Foreign Exchange Transaction System of National Bank Ltd

Executive Summary:

NBL has the glory of being oldest bank owned by the general people of Bangladesh and it servers the nation for last 26 years with largest line of diversified banking services in different sectors. So far, NBL is performing well and listed in the “A” category for long time. With globalization our country also takes part in global and international business. Manpower is now a very potential sector of government to export. There is not need to explain how much we are being engaged with foreign exchange. NBL is helping its customers in every aspect of foreign exchange. The mission is to continue NBL’s support for expansion of activities at home and abroad by adding new dimensions to our banking services which have been ongoing in an unabated manner. Ensuring highest standard of clientele services through best application of latest information technology, making due contribution to the national economy and establishing NBL’s firmly at home and abroad as a front ranking bank of the country have been its cherished vision. There are 19 division of NBL. Its branches have more or less 8 sections. The bank has earned the confidence and reputation as a reliable organization of paying hard-earned money of the expatriate Bangladeshis to their beneficiaries in the country safely and quickly, the bank handled USD 402.57 million (Tk. 2,756.08 crore) in 2007 which was USD 92.85 million. Foreign exchange gives much kind of facilities like L/C opening, export processing, remittance collection, LIM, LTR etc. Its customers are both exporter and importer, resident & non resident Bangladeshis. International Division is the section of NBL Head Office which monitors foreign exchange. Every branch of NBL gives monthly report of international exchange to ID. ID gives exchange rate to different branches and it is the first step to make profit by foreign exchange. Everyday exchange rate is sent to branches for transaction. In marketing strategies NBL follow both internal marketing and Interactive marketing. NBL is following overall cost leadership. Because of its glorious past it is now able to serve its customers in low cost, its low price helps it to achieve a large market share. With a strong deposit balance and Assets National Bank Limited has been trying to operate its business successfully since 1983. The bank has already developed good image and goodwill among its clients by offering excellent services in foreign exchange and other area.

 DEFINITION OF L/C:

On behalf of the importer if the bank undertakes to make payment to the foreign bank is known as documentary credit.

A letter of credit is known as instrument issued by bank to a customer placing at the letters disposal such agreed sums in foreign currency as stipulated. An importer is a country requests his bank to open a credit in foreign currency in favor of his exporter at a bank in the letters country. The letter of credit is issued against payment of amount by the importer or against satisfactory security.

FORMS OF LETTER OF CREDIT:

A letter of credit (L/C) may be two forms. These as follows:

i) Revocable letter of credit.

ii) Irrevocable letter of credit.

i)                    Revocable L/C: If any letter of credit can be amendment or change of any clause or cancelled by consent of the exporter and importer is known as revocable letter of credit.

ii)                  Irrevocable L/C: If a letter of credit can not be changed or amendment without the consent of the importer and exporter is known as irrevocable letter of credit.

TYPES OF LETTER OF CREDIT:

Letters of Credit are classified into various types according to the method of settlement employed. All credits must clearly indicate in major categories.

1. Sight payment credit
2. Deferred payment credit
3. Acceptance credit
4. Negotiation credit
5. Red close credit
6. Revolving credit
7. Stand by credit
8. Transferable credit

PARTIES TO A LETTER OF CREDIT:

A letter of credit is issued by a bank at the request of an importer in favor of an exporter from whom he has contracted to purchases some commodity or commodities. The importer, the exporter and the issuing bank are parties to the latter of credit. There are

however, one or more than one banks that are involved in various capacities and at various stages to play an important role in the total operation of the credit.

