Internship Report on Foreign Exchange Service of Prime Bank Ltd

 Introduction:

Bangladesh is one of the developing countries in the world. The economy of the country has a lot left to be desired and there are lots of scopes for massive improvement. In an economy like this, banking sector can play a vital role to improve the overall social – economic condition of the country. The banks by playing the role of an intermediary can mobilize the excess fund of surplus sectors to provide necessary finance, to those sectors, which are needed to promote for the sound development of the country.The motives of banks are profit-earning. The word ‘Bank’ refers to the financial institution that deals with money transaction. Banks collect deposits at the lowest possible cost and provide loans and advances at highest cost. The spread between the two is the profit for the bank. Commercial banks are primary contributors to the national development of the country.The revenue earning sources of banks are mainly loans and advances. The credit facility can be of two types: funded and non-funded. Funded credit can be expensive for the banks, as the bank has to pay interests. Non-funded credit includes Letter of Credit, Foreign Guarantee, Bank Guarantee, Remittance etc., these are the main source of income for the foreign exchange business.If a bank can increase its import and export transactions, its profit will obviously reach a higher level, as the costs are negligible.This report is an attempt to reflect the position of Prime bank Ltd in the banking industry of the country in respect of her activities in the arena of Foreign Exchange business.

Rationale of the study:

Commercial banks in Bangladesh economy are to face an increasing competition for their business in coming days, like any other emerging market economies. Their business is no longer remaining easy as they earlier. The real change in the banking business has started to come with the government’s decision to allow the business in the private sector in the middle of the Eighty’s. This report is an effort to reflect a clear idea about the strategies, activities, and performance of Prime Bank Ltd. regarding foreign trade or Foreign Exchange Business.

The Foreign Exchange department is the vital part for financial institution. Values are established for commodities and manufactured goods imported or exported among countries by the means. So it is very important to have an effective and sound management system in foreign exchange business for performing International trade. As a business studies student it is necessary for me to have vast acquaintance regarding foreign trade and I wanted to be acquainted with the whole procedure of foreign trade.

Origin of the report:

This report is originated having three months long internship program originated after completing the BBA program from Department of Finance under DhakaUniversity. During the internship a student has to undertake an arena of investigation of any organization for in depth study. This report is the outcome of the assigned internship, suggested by the human resource department of Prime Bank Limited, Head Office.

 Objective of the report:

In this report, I tried to furnish all sorts of practical dealings that are conducted in case of handling various types of activities in foreign exchange department, the theoretical aspects, that is what should be the procedures and requirements maintained from first to last, and actual practices as well as the ultimate gain for the bank in conducting financial activities are mainly discussed. So the purpose and objective of this report can be summarized as follows:

Broad:   

To portray of the Foreign exchange operations in respect of Import and Export and risk management regarding foreign exchange conducted by Prime Bank Ltd.

As it is an overall study of foreign trade regarding import & export so I am going to analyze the related factors of export-import business and bank’s performance by fulfilling the following objectives including Import-Export procedure. Therefore, my specific objectives are:

Specific:

To focus on the Brief description of foreign trade.

To know deeply about Import- Export procedure

To examine bank’s performance in foreign exchange business

To know how they minimize foreign exchange risks

To focus on some other activities of foreign trade

To specify some findings on given topic

To reveal some recommendation for better performance in foreign trade

Scope of the report:

The report is highlighting the major functional area of foreign exchange department and procedure of import & export. It is not possible to pinpoint the each & every aspects of foreign exchange transactions due to this short span of time.

Methodology:

The methodology of this report is very different from conventional reports. I have emphasized on the practical observation though this report has to need some primary and secondary data. Nevertheless, eventually almost the entire report consists of my practical observation.

Sources of data collection:

While preparing the report, I have taken information from the following sources:

Primary Sources:

• Observation of banking activities.
• Overflowing Conversation with the in-charge of the foreign exchange department of Prime Bank Limited, Mouchak Branch.
• Working with my own experience while internship program.

Secondary Sources:

• Daily diary (containing my activities of practical orientation in Prime Bank Ltd) maintained by me,
• Various publications on Bank,
• Website of Bangladesh Bank,
• Website of Prime Bank Limited,
• Annual Report of the bank,
• Personal investigation with bankers,
• Different circulars issued by Head Office and Bangladesh Bank

 Potential problems statement:

During my internship period, I have faced some problems, which hindered me to cover all the aspects of my study. Like:

Every voucher, statement, maintaining of register etc. are done by manually, for which it is not possible for me to collect information on right time.

The branch is a busy branch and more so, shortage of manpower in foreign exchange department of the branch, I could not get information as required my study although they have good intention to provide.

Three-month time is not sufficient to have practical knowledge and prepare a report such a big subject like foreign exchange.

While colleting data they did not disclose much information/data due to the secrecy of the organization.

 Introduction of the Organization:

Bank is a financial institution. The economy is mostly depended on the bank since the bank facilitates the economic and financial transactions. Prime bank limited is a fast growing private sector bank and the bank is already at the top slot in terms of quality services to the customers and value addition for the shareholders. The bank made satisfactory progress in all areas of business operation in 2006.

Prime Bank Ltd. is one of the few banks permitted by the Bangladesh in the early 90’s. These banks are known as the second-generation banks and fortunate to remain immune from the bad loan culture. Prime Bank Limited was designed to provide commercial and investment banking services to all types of customer ranging from small entrepreneur to big business firms. Besides investment in trade and commerce, the bank participates in the socioeconomic development through the participation in priority sectors like agriculture, industry, housing and self-employment. Prime Bank Limited wants to establish, maintain, and conduct all types of banking, investments and businesses in Bangladesh and abroad with superior service quality and performance.

The bank has consistently turned over good returns on Assets and Capital. During the year 2006, the gross revenue of the bank grew by 34% to reach Tk.3232 million while operating profit increased by 40% to arrive at Tk. 2131 million.

Presently the bank has 50 branches all over the Bangladesh and a booth located at Dhaka Club, Dhaka. Out of the above 41 branches,  05 (Five) branches are designated as Islamic Branch complying with the rules of Islamic Shariah, the modus operandi of which is substantially different from other branches run on commercial conventional basis.

The Principal activities of the bank were banking and related businesses. The banking businesses included deposits taking, extending credit to corporate organization, retail and small & medium enterprises, trade financing, project financing, international credit card etc. Prime Bank Limited provides a full range of products and services to its customers, some of which are mentioned below with a brief overview of the major business activities.

