;

iv)           Inspection clause;

v)            Nomination of specific shipping/Air line or nomination of specified vessel by subsequent amendment;

vi)           Bill of lading endorses blank, endorses to 3rd bank, endorses to buyer or 3rd party;

vii)          No specific reimbursing clause;

viii)         UCP clause not mentioned;

ix)            Shipment/ presentation period is not sufficient;

x)             Original documents to be sent to buyer or nominated agent;

xi)            FCR or HAWB consigned to applicant or buyer;

xii)           “Shipper’s load and count is not acceptable” clause;

xiii)          L/C shall expire in the country of the issuing bank;

xiv)         Negotiation is restricted.

 Payment of Back-to-Back L/C

Payment of BTB L/C must be made with export proceeds. For this purpose an account is maintained known as FC held against BTB liability. A register (party- wise) is also maintained in MBL, Kawran Bazar branch. Any amount remains after deducting other liabilities except BTB L/C, when the export proceed realized is credited to this account for the purpose of payment of BTB L/C of the corresponding export. When the BTB L/C matures for payment, this account is debited to make the payment.

Normally BTB L/C are opened on usance basis (payment is deferred). Usance period may be up to 180 days. Payment is given after realizing export proceeds from the L/C Issuing Bank. In case of export failure or non realization/ short realization of export proceeds, forced loan  has to be created in order to settle the Back to Back L/C payment.

If the party is paid in foreign currency, B.C. rate is applied in this regard. International Department takes the T.T. & O.D. rate.

There is no notional rate exists in Mercantile Bank. As a result, when rate changes, branch required to issue vouchers in order to revaluate the reserve. H/O general account with Kawran Bazar branch is debited or credited if the rate appreciated or depreciated respectively.

[Generalized System of Preference (GSP) Facility: Foreign buyers of USA and EU countries enjoy this tax facility, if the garments are made of local fabrics. BTMA provides the certificate about the fabrics. This certificate is also required to get the cash incentive facility offered by the government. The exporters ask for the certificate from the BTB local exporters with the other required documents.]

Inland Letter of Credit (ILC)

ILC means L/C within the same country. This type of L/Cs are opened when seller does not believe the buyer though they are in the same country and also in the cases where the sales contract is of a big amount.

For Local L/C no LCA Form is required or the IMP form. Only two local banks are involved usually. Lodgment/retirement of local bill normally effected by issuing a DD or FDD in favor of the beneficiaries bank.

Local Bill Purchase

he purchase of local bills is done in the following ways –

  The customer submits the L/C to the branch along with the documents to negotiate;

  The branch officials scrutinizes the documents to ensure the conformity with the terms and conditions;

  The documents are then forwarded to the L/C Opening Bank;

  The L/C Issuing Bank gives the acceptance and forwards an acceptance letter;

 Payment is given to the customer on either by collection basis or by purchasing the document.

Accounting entries

FDBP account is debited and the customer account, postage, handling charge, exchange gain, excise duty are credited. Bill is purchased at usance rate and FDBP account is created at OD sight rate. The difference between the two rate is the exchange gain of the branch.

Bank may also allow SOD at usance rate, in stead of discounting the bill after keeping a certain margin.

Remittance

This function is running on a very small scale MBL, Kawran Bazar branch. Very insignificant amount of outward remittance is made every month. The Portion of Inward remittance is also negligible (except export business). There are not education file opened in this branch. Remittance are of two types,

  Outward Remittance

  Inward Remittance

Outward remittance is needed for traveling purpose, Health care, education, membership fees of international organization, participate in trade fair abroad, credit card payment etc. Bank requires to provide the TM form to customer and filled them up. Customer also submits the documents necessary to justify the purchase of foreign exchange, for example, for travel purpose, the passport with visa, two way air ticket etc. For education purpose, the offer letter, the estimation of expenses provided by the university etc. For health purpose, the opinion of the medical board of a hospital. If bank is satisfied then bank sells the FC.

For travel purpose the amount maximum bank can allow is $ 3000, per person a year and maximum $1500 in cash and the remaining amount in Travelers Cheque. But before getting visa bank only can sell $ 200. The amount is $ 1500 for SAARC countries in air travel, and $ 500 in road.

If bank receive any inward remittance, bank informs the beneficiary to collect the money after providing the documents necessary to identify him. If the amount exceeds $ 2000 then the beneficiary must fill up the “form C” as rule provided by Bangladesh Bank to inform the purpose of the remittance.

MBL Kawran Bazar Branch also issues FDD, in favor of any person residing abroad, or for making any payment, for example, membership fees, enrolment fees for students etc.

Operation of Foreign Currency Accounts

There are different types of foreign currency accounts. For example, Non-resident foreign currency account, Resident foreign currency account, NITA account, Exporters retention quota account. MBL, Kawran Bazar Branch are maintaining few foreign currency accounts including exporter’s retention quota account.

Non-resident Foreign Currency Account: Non resident means any Bangladeshi national residing outside Bangladesh, may be of Bangladesh origin, might also have dual citizenship are non-residents. They may open such accounts even after their return to Bangladesh, within six months of their arrival. Balance of such accounts is freely remittable to abroad. Foreign nationals working in Bangladesh with permission are able to open FC account.

Resident Foreign Currency Accounts: Persons ordinarily resident in Bangladesh may maintain foreign currency accounts with foreign exchange brought in at the time of their return to Bangladesh from visit abroad. Usually any one can bring up to $ 5000 in Bangladesh without declaration. Or anyone who enjoying the travel quota, when he returns from abroad he can open an FC account by depositing the unspent portion of his foreign currency. This can be used for travel purpose. Or any other personal need. But no taka can be credited in those accounts.

Non–resident Investors’ Taka Account (NITA): This account is needed to be maintained along with an FC account by which Non-resident Bangladeshi can deposit foreign currency for investment in security of stock exchanges. For such accountholders, 5% of primary shares are reserved. NITA account is necessary to realize dividends in taka then convert this taka into foreign currency, or to deposit the sale proceeds of shares and ultimately to transfer this to the FC account.

To apply for IPO through DD, branch charge Tk. 750 for issuing FDD. If no share is allotted, FDD is returned, branch again charge fees for collection of that FDD.

Exporter’s retention quota account: Exporter can set aside about 10% of their export proceed and deposit to this account in foreign currency. He can use it for business promotion, or import payments and also for travel purpose.  

Though MBL Kawran Bazar branch allows use the deposit of FC account for share application to a very limited extent, but they do not maintain any NITA account.

Bangladesh Bank Returns

At the end of every month, the reporting to Bangladesh Bank regarding the following information is mandatory –

i)         Filled up S1-S6 forms, IMP, EXP, Bill of entry matched with IMP, LCAF etc.  that covers the entire month’s amount of import, export, category of goods, currency, county etc.

ii)        T/M Forms.

iii)       Form-C

These returns should be sent to Bangladesh Bank by the fifth day of the following months.

Conclusion

Mercantile Bank Ltd. is one of the most potential Banks in the banking sector. It has a large portfolio with huge assets to meet up its liabilities and the management of this bank is equipped with the expert bankers and managers in all level of management. MBL is able to quickly adapt with the changes in the environment. The financial performance over the year was also very sound. Its general banking service is widening by introducing online banking, its foreign exchange business also shows increasing trend. MBL is also expanding its branch network to avail the more investment/business opportunity. It has very talented and expert human resources and always recruits high quality officers in their management positions. There every possibility that this progress of MBL will continue and could overcome its limitation to produce good result in future.