1. The Opening Bank
2. The Advising Bank
3. The Buyer and the Beneficiary
4. The Paying Bank
5. The Negotiating Bank
6. The Confirming Bank

CONTENTS OF THE LETTER OF CREDIT:

Banks normally issued letter of credit (L/C) on forms which clearly indicate the banks name and extent of the banks obligation under the credit. The contents of the L/C of different. In general L/C contains the following information:

i)                    Name of the buyer: Who is also known as the accounted since it is for his account that the credit has been opened?

ii)                  Name of the seller: Who is also known as the beneficiary of the credit?

iii)                Moment of the credit: Which should be the value of the merchandise plus any shipping charges intent to be paid under the credit?

iv)                Trade terms: Such as F.O.B. and C.I.F.

v)                  Expiration date: Which is specified the latest date document may be presented. In this manner or by including additionally a latest date, the buyer may exercise control over the time of shipping.

vi)                Documents required: Which will normally include commercial invoice consular or customer invoice, insurance policies as certificate.

vii)              General description of the merchandise: Which briefly and in a general manner duly describes the merchandise covered by a letter of credit?

DOCUMENTARY LETTER OF CREDIT (IMPORT/EXPORT DOCUMENTATION):

Documentary letter of credit is such kinds of commercial letter which a bank issue on behalf of foreign seller (exporter) according to the direction of the (importer) purchaser. The documents shown under are known as export documents form the importer’s side. These are:

(1) Bill of Exchange: The bill of exchange is that particular instrument through which payment is effected in trade internal and international. The payment for the goods is recovered by the seller through the medium of a bill of exchange drawn on the buyer for

the amount depending on the contract. It is a negotiable instrument. There are five main parties involved in a bill of exchange. They are:-

(a)    Drawer

(b)   Drawee

(c)    Payee

(d)   Endorser

(e)    Endorsee

(2) Bill of lading: A bill lading is a document of title to goods entitling the holder to receiver the goods as beneficiary or endorsee and it is with the help of this document on receipt form the exporter that the importer takes possession of the goods form the carrying vessel at the port of destination.

(3) Airway bill / Railway receipt: When goods to be transported are small in bulk or requiring speedy delivery or those are perishable in nature on the deal is in between the neighboring countries then mode of transports other then shipping may be resorted to far the carriage of the goods Airways bill /Railway receipt take place of Bill of lading depending on the nature of the carrier.

(4) Commercial invoice: It is the seller’s bill for the merchandise. It contains a description of goods, the price per unite at a particular location, total value of the goods, packing specifications, terms of sale, latter of credit bill of lading number etc. There is no standard form far a commercial invoice. The invoice is made out by the seller under his signature in the name of the buyer and must be submitted in a set of at least 3copies.

(5) Insurance policy:  In the international trade insurance policy is a must to cover the risk of loss on consignments while they are on seas, roads, and airways. The insurance is the responsibility of the buyer (consignee) under FAS, FOB and C F contracts and of the seller (consignor) under CIF contract. The policy must be of the type as specified in the relative /credit.

(6) Certificate of origin: This is a certificate issued by a recognized authority in exporting country certifying the country of origin of the goods. It is usually by the chambers of commerce. Some time, it is certified by local consul or Trade Representative of the importing country as per terms of the credit.

(7) Packing list: The exporter must prepare an accurate packing list showing item by item, the contents of the consignment to enable the receiver of the shipment to check the contents of the goods, number and marks of the package, quality, per package net weight, gross weight, measurement etc.

(8) Weighting and Measurement: Issued by recognized authority (like chambers of commerce and industry) in exporting country certifying correct weighting and measurement of the goods exported.

(9) Bill of Entry: A bill of entry is a document which contains the particulars of the imported goods as well as the amount of customs duty payable.

PAYMENT AGAINST DOCUMENTS (PAD):

Banks deal in documents and not in goods. If the shipping document against the L/C is in order then the L/C opening bank must have to payment to the foreign bank within 3 days or 72 hours according as Uniform Customs and Practice for Documentary Credit (UCPDC) 500 of revision of ICC.

If the shipping documents have any discrepancy, then the L/C opening bank informed to the negotiating bank within 7. Otherwise, the shipping documents have not discrepancy. If the importer have not adequate funds in the bank account then the bank payment to the foreign bank against the shipping documents.