Retail Banking:

As a part of risk diversification strategy PBL expended the lending activities in this sector during 2006. The growth rate of PBL’s consumer financing was 38% during this year. The loan schemes offered by the bank include Home Loan, Loan against Salary, Marriage Loan, Car Loan, Hospitalization Loan, Education Loan, Doctors Loan, Travel Loan etc.

SME Lending:

Job creation is essential and it must come from Small and Medium Enterprise that will ultimately dominate the private sector. During 2006 bank’s Strategy was focused on customer convenience. The Bank provided working capital loans to suppliers or dealers of large corporations or clusters of small exporters of non-traditional items. Outstanding loan of SME is Tk.437 million. The growth rate of PBL’s SME Lending was 41% during this year.

Corporate Credit:

PBL’s strategy is to provide comprehensive service to the clients of this segment who are large and medium size corporate customers with expertise in trade finance and related services. Besides trade finance bank are providing working capital finance, project finance and arranging syndication for our corporate clients. Syndication and structured Finance Unit of the Bank strengthened its footstep in the consortium financial market and arranged a number of syndication deals for its corporate clients.

Islamic Banking:

For the development of Islamic Banking Business, 2006 was also a commendable year. It has been observed that compliance of Shariah has improved in 2006 as compared to the preceding years. According to their advice Islamic Banking operation of the bank has been separated from the operation of Conventional Banking and shown separately in the bank’s financial statement. It is found that the investment and deposits grew by 38% and 89% respectively in the year 2006. The operating profit of Islamic Banking Branches grew by 45% during the Year.

Credit Card:

In the year of 2005, Prime Bank Ltd has launched VISA. Before that PBL started its credit card operation in 1999 by introducing Master Card. Now PBL has become the first local Bank of the country to achieve principal membership of both the worldwide-accepted plastic money network i.e. Master Card and VISA. PBL has redesigned the credit card facility by providing the incentive of “Free Life Insurance Coverage” for their valued cardholders to mitigate the financial risk.

Custodial Service:

PBL equator fulfills its strategic commitment to provide custody and clearing services. Equator’s focuses are on the following:

• Commitment to quality
• Dedication to customer needs
• Sustained investment in people and systems

International Trade Management:

This division is operational throughout the group and PBL’s core strength is trade finance and services. With an experience, Prime Bank has developed knowledge of trade finance, which is world class. Principle services to importers include imports letter of credit, import bills for collection and back-to-back letters of credit facilities. Services provide to exporters include export letters of credit, direct export bills, bonds, and guarantees.

Cash Management:

Prime Bank recognizes the importance of cash management to corporate and financial institutional customers, and offers a comprehensive range of services and liquidity management.

Institutional Banking:

Prime Bank Limited provides a wide range of services to institutional clients, commercial, merchant and central banks; brokers and dealers; insurance companies; funds and managers, and others. It provides relationship managers who are close to their customers and speak local language. This wide network of institutional banking facilities includes transaction, introduction, problem solving and renders advice and guidelines on local trading condition.

Treasury:

Treasury operations had been consideration as an important avenue for income generation purpose within Head Office. In fact, in the past, income from treasury operation was quite sizable and significant to the total income generated by the bank. The treasury division publishes daily and weekly currency newsletters, which provide analyses of currency trends and related issues. Seminars and workshops are conducted for customers from time to time on foreign exchange related topics. Prime Bank is one of the first local banks in Bangladesh to integrate treasury dealings of local money market and foreign currency under one Treasury umbrella. The bank has handled significant volumes of treasury over the last several years. Prime Bank’s Dealing Room is connected with automated Reuters Terminal facility thus enabling the bank to provide forward/future facilities to its corporate clients at a very competitive rate.

Foreign Exchange Business:

Over the years, foreign trade operations of the bank played a pivotal role in the overall business development of the bank. The bank has established relationship with as many as 110 new foreign correspondents abroad thereby raising the total number of correspondents to 350. The total import & export business handled by the bank during the year 2006 was TK 52,639 million and Tk 41,801 million. The growth rate was 46%. The bank has also entered into remittance arrangements with several banks and exchange houses and expects to handle increased volume of remittance business over the near future.

Merchant Banking:

The Bank’s operation in this sector was limited to Underwriting, Portfolio Management and Banker to the Issue functions. The compulsory requirement for opening BO account for share trading has increased the demand for opening BO account.

Online Branch Banking:

The bank has set up a Wide Area Network (WAN) across the country to provide online branch banking facility to its valued clients. Under this scheme, clients of any branch shall be able to do banking transaction at other branches of the bank.

Under this system a client will be able to do following type of transactions:

• Cash withdrawal from his/her account at any branch of the bank.
• Cash deposit in his/her account at any branch of the bank irrespective of the location.
• Cash deposit in other’s account at any branch of the bank irrespective of the location.
• Transfer of money from his/her account with any branch of the bank.

SWIFT:

Prime Bank Limited is one of the first few Bangladeshi banks, which have become member of SWIFT (Society for Worldwide Inter-bank Financial Telecommunication) in 1999. SWIFT is a member-owned co-operative, which provides a fast and accurate communication network for financial transactions such as Letters of Credit, Fund Transfer etc. By becoming a member of SWIFT, the bank has opened up possibilities for uninterrupted connectivity with over 5,700 user institutions in 150 countries around the world.

Information Technology in Banking Operation:

Prime Bank Limited adopted automation in banking operation from the first day of its operation. The main objective of this automation is to provide efficient and prompt services to the bank’s clients. At present, all the branches of the bank are computerized. At branch level, the bank is using server-based multi-user software under UNIX operating system to provide best security of automation.

 Profitability and Shareholder Satisfaction:

The bank had been one of the most profitable in the banking sector. The bank’s return on assets (ROA) was 2.05% in the year 2006. Even though the capital market of the country has been suffering over the last few years, the good performance of Prime Bank made sure that the banks share price remained in a respectable position.

Prime Bank Limited offers various kinds of deposit products and loan schemes. The bank also has highly qualified professional staff members who have the capability to manage and meet all the requirements of the bank. Every account is assigned to an account manager who personally takes care of it and is available for discussion and inquiries, whether one writes, telephones or calls.