Chapter – 5

Back to back & Export L/C

Back to Back L/C

Back to back L/C is very popular in Bangladesh. What is back to back L/C? To define we can say Back to Back is the situation where the end user opens a L/C in favor of the importers, the importers than asks his / her bank for a companion L/C to be issued to the supplier. Therefore, the original L/C acts as the financial basis for the second L/C. Many banks do not look favorable upon this type of financing of other options are available.

NBL receive a big amount of profit from back to back L/C. NBL is not a mysterious entity. They are business people just like the importers & exporter. They are in the business of lending money for the purpose of financing attractive proposals. The suggestions they make can save considerable expense and Tim of international businessman. NBL can work as advising bank or issuing bank.

Kinds of Back to Back L/C

Back to Back L/C can be divided into two types: Foreign and local. In foreign back to back L/C is opened against a muster L/C favoring a foreign party. Local back to back L/C.

1. Foreign Back to Back L/C:

 NBL issue or advice this kind of L/C. It is opened against a master L/C to do business aboard. Payment is given in other country.

 2. Local L/C:

 Local back to back L/C is opened against a master L/C to pay the local businessman. Business within Bangladesh.

 Local L/C can be divided into two types-

 a) Cash L/C:

 It is the L/C normally open for a bank acceptance. No master L/C is needed. Sometime people want a bank guarantee. It is one of them. It can be at sight and may be defer.

 b) Local back to back

It is used to do business in Bangladesh. It is opened against a master L/C.

SERVICE PROVIED BY BANK AGAINST BACK TO BACK L/C:

• LDBC
• LDBP

Is opened in favor of national’s party:

In back to back L/C following limit of loan facilities is given-

• 90% loan against master L/C is given
• 75%  can be received opening back to back L/C
• Rest 15% is given when bank receive export document.

Fort example against $ 100000 master L/C, $ 90000 loan facilities is given. $ 75000 is given when L/C is opened $ 15000 is given after receiving documents.

LDBC:

Local documentary bill collection is a service of NBL to collect the bill of their party for payment. When NBL is advising bank they can collect payment against the document.

When in back to back L/C NBL is advising bank. After the maturation period NBL collect they payment by LDBC.

Steps in LDBC:

The procedure is as following:

1. Exporter presents the documents to NBL for collection from importer within 3 days of shipment. The document contains-

a)      Track receipt.

b)      Commercial invoice.

c)      Packing list.

d)     Delivery receipt.

e)      Country of origin.

f)        Bill of exchange.

2. NBL sends the documents to issuing bank for collection.

3. NBL use a controlling no or LDBC No.

4. If back to back L/C is not on sight the issuing bank will not give the payment to NBL on receiving day. So an acceptance is sent to NBL, saying that the payment will be made after maturation period. It may be 90 days, 120 days etc.

5. After that they NBL get payment by pay order.

6. NBL will send the pay order for clearing.

7. After payment is received by NBL through clearing NBL will collect change and give the money to party.

 LDBP:

Local documentary bill purchase is a great source of profit for NBL. Here when the export documents comes the party want to get payment without waiting for the maturation date. So NBL, finance for that day and charge interest.

For example- Cat Textile Mills Ltd. Exports finished shirt to Sweden and buy clothes from M/S Sushi chemicals of Bangladesh. Here Cat Textile Mills Ltd’s bank is AB bank and M/S Sushi chemicals bank is NBL. So in this case the parties involved is as following:

Now if Sushi chemicals want to get payment before the bill maturation, NBL can purchase the bill. It is called LDBP.

Steps in LDBP:

1. At first a party brings a document of back to back L/C to NBL. The officer cheeks the documents. He/she emphasize on =

• Name of two parties.
• USD $ or other currency
• L/C/C No.
• Opening data.

Than a number is given (LDBP No) and as advice is sent to issuing bank.

2. Issuing bank sends an ‘advice of acceptance’ to NBL

3. Party makes following documents.

a)      Bill of exchange.

b)      Track receipt.

c)      Commercial invoice.

d)     Packing list.

e)      Delivery challan.

f)       Delivery receipt.

g)      Country of origin.