Deposit Products:

      Monthly Contributory Savings Schemes(CSS)

      Monthly Benefit Deposit Receipt(MBDR)

      Special Deposit Receipt Scheme(SDR)

      Education Savings Scheme(ESS)

      Fixed Deposit Receipt Scheme(FDR)

      Current Account

      Savings account

      Short Term Deposit

Loan Schemes:

      General Loan Scheme

      Consumer Credit Scheme

      Lease Finance

       HouseBuilding Loan & Apartment Loan Scheme

      Advance against Shares

       Custodial Services for investors (both individual & institutional) investing in through Stock exchange

       One stop services for payment of utility bills.

      Credit card

Investment:

The Bank’s investment increased during the year by Tk 3905 million and stood at Tk. 7844 million as at 31 December 2006.

Loan & Advances and Deposits:

Loans and Advances of the Bank grew strongly by 41% to 45010 million in 2006. Bills purchased and discounted increased by 27% indicating strong growth in export performance.

The Bank’s deposits and the Customer deposits of the Bank grew by 52% & 52% respectively in 2006. However, fixed deposits remained the main component of deposits contributing about 55% of total deposits. 

Liabilities:

Total liabilities of the Bank are increased by Tk. 18341 million during 2006. resulting mainly from increase in deposits from customers.

Shareholders Fund:

The Shareholder’s Fund is increased by 37% during the year. Paid-up capital increased by Tk.350 million and stood at Tk.1750 million during 2006.

Non-interest & Investment Income:

Non-interest & Investment Income are increased by 28% & 62% respectively in year 2006.

Net Profit before & After Tax :

Net Profit before Tax stood at Tk.1741 million and Net Profit after Tax had become Tk.1052 million. Thus the growth rate of the Net Profit before Tax was 45% then that of previous year. In case of Net profit after Tax it was negative growth of 85% during 2006.

The financial position for the last five years of Prime Bank Limited At a Glance

 (Taka in million):

Particulars200220032004 

20052006Total Deposits164822048328069

36022

54727Loans and Advances126871649223220

31916

45010Investment199627503084

3940

7844Foreign Exchange Business317544193156249

69185

94440Operating Expenditure448.36591824

886

1101Operating Profit74810011146

1520

2131Profit after tax418375612

568

1052Total Assets193592424932362

41506

60899Market value per share307.51374.25879.5

618.50

528.75No of Branches273036

41

50No of Employees730777894

1024

1172No of Shareholders172719932620

4467

5262No of Foreign Correspondences422441501

517

528

Summary of Financial Performance:

Despite the challenges, Prime Bank closed on a high note and made an impressive progress in many lines of business during 2006. The operating profit before provisions registered a growth of 40% during the year. Strong profit performance was attributable to its sustained high level of deposits and loan growth, maintaining the good asset quality and enhancing productivity and proactive management of balance sheet. Revenue income increased by 34% while expenses increased by 24%. The growth asset was 47% and non-performing loan remained below 1%.

Contingent business grew by 21% during 2006 contributing to the increase in fee based income. Profit before tax showed a growth of 45%. Profit after tax was 1052 million registering growth of 85%. Return on asset stood at 2.03% compared to 1.54% of previous year. Despite the rise in capital base by Tk. 350 million, EPS was an impressive Tk. 60.11 while return on average equity stood at 31.55%.

 SWOT Analysis:

The acronym for SWOT stands for

• STRENGTH
• WEAKNESS
• OPPURTUNITY
• THREAT

The SWOT analysis comprises of the organization’s internal strength and weaknesses and external opportunities and threats. SWOT analysis gives an organization an insight of what they can do in future and how they can compete with their existing competitors. This tool is very important to identify the current position of the organization relative to others, who are playing in the same field and also used in the strategic analysis of the organization.

• Banking Experience of 12 years provides PBL the strength of being one of the market leaders in the sector. This strength of PBL is totally unmatched by any other commercial bank in Bangladesh, as the long term success of a bank heavily depends on its reputation while dealing with every sensitive commodity like money.
• PBL received many awards during 2006. PBL is the recipient of 1^st prize under ICAB National Awards 2005.
• Credit Rating Information and Services Limited (CRISL) rated the Bank as A+ Considering its good profitability, best asset quality and diversified product lines.
• As the 6^th largest listed company at Dhaka Stock Exchange PBL has strong confidence among the investors, both individual and institution.
• PBL focus strongly on remittance business and with that aim they opened rural branches where remittance business concentrates. PBL opened Exchange House at Singapore, Prime also entered into agreement with various exchange houses at USA, UK, Middle East and South Asian countries for inward foreign remittances of the wage earners.
• To be the most efficient Bank PBL has chosen T24 of Temenos Holdings, NV Netherlands Antilles as the core banking Software (CBS) for the first time in Bangladesh.
• In Bangladesh PBL has wide range of customer base and is operating efficiently in this country.
• PBL has a bulk of qualified, experienced and dedicated human resources.
• PBL has the reputation of being the provider of good quality services to its potential customers

• PBL has fewer branches than their competitors. Such as PBL have only 50 branches whereas Uttara Bank Limited has 198 branches and 12 regional offices.
• PBL do not provide any ATM facility to the customers. This is one of the major weaknesses of PBL.

• The population of Bangladesh is continuously increasing at a rate of 7.3% per annum. The country’s growing population is gradually and increasingly learning to adaptation of consumer finance. As the bulk of our population is middle class, different types of products have very large and easily pregnable market.
• The activity in the secondary financial market has direct impact on the primary financial market. Investment is a national socio economic activity. And activity in the national economy controls the bank.
• PBL is now focusing on lending to SME and Retail sector. The bank is not only providing credit but also decided to popularize the SME sector by participating in various trade shows organized in the country.
• Bangladesh have a huge consumer base for maintaining several accounts. So PBL has the opportunity to keep these customers by reducing its current fees and charges.
• In today’s economy, substantial amount is remaining idle and currently the investment in the secondary market by foreign is relatively low. These economic situations of the country indicate political threats.
• Increased competition by other banks is also another threat to PBL. . Furthermore, the new comers in private sector like Dutch Bangla Bank, EXIM Bank, BRAC Bank, Southeast Bank, Mercantile Bank, Social Investment Bank, Islami Bank are also coming up with very competitive force.

Letter of Credit:

Letter of Credit (L/C) can be defined as 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. Since the agreed conditions include, amongst other things, the presentation of some specified documents, the letter of credit is called Documentary letter of credit. The uniform Customs & Practice for Documentary Credit (UCPDC) published by International Chamber of Commerce (1993) Revision; publication No. 500 defines Documentary credit.

Any arrangement however named of descried, whereby a bank (the issuing bank) acting at the request and on the instructions of a customer (the Applicant) or on its own behalf.

       Is to make a payment or to the order of third party (the beneficiary, or is to accept and pay bills of exchange (Drafts) drawn by the Beneficiary or.

      Authorizes another bank to effect such payment, of to accept and pay such bills of exchange (Drafts)

      Authorizes another bank to negotiate against stipulated documents (s) provided that the terms and conditions are complied with.

Documentary Credit may be either:

                          i.Revocable

                        ii.Irrevocable.

Revocable Credit: A revocable credit is a credit which can be amended or canceled by the issuing bank at any time without prior notice to the seller.

Irrevocable Credit: A revocable credit constitutes a definite undertaking of the issuing bank (since it can not be amended or canceled without the arrangement of all parties thereto), provided that the stipulated documents are presented and the terms and conditions are satisfied by the seller. An irrevocable credit can be either confirmed or unconfirmed depending on the desire of the seller. This sort of credit is always preferred to revocable letter or credit.

Sometimes, letter of credits are marked as either with recourse to drawer or without recourse to drawer.

                  Revolving Credit: The revolving credit is one which provides for restoring the credit to the original amount after it has been utilized. How many times it will be taking place must be specifically mentioned in the credit. The revolving credit may be either cumulating or non cumulative.

                  Transferable Credit: A transferable credit is one that be transferred by the original beneficiary in full or in part to one or more subsequent beneficiaries. Such credit can be transferred once only. Fractions of a transferable credit can be transferred separately, provided partial shipments are not prohibited.

                  Back to Back Credit:  The back to back credit is a new credit opened on the basis of an original credit in favor or another beneficiary. Under to back to back concept, the seller as the beneficiary of the first credit offers it as security to the advising bank for the issuance of the second credit. The beneficiary of the back to back credit may be located inside or outside the original beneficiary’s country.

                  Anticipatory Credit: The anticipatory credits make provision for pre shipment payment, to the beneficiary in anticipation of his effecting the shipment as per L/C conditions.

Red Clause:

When the clause of the credit authorizing the negotiating bank to provide pre-shipment advance to the beneficiary is printed/typed in red, the credit is called Red Clause letter of Credit.

Under the above-mentioned clauses, the opening bank is liable for the pre shipment advances made by the negotiated bank, in case the beneficiary fails to repay deliver the documents for negotiation.

There are a number of parties involved in a L/C and the right & obligations of the different involved parties also differ from each other

The involved parties can be named below:

1. Importer/Buyer
2. Opening/Issuing Bank
3. Exporter/Seller/Beneficiary
4. Advising/ Notifying Bank.
5. Confirming Bank
6. Negotiating Bank
7. Paying/Reimbursing Bank.

Importer/ Buyer: are the person who request /instruct the opening bank to open a L/C. He is also called Opener of Applicant of the credit.

Opening/Issuing Bank: is the bank which opens/ issues a L/C on behalf of the importer. It is also called the importer’s Bank.

Exporter/Seller/Beneficiary: is the party in whose favor the L/C is established.

Advising/ Notifying Bank: is the bank through which the L/C is advised to the exporter. It is a bank situated in the exporting country and it may be a branch of the opening bank or a correspondent bank. It may also assume the role of confirming and/or negotiating bank depending upon the conditions of the credit.

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 not be the advising bank.

Negotiating Bank: is the bank which negotiated the bill and pays the amount to the beneficiary. It has to carefully scrutinize the documentary credit before negotiation in order to whether the documents apparently are in order or not. The advising bank and the negotiation bank may or may or may not be one and the same. Some times it can also be the confirming bank.

Paying/ Reimbursing Bank: is the bank or whom the bill will be drawn (as per conditions of the credit). It is nominated in the credit to make payments against stipulated documents complying with the terms of the credit. It may or may not be the issuing bank. Details regarding the rights and obligations of the different parties involved in the documentary credit operations may be had from UCPDC

The following five major steps are involved in the operation of a documentary letter of credit.

1. Issuing;
2. Advising
3. Amendment (if necessary)
4. Presentation; and
5. Settlement.

1. Issuing a Letter a Credit: Before issuing a L/C the buyer and seller located in different countries, concludes a ‘sales contract’ providing for payment by documentary credit. As per requirement of the seller, the buyer then instructs the bank- the issuing bank- to issue a credit in favor of the seller (beneficiary). Instruction/Application for issuing a credit should be made by the buyer (importer) in the issuing bank’s standard form. The credit application which contains the full details of the proposed credit, also serves as an agreement between the bank and the buyer. After being convinced about the necessary conditions contained in the application form and sufficient conditions to be fulfilled by the buyer for opening a credit, the opening bank then proceeds for opening the credit to be addressed to be beneficiary.

2. Advising a Letter of Credit: Advising through a bank is a proof of apparent authenticity of the credit to the seller. The process of advising a credit consists of forwarding the original credit to the beneficiary to whom it is addressed. Before forwarding the advising bank has to verify the signature (s) of the officer (s) of the opening bank and ensure that the terms and conditions of the credit are not in violation of the existing exchange control regulations and other regulations relating to export. In such act of advising, the advising bank does not undertake any liability.

3. Amendment of Credit: Parties involved in a L/C, particularly the seller and the buyer can not always satisfy the terms and conditions in full as expected due to some obvious and genuine reasons. In such a situation, the credit should be amended. In case of revocable credit, it can be amended or canceled by the issuing bank at any moment and without prior notice to the beneficiary. But in case of irrevocable credit, it can neither be amended nor canceled without the agreement of the issuing bank, the confirming bank (if any) and the beneficiary.

Presentation of Documents: The seller being satisfied with the terms and conditions of the credit proceeds to dispatch the required goods to the buyer and after that 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 the issuing bank. The issuing bank also checks the documents and if they are found as per credit requirements, either

a) Effects payment, or

b) Reimburses in the pre-agreed manner

4. Settlement: Settlement means fulfilling the commitment of issuing bank in regard to effecting payment subject to satisfying the credit terms fully. This settlement may be done under three separate arrangements as stipulated in the credit.