4. Next party comes for selling the bill to NBL, with all documents.

5. NBL purchases the bill. The account treatment is as follows

LDBP………….dr

Party’s name…… cr

The bill maturation date may be 90 days, 120 days etc.but by selling bill party is getting the payment of 90% today. So they have to pay 13% interest  and other charges from the day of  purchase and maturation of the bill. It is source of revenue for NBL.

6. Maturation  day comes and NBL, get money through T/T from issuing bank no NBL’s other branch.

7.  Account treatment on maturation of the bill is-

Sundry deposit A/C sundry creditor’s dr.

                  LDBP……………….       Cr.

                  Interest on LDBP……      Cr.

                  Advising Change……       Cr.

                  Postage……………..        Cr.

                  Commission………..        Cr.

                  Party’s A/C…………       Cr.

From the account treatment we can find NBL’s income.

8. The party collect the voucher and receive payment, rest of the amount which was not purchased by NBL. NBL cut the cost of party from it.

EXPORT L/C:

Export L/C is issued by a foreign bank favoring Bangladeshi exports through our banks having correspondent relationship with them.

NBL provides different services to the exporter of Bangladesh. To get export facility the party must have following requirements-

1. Current deposit (CD)
2. ERC (Export registration certificate)
3. Mortgage

NBL permit 50% to 70% loan against mortgage. Other loan facility are –

1. Back to back- 75% of export L/C
2. Cash credit-90% in FDBP

Packing credit (PC)- 90% of export L/C

Export advance & loan facility is sanctioned by head office. According to the prospect of party they take the loan decision.

SERVICES PROVIDED BY BANK AGAINST EXPORT L/C:

A.    Advising of export L/C: The advising bank getting the import L/C sent by the issuing bank located abroad will advise the L/C to the beneficiary without any engagement or responsibly on their part. It will see the following only:

a. Authenticity of L/C (Test agreed in case of Telex L/C and signature verified in case air mail L/C.

b.Merchandise specified in the L.C is permissible and clauses incorporated in the L/C are not against country’s regulations.

B.     Add Confirmation of Export L/C: Bank may add additional confirmation to export L/C where there is specific instruction from the L/C issuing bank to do so. Additional confirmation of L/C gives the seller a double assurance of payment. Bank’s requirement of adding confirmation:

1. 1. Issuing Bank should be a reputed bank.
   2. Credit line/ Arrangement with the L/C issuing bank.
   3. L/C clause are to be acceptable to confirming bank
   4. Approval from the competent authority for adding confirmation of export L/C/
   5. Confirmation charges are to be recovered as per rules.
2. C.    Negotiating of Export L/C: Documents / papers to be submitted by exporter to bank for negotiation/ collection against export L/C. The exportersubmit the documents to bank as per requirement of bank. List of export documents is as follows:

1. Export L/C
2. EXP Form
3. Bill of exchange
4. Invoice
5. Bill of Lading
6. Packing List
7. Certificate of Origin
8. Inspection Certificate
9. Insurance Document
10. Weight List
11. Any other documents as per L/C

Bank must scrutinize all the documents stipulated in the credit with reasonable care to ascertain whether they confirm with the terms of the credit, the bank may negotiate and pay the value of export bill to the exporter at:

      ♠ OD buying rate (Sight Draft)

      ♠ Usage rate (For DA Bill)

      ♠ Appropriate rate (For DP Bill)

1. D.    FDBC: If the export document is not purchase by NBL it is called Foreign Documentary Bill Collection. At the maturation data of export bill NBL collect the payment for party. The collection process is same as LDBC. Only the postage charge is high.

The postage charge is Tk. 800 within SAARC countries within Asia Tk.1500 and outside Asia is Tk. 2000.

1. E.     FDBP: If the exporter need money before that the maturation of export document. He/ She can sale it to NBL. It is called Foreign Documentary Bill Purchase. The steps of FDBP are discussed with an example. Let, J.J. Enterprise is a party of NBL who export shirt to Nepal at $20000/-. In Nepal Impex Co. buys it and their bank is Everest Bank. The Steps are as follows:
   1. NBL is receive a L/C of $ 20000 from Everest Bank of Nepal.
   2. NBL inform J.J. Enterprise about L/C
   3. J.J. Enterprise what the money right now. So they sale to NBL and get 90% of payment. NBL gives an FDBP No.

1. When bill is purchased, NBL creates a FDBP $20000×90%=18,000 will be given to J.J. Enterprise right now.
2. When NBL receive payment from Everest Bank, NBL charge J.J. Enterprise the following cost-

1. After these cost is deducted from rest of 10% L/C amount. J.J Enterprise get the payment.

COLLECTION DOCUMENTS:

Export documents not covered by and L/C documents not drawn in terms of the credit are accepted on collection basis with the shipper authority at their documents are forwarded through foreign correspondents to the drawee for payment or acceptance. After realization off the bills on collection export is paid appropriate rate after adjustment of liabilities on his account (if any).

Voucher to be passed:

Lodgment (Accepted for sending on collection):

 Realization: (Reverse of Contra Voucher)

 Chapter-6

Foreign Remittance

 INTERNATIONAL DEVIATION:

International Deviation is the section of NBL Head Office monitor foreign exchange. Every branch of NBL give monthly report of international exchange to ID. ID gives exchange rate to different branches and it is the first step to make profit by foreign exchange. Everyday exchange rate is sent to branches for transaction.

Exchange Rates:

Different types of exchange rate and their use area are given below-

 Use of rate in Foreign Exchange Services:

Service wise use of rate is given below-

Import L/C:

1. To open L/C-TT & DOC
2. PAD (Payment Against Document)-BC selling.

Back to back:

TT clean rate, TT, DOC

Export L/C:

OD sight export. TT clean, TT DOC

Chapter-8

Impact of International Transaction

 Bangladesh takes part both import and export business. The commercial bank of Bangladesh is helping in international trade. NBL is very well known bank to businessman of our country. A large number of people is working abroad they send their earnings to their dear one in Bangladesh. NBL is helping to transfer money. In a economy like Bangladesh, foreign exchange has a great impact. So foreign exchange is directly governed by Bangladesh Bank along with the help of commercial bank.

EXPORT IMPORT PRODUCTS:

Exportable Products: If not referred to differently, and except the ones enlisted in Annex 1, I.e. export prohibited products and the products for which the export is contingent to certain conditions, all other products shall be freely exportable. E.g. bicycle, garments item, goods from hide and skin, agriculture products etc.

Important Products: Export oriented readymade garments industry, Export oriented mechanized shoe industry, Export oriented tannery industry, Other Exporters/Manufacturers, Crude Palm Olean, Nuclear Reactors & its parts, Acid, Chemical Fertilizer, Pesticides & Insecticides, Second-hand Clothing, Sweater, Ladies Cardigan, Neb’s jacket including zipper jackets, Men’s trouser, Blanket, shirts of synthetic blended fabric, Medicine, Cigarette, Computer, Gold & Silver, Gas in cylinder, Petroleum oil & all kinds of oil obtained from bituminous mineral crude & LPG etc.

EXPORT –IMPORT OF BANGLADESH:

Export-Import Bureau, Bangladesh

Export performance for the Month of July – June, 2008-09

Overall position

Mn.US $

National Bank Limited

Export performance of primary & manufactured products

Export performance for the month of June, 2009

 Chapter-9

Reporting & Monitoring of Bangladesh Bank

To full control of foreign Exchange Bangladesh Bank, has many controlling form and information system for all commercial bank. NBL also has to follow it. NBL has many type of reporting form and one IT system to inform Bangladesh Bank about dollar transaction.

DECLARATION FORM

1. 1.      IMP form:

When import L/C is issued by a bank or NBL IMP form is needed to keep a record and inform Bangladesh Bank.