These are:

i) Settlement by payment: Here the seller presents the documents to the paying bank and the bank then scrutinizes the documents. If satisfied the paying bank makes payment to the beneficiary and in case this bank is other than the issuing bank then sends the document to the issuing bank. If the issuing bank is satisfied with the requirements, payment is obtained by the paying bank from the issuing bank.

ii) Settlement by Acceptance: Under this arrangement, the seller submits the documents evidencing the shipment to the accompanied by the draft drawn on the bank (where credit is available) at the specified tenor. After being satisfied with the documents, the bank accepts the documents and the draft and if it is  a bank other than the issuing bank, then sends the documents to the issuing bank stating that it has accepted the draft and at maturity the reimbursement will be obtained in the pre-agreed manner.

iii) Settlement by Negotiation: This settlement procedure starts with the submission of documents by the seller to the negotiating bank accompanied by a draft drawn on the buyer or any other drawer, at sight or at a tenor as specified in the credit. After scrutinizing that the documents meet the credit requirements, the bank may negotiate the draft. This bank if other than the issuing bank, then sends the documents and the draft to the issuing bank As usual reimbursement will be obtained in the pre-agreed manner.

      Forwarding: Negotiating Bank sends the shipping documents to Issuing Bank with the cover of Forwarding Letter mentioning the details of encloses.

      Bill of Exchange: According to the section 05, Negotiable Instruments (NI) Act-1881, A “bill of exchange” is an instrument in writing containing an unconditional order signed by the maker, directing a certain person to pay [on demand or at fixed or determinable future time] a certain sum of money only to or to the order of a certain person or to the bearer of the instrument.  It may be either at sight or certain day sight.  At sight means making payment whenever documents will reach in the issuing bank.

      Invoice: Invoice is the price list along with quantities.  Several copies of invoice are given.  Two copies should be given to the client and the other copies should be kept in the bank.  If there is only one copy, then its photocopy should be kept in the bank and the original copy should be given to the client.  If any original invoice contains the custom’s seal, then it cannot be given to the client.

      Packing List: Packing list is the letter describing the number of packets and there size.  If there are several copies, then two copies should be given to the client and the remaining should be kept in the bank.  But if there is only one copy, then the photocopy should be kept in the bank and the original copy should be given to the client.

Bill of Lading: Bill of Lading is the bill given by shipping company to the client.  Only one copy of Bill of Lading should be given to the client and the remaining copy should be kept in the bank.

Certificate of Origin: Certificate of origin is a document describing the producing country of the goods.  One copy of the certificate of origin should be given to the client and the remaining copy should be kept in the bank.  But if there is only one copy, then the photocopy should be kept in the bank and the original should be given to the client.

Shipment Advice: The copy mentioning the name of the insurance company should be given to the client and the remaining copies should be kept in the bank.  But if only one copy is given, then the photocopy should be kept in the bank and the original copy should be given to the bank.

      PSI (Pre-shipment Inspection Certificate): It is a confirmation that the goods have been inspected prior to shipment and found as per requirement of the client (importer) and as per L/C. It is generally issued by a neutral organization. It is also called CRF (Clean Report of Findings).

      Insurance: International trade is very much risk ridden. So it is necessary to insure the goods against the risk of loss or damage. Insurance is a contact whereby the insurer is undertaking to indemnity the assured to the agreed manner and extent against fortuitous losses. Insurance is, therefore, a contract of indemnity.

The document is which contract of indemnity (or, insurance) is embodied is called a policy. The man 9od firm) who undertakes to insure s called insurer. When the insurer will subscribe his name in the policy then he will be called an underwriter. The owner of the goods (which are insured) is called assured. The thing which is assured has in the subject matter of insurance. The interest which the assured has in the subject matter is known as his insurable interest. The payment for which insurer undertakes to indemnity is termed as premium.

This form is prepared for maintaining account of the money, which goes out side the country for the purpose of payment.  This form is required by Bangladesh Bank.  It is an application for permission under 4/5 of the Foreign Exchange Regulation Act, 1947 to purchase foreign currency for the payment of import.

IMP – FORM has four copies:

1.         i.            Original copy for Bangladesh Bank.
2.       ii.            Duplicate copy for authorized dealers.  It is issued for processing Exchange Control Copy of bill of entry or certified invoice.
3.     iii.            Triplicate copy for authorized dealers’ record.
4.     iv.            Quadruplicate copy for submission to the bank in case of imports where documents are retired.

Following documents are sent with FORM-IMP:

1.         i.            Letter of Credit Authorization Form,
2.       ii.            One copy of invoice,
3.     iii.            Indent copy / proforma invoice.

The following Information is included in the FORM-IMP:

i)                    Name and address of the authorized dealer,

ii)                  Amount of foreign currency in words and figures,

iii)                Names and address of the beneficiary,

iv)                L/C Authorization Form number and date,

v)                  Registration number of L/C Authorization Form with Bangladesh Bank, and Description of the goods

Import Segment:

International trade is essential for the prosperity of the trading nations, because:

      i.    Very country lacks some vital resources that it can get only by trading with others

     ii.    Each country’s climate, labor force, and other endowments make it a relatively efficient producer of some goods and an inefficient producer of other good” and

    iii.    Specialization permits larger outputs and can therefore offer economies of large-scale production.

IMPORT:  Import is the flow of goods and services purchased by economic agents located in one country from economic agents located in another.Under the Imports and Exports (Control) Act, 1950 the Government of Bangladesh formulates the Import policy through Ministry of Commerce. The existing Import policy (1997-2002) has come into effect from June 14, 1998 to June 30, 2002.

 Main Features of Import policy (1997-2002) :

a)      Import facility through  import permit and clearance permit

b)      Import facility   through indent and   Performa  invoice:

c)      Import facility for specimen. advertisement related goods and  gifts without permission in a limited amount:

d)      Temporary import facility for re-export:

e)      Import facility through barter:

f)       Joint  import facility (group of industrial consumers and commercial  importers):

g)      Import facility on the basis of deferred payment and against suppliers credit:

h)      Import on the basis of deferred payment subject to the clearance of BB:

i)        Import to EPZ and export from it beyond  the purview of this policy. It will be regulated by respective BB and  NBR orders:

j)        Import facility up to $ 2,000 for actual user without permission:

k)      Import facility on the basis of direct payment in foreing  countries:

l)        The number of banned and conditional  items has been reduced to 121 from 703:

m)    BEPZA , BSCIC and  BOI have been treated as patron organizations in the case of industrial capital machinery import.

n)      Maximum  customs duty has been reduced from  45% to 42.5%  (now- from 42 .5% to 40%) :Nominal tariff rate has been  reduced to 20.3%, 1991/92-57.5%):

• o)      Import under L/C must be irrevocable. But in case of perishable items like food from $5.000 transported by road L/C is not required :

p)      Import through LCA form without opening of any L/C: Books Magazines Publications (on the basis of sight draft/Nuisance bill):

q)      Industrial raw materials and capital goods can be imported without opening L/C :

r)       Government sector bodies can be import without any license permit and   IRC:

s)       Special import facility for non –resident Bangladeshi scientists, doctors , engineers etc. to import instruments and appliances without any permission:

t)     Facility of imports for exports –oriented industries by govt, foreign exchange rate

u)    L/C on imports of capital machinery and spare parts for new industrial units can be opened without IRC (Import Registration Certificate).

v)    Commercial import by cash payment only.

Import Restrictions:

i.        In the schedule- 1 there is a list of banned items which cannot be imported:

ii.        In the schedule -2 there is a list of restricted items, which import is subject to fulfillment of certain conditions.

Imports of goods into Bangladesh are regulated by the Ministry of Commerce and Industry in terms of the Import and Export (Control) Act, 1950, with import policy orders issued by annually, and Public Notices issued from time to time by the office of the Chief Controller of Import and Export (CCI & E).

Imports are purchase of foreign goods and services by consumers, firms and Government in Bangladesh. There are some requirements those have to be fulfilled by the importer are as follows:

 The Importer must obtain Import Registration Certificate (IRC) from the CCI & E by submitting the following papers:

• Up to date Trade License
• Nationality Certificate
• Tax Identification Number (TIN)
• In case of a company, Memorandum & Articles of Association And Certificate of Incorporation
• In case of Partnership concern, Partnership Deed duly registered
• Bank Solvency Certificate
• Photograph of the Importer
• Membership certificate from a valid Trade Association

 The importer has to contact with the seller outside the country to obtain the Pro-forma Invoice.

Usually an indenter, local agent of the seller or foreign agent of the buyer makes this communication. Other sources are:-

• Trade fair
• Chamber of commerce
• Foreign missions in Bangladesh
• Journals etc.

      After that the importer accepts the Pro-forma Invoice he makes a purchase contract with the exporter detailing the terms and conditions of the import.

      After making the purchase contract with the seller the importer goes to an AD (Authorized Dealer) branch of a bank to open L/C which is the main means of payment in Bangladesh. The other means are Cash in Advance, Open Account, and Collection Methods. It is mentioned in the purchase contract by which payment procedure has to be applied.

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

a) Cash in advance:

Importer pays full, partial or progressive payment by a foreign DD, MT or TT. After receiving payment, exporter will send the goods and the transport receipt to the importer. Importer will take delivery from the transport company.

b) Open account: 

Exporter ships the goods and sends transport receipt to the importer. Importer will take delivery and makes payment by foreign DD, MT at some specified date.

c) Collection methods:

Collection methods are either clean collection or documentary collection.

Again, documentary collection may be document against payment or document against acceptant collection may be document against payment or another is direct collection in which the exporter obtains his bank’s renumbered direct collection letter.

The procedure of collection methods:

The exporter ships the goods and draws a draft/bill on the buyer. The exporter submits the draft/bill (only or with documents) to the remitting bank for collection and the bank acknowledges it.

The remitting bank sends the draft/ bill (with or without documents) and a collection instruction letter to the collecting bank.

Acting as an agent of the remitting bank, the collecting bank notifies the importer upon receipt of the draft. The title of goods released to the importer upon full payment or acceptance of the draft/bill.

d) Letter of credit:

Letter of the credit is the well accepted and most commonly used means of payment. It is an undertaking for payment by the issuing bank to the beneficiary, upon submission of some stipulated documents and fulfilling the terms the conditions mentioned in the letter of credit.

• Importer Registration Certificate.
• Trade License.
• IMP Form.
• Letter of Credit Authorization (LCA form)
• Pro-forma Invoice/ Indent/ Contract/ Purchase Order.
• Credit report of the importer.
• Credit report of the seller should be collected from correspondent bank.
• In case of F.O.B. C &F, insurance cover note.
• In case of quota item, quota allocation paper.

Then,

• Bank serves its L/C application form-affixing stamp, which acts as the contract between the importer and the opening bank.
• Importer submits the L/C application form along with Pro-forma Invoice/ Indent, IMP, LCA Form duly signed.
• Bank realizes necessary margin and other charges from the importer at the time of opening of L/C.
• Bank will verify the marketability of the goods to be imported
• Necessary charge documents to be obtained from the importer duly signed.

At the time opening of L/C PBL creates the following Dr. / Cr. Vouchers:

Margin A/C

L/C opening commission

Vat on Commission

SWIFT Charge

D.H.C

Stamp in Hand

Miscellaneous EarningsDr.

Cr

Cr

Cr

Cr

Cr

Cr

Cr

There are usually two banks involves in a documentary credit operation. The issuing bank and the advising bank which is usually a bank in the seller’s country. The issuing bank asks another bank to advise or confirm the credit.

PBL also passed the liability vouchers:

Banker’s Liability A/CDr.

Cr.

If the advising bank is simply ‘advising the credit’, it will mention that when it forwards the credit to seller, such a bank is under no commitment or obligation to pay the seller.

If the advising bank is also ‘confirming the credit’, this mention that the confirming bank, regardless of any other consideration, must pay accept or negotiate without recourse to seller. Then the bank is called confirming bank also.

On receipt of the L/C from the advising bank the beneficiary/ exporter checks the contents of the same. If it agrees with the terms of contract made with the buyer, the seller processes to shipment of goods. The presentation of documents take place after the shipment of goods has been made.

The exporter submits documents to the bank in complete form and in compliance with the credit terms. The exporter’s bank examines the submitted documents and if the documents meet the requirement of the credit, they negotiate the documents and give value to the exporter as per terms of the credit. The negotiating bank then sends the documents to the issuing bank.

      Lodgment of Import Bills:

After receipt of shipping documents, the issuing bank must examine all documents stipulated in the Credit with reasonable care, to ascertain whether or not they appear, on their face, to be in compliance with the terms and conditions of the Credit. If any discrepancy detected in the documents then the issuing bank will inform the negotiating bank within 7 working days on receipt of import documents as per UCPDC.

After completion of examination of documents and if the same satisfy the requirement of the Credit steps are taken to lodge the import documents in PAD (Pay Against Documents) Accounts.

Documents now are to be stamped with PAD number and entered in PAD register. Relative LCAF is to be endorsed showing the utilization of credit amount. The utilized amount also to be noted in the LC or on the printed format of the LC file IMP forms are signed by the importer are to be filled in at the time of lodgment.

Clean import documents should be lodged within 24 hours on receipt of the same.

      Retirement of Import Bills:

On the day of lodgment of import documents, the importer is to be intimated with full particulars of shipment and also is to be advised for retirement of the same against payment. On intimation the importer requesting retirement of the shipping documents against payment to the debit of their account by the bill amount and other charges payable. Bank then prepares cost memo (in printed form) on account of the customer giving detailed head of charges payable as under:

It is reasonable to calculate interest on PAD from the date of negotiation to date of retirement after deducting margin amount from the bill value

After retirement, documents along with custom copy of LCAF are to be delivered to the importer giving following endorsement:

(a) Draft/Bill of Exchange is to be endorsed stating “Received Payment.

(b) The Invoice value is to be certified.

(c) The Bill of Lading is to be endorsed in favor of importer for taking delivery of goods  stating

“Please deliver to order of

       M/S……………………”

The Letter of Transmittal Ensure:

• That it is addressed to the bank
• That it has a current date
• That it relates to the Documentary Credit number referenced
• Tat the document enumerated are attached
• That the value of the documents and the value mentioned in the cover letter are the same.
• That the bank (if any) remitting documents is acting a Paying, Accounting, Negotiating, or Remitting Bank.
• That the payment instructions are clear and understood
• Whether any discrepancy (ies) has been noted and whether payment, acceptance, or negotiating was effected against an indemnity or under reserve.

The Documentary Credit Ensure:

• That it is the correct referenced Documentary Credit.
• That it is still valid not expired/ cancelled).
• That the available balance in the Documentary Credit is sufficient to cover the value of the drawing.
• That the documents required by the Documentary Credit are presented.

The Draft Ensure:

• That the Draft bears the correct Documentary Credit reference number.
• That it has a current date.
• That the signature and/or the name of the Drawer correspond with the name of the Beneficiary.
• That it is drawn on the correct Drawer.
• That the amount in figures and in words is corresponding.
• That the tenor is as required by the Documentary Credit.
• That there are no restricted endorsement
• That the amount drawn for does not exceed the balance available in the Documentary Credit.
• That the value of the draft and the invoices corresponds.

The invoice, ensure:

• That it is issued by the Beneficiary of the Documentary Credit.
• That the Applicant (the buyer) is indicated as the invoiced party, unless otherwise stated in the Documentary Credit.
• That it is not titled “pro-forma” or “provisional” invoice.
• That the description of the goods corresponds with the merchandise description in the Documentary Credit.
• That no additional detrimental description of the goods appears that may question their condition or value.
• That the details of the goods, prices and terms as mentioned in the Documentary Credit are included in the invoice.
• That any other information supplied in the invoice, such as marks, numbers, transportation information, etc. it is consistent with that of the other documents.
• That the currency of the invoice is the same as that of the Documentary Credit.
• That the value of the invoice corresponds with that of the draft.
• That the value or the invoice does not exceed the available balance of the Documentary credit.
• That the invoice covers the complete shipment as required by the Documentary Credit (if no part shipments are allowed)
• That if required by the Documentary Credit the invoice is signed, notarized, legalized, certified, etc.
• That the correct number of original (s) and copy (ies) is presented.

Transport documents Ensure:

• That the full set of originals issued is presented.
• That it is not a “charter party” transport documents, unless authorized in the Documentary Credit.
• That the name of the consignee is as required in the Documentary Credit.
• That the name of the shipper or his agent.
• That the name and address, if any, of the notifying party is as required in the Documentary Credit.
• That the description of the goods generally corresponds to the description of the goods as stated in the Documentary Credit, and that the marks and numbers as well as other specifications, if any, are identical to those appearing on the other documents.
• That the indication of freight prepaid or freight collects costs, as required by the terms of the Documentary Credit, appears on it.
• That there is no clauses on the transport document that may render it “foul” or “unclean”.

Insurance document Ensure:

• That the policy/certificate/declaration/cover note, as required by the Documentary credit, is presented.
• That the full set of the insurance document issued is presented.
• That the date of issuance or date from which cover is effective at the latest from the date of loading on board or dispatch or taking in charge of the goods, as the case may be.
• That the value of the goods insured is as required by the Documentary Credit.
• That it is issued in the same currency as the Documentary Credit, unless otherwise allowed in the Documentary Credit.
• That the goods description corresponds with that of the invoice.
• That it covers the merchandise from the designated port of embarkation or point of taking in charge to port of discharge or port of delivery.
• That it covers the specified risks as stated in the Documentary Credit and that the risks are clearly defined.
• That the marks and numbers, etc. correspond with those of the transport document.
• That all other information appearing on the document is consistent with that of the other documents.

Certificate of origin Ensure:

• That it is a unique document and not combined with any other document.
• That it is signed notarized, legalized, visited as required by the Documentary Credit.
• That the data on it is consistent with that of the other documents.
• That the country of origin is specified, and that is meets the requirements of the Documentary Credit.

Inspection certificate Ensure:

• That the inspection firm nominated in the Documentary Credit, if any, issued the certificate.
• That it is signed.
• That the certificate complies with the inspection requirements of the Documentary Credit.
• That it contains no detrimental statement as to the goods, specifications, quality, packaging, etc. unless authorized by the Documentary Credit.

 Export Segment:

International trade is essential for the prosperity of the trading nations, because:

i)                    Every country lacks some vital resources that it can get only by trading with others;

ii)                  Each country’s climate, labor force, and other endowments make it a relatively efficient producer of some goods and an inefficient producer of other goods; and

iii)                Specialization permits larger outputs and can therefore offer economies of large-scale production.

Creation of wealth in any country depends on the expansion of production and increasing participation in international trade. By increasing production in the export sector we can improve the employment level of such a highly populated country like Bangladesh.

Employment generation-Income-Savings-Investment-Increasing Production-Growth- Economic Development.

Structural weaknesses of export sector of Bangladesh: 

1. Commodity concentration: very few commodities are occupying major share of our export (only five export items-RMG, Knitwear, Jute and Jute goods, Frozen food, Leather provide more than 90% of export earnings of Bangladesh).
2. Geographical concentration: the periphery of our export market is very narrow (more than 80% of exports of Bangladesh-to USA and EEC countries).

Since the beginning of the 80-s Bangladesh is following an export-led growth strategy.

A. Export: Flow of goods and services produced within Bangladesh, but purchased by economic agents (individuals, firms, governments) of other countries.

Export policies formulated by the Ministry of Commerce, Govt. Of Bangladesh provide the overall guideline and incentives for promotion of exports in Bangladesh. Export policies also set out commodity-wise annual target.

It has been decided to formulate these policies to cover a five-year period to make them contemporaneous with the five-year plans and to provide continuity to the policy regime.

The export-oriented private sector, through their representative bodies and chambers are consulted in the formulation of export policies and are also represented in the various export promotion bodies set up by the government.

Export Incentives:

A. Financial incentives:

1. Convertibility of Taka in current account (from March 26, 1994);
2. Exporters can deposit 40% of FOB value of their export earnings in own accounts in dollar and pound sterling (jute, jute goods, leather, shrimp) (excluding RMG, petrochemicals, electronics goods with high import intensity, in those cases 7.5%);
3. Expansion of export credit period from 180 days to 270 days;
4. Insurance premium rebate for non-traditional exports (CIF);
5. 50% tax rebate on export earnings;
6. Duty draw back facilities;
7. Bonded warehouse facilities to 100% export oriented firms;
8. Duty free import of capital equipment for 100% export oriented firms;
9. Cash incentive for RMG using local fabrics, 10%- for jute goods, vegetables, fruits, 10%- for quilt, fresh and artificial flower, 10% – for 100% export-oriented leather goods firms instead of bonded ware house and duty draw back facilities.

 General Incentives: 

1.  Special rebate in air freight for export of  perishable agricultural products and products under crash program (toys, luggage, electronics and leather goods, jewelry, silk fabric, artificial flowers and orchid, gift items, vegetables, engineering consultancy and services);
2.  Training course on external trade;
3.  Arrangement of international trade fairs, commodity-based exhibitions in the country and participation in foreign trade fairs;
4. National Export Trophy to successful exporters;

Thrust Sectors: leather and leather goods, RMG, computer software, agro-processing industries.

In the Export Policy (1997-2002) there are lists of banned items and conditional export items. Banned items for export: petroleum and petroleum products (excluding naphtha, furnace oil, lubricant, and bitumen), oil seed and edible oil, wheat, arms and ammunition, radioactive materials, human skeleton, plasma of human blood, lentils, onion, frog and frog legs, raw and wet blue hides and skins etc. Conditional items for export: urea fertilizer, etc.

Regulatory/promotional organs for Exports:

1. National committee for Exports: Chairperson-Prime Minister, members-ministers of ministry of foreign affairs, finance, commerce and industries, planning, jute and textile.  Mandated to oversee and monitor the performance of the export sector.
2. Export Council: Consultative body comprising of chambers, exporters associations and institutions of public sector.
3. Export Promotion Bureau

Functions of Export (Promotion Bureau):

1. Quota allocation for export of RMG;
2. Issuance of GSP Certificate to the exporters;
3. Participation in international trade fair;
4. Arrangement of fair and exhibition both at home and abroad;
5. Arrangement of export training programs;

Export Processing Zones:  are the main vehicles of FDI inflow into Bangladesh. These are industrial estates with the necessary infrastructure facilities for the promotion of export-oriented industries and the attraction of foreign investment.

EPZS:Chittagong, Dhaka. The preparatory works of establishing EPZs in Gazipur, Mongla, Ishwardy, Tangail, Comilla, Syedpur, and Sirajganj are going on.

Under the export policy of Bangladesh the exporter has to get the valid Export Registration Certificate (ERC) from Chief Controller of Import and Export (CCI&E). The ERC is required to renew every year. The ERC number is to be incorporated on EXP forms and other papers connected with exports.

Registration of Exporters: For obtaining ERC intending Bangladeshi exporters are required to apply to the Controller/ Joint Controller/ Deputy Controller/ Assistant Controller of Imports and Exports, Dhaka/ Chittagong/ Rajshahi/ Khulna/ Mymensingh/ Sylhet/Comilla/Barisal/ Bogra/Rangpur/Dinajpur in the prescribed form along with the following documents:

1. Nationality and Assets Certificate;
2. Memorandum and Articles of Association and Certificate of Incorporation in case of Limited Company;
3. Bank Certificate;
4. Income Tax Certificate;
5. Trade License etc.

Securing the Order: After getting the ERC the exporter may proceed to secure the export order. He can do this by contacting the buyers directly or through correspondence.

In this purpose exporter can get help from:

1. Liaison Office;
2. Buyer’s Local Agent;
3. Export Promoting Organization;
4. BangladeshMission Abroad;
5. Chamber of Commerce (local & foreign);
6. Trade Fair etc.

Signing the Contract: After communicating with buyer exporter has to get contracted (writing of oral) for exporting exportable item (s) from Bangladesh detailing commodity, quantity, price, shipment, insurance and marks, inspection, arbitration etc.

Receiving the Letter of Credit: After getting contract for sale, exporter should ask the buyer for letter of Credit (L/C) clearly stating terms and conditions of export and payment.

The followings are the main points to be looked into for receiving/ collecting export proceeds by means of Documentary Credit:

1. The terms of the L/C are in conformity with those of the contract;
2. The L/C is an irrevocable one, preferably confirmed by the advising bank;
3. The L/C allows sufficient time for shipment and negotiation;
4. (Here the regulatory framework is UCPDC-500, ICC publication)

Procuring the materials: After making the deal and on having the L/C opened in his favor, the next step for the exporter is to set about the task of procuring or manufacturing the contracted merchandise.

Shipment of goods:Then the exporter should take the preparation for export arrange for delivery of goods as per L/C and Incoterms, prepare and submit shipping documents for Payment/Acceptance/ Negotiation in due time.

Documents for shipment:

1