1. 2.      LCA form:

It is 6 copy from 1^st copy is used to report Bangladesh Bank.2^nd copy is to get the delivery of product. 3^rd and 4^th copy is for CCI. Now this record kept by Bangladesh Bank. 5^th and 6^th copy is kept in foreign exchange L/C file of NBL.

1. 3.      EXP Form:

Exp form is used in export like IMP form is used in import. To get Exp for party have to show L/C and contract like preformed invoice commercial invoice etc. Exp form has to be verified by customs and then exporter ship the goods.

1. 4.      TM Form:

TM form is used to sell cash dollar. When cash dollar is going out Bangladesh Bank need a reporting TM form?

1. 5.      C Form:

When remittance is coming in Bangladesh a C form given by NBL to Bangladesh Bank.

REPORTING BY INTERNET

1. 1.     Foreign currency transaction system:

At eh month end how much import, export, foreign remittance comes and goes out is reported by this software program. At first the officer will give the posting, then make schedule, checked by foreign exchange head that statement is created and sent to Bangladesh Bank with different colored pages. The month end statements should be submitted within date 5 of a month, wrong posting is punishable worth Tk. 5,00,000 for the Branch and Tk. 10,00,000 for the officer.

1. 2.     L/C Monitoring System:

It is a every day program governed by Bangladesh Bank. When L /C is opened foreign exchange officer give the posting in a 3 step L/C monitoring system by internet.

All the monitoring, reporting is governed by Bangladesh Bank because foreign has the precise impact on the economy.

Chapter-10

Recommendation & Conclusion

Recommendation

After analyzing over all performance of NBL, we have some recommendation to

improve the foreign exchange services.

1. Businessman are very much interested in import L/C. Export l/c is small in number. So NBL should attract exporter.

2.   Local l/c is not introduced in our society very much. NBL can make a work force

      to attract local businessman and make them understand about the benefit of local

      L/C.

3. NBL should open their branches in the business area like near EPZ, port etc. SO

      that importer and exporter need not to find NBL’s branches.

4.  Number of AD branches need to be increased.

5.  Employees of NBL proper training to serve the customers. Not only academic

       training but also mental setup training is needed.

6. NBL should be more conscious about the promotional activities. NBL should use

      aggressive marketing campaign to attract clients.

7. NBL can pursue a diversification strategy in expanding its current line of  business. The management can consider options of starting retail banking.

8.   NBL should perform more welfare activities.

9. NBL should redesign the service scheme to provide better interest rate.

Conclusion:

          With a strong deposit balance and Assets National Bank Ltd. operates efficiently in our country as a pioneer in private banking sector. National Bank Limited has been trying to operate its business successfully since 1983. The bank has already developed good image and goodwill among its clients by offering excellent services in foreign exchange and other area. As a newly established Branch, NBNL is serving at its locality with utmost satisfaction of the customer. So, NBL has to comet e with government-affiliated banks as well as with other Commercial Banks. Today, the whole Banking sector is facing a tough competition and challenge. In this situation NBL is in good position than any other Bank of its locality and day-by-day NBL is increasing its activities and goodwill.

          Finally, I can say that among the entire private bank in Bangladesh, National Bank limited always providing the efficient service with very affordable price. It is expanding their business. Overall performance satisfies the investor of the bank. It is a good bank to operate financial activities.

Bibliography:

1. Shekhar & Shekhar. Banking  Theory & Practies, 18^th Edition, .
2. Gordon. E & Natarajan. K, Banking Theory, Law and Practice, 11^th Edition, Himalaya Publishing House, p. 180, 181.

3. Rose P.S. Commercial Bank Management 5^th Edition
4. Annual Report of National Bank Limited, 2002-2009.
5. Modern Accountancy- Hanif Mukharjee.
6. Bedi B.L. Hardikar,V.k Practical Banking Advance 10^th Edition
7. www.nbl.bd.com
8. www.bangladesh-bank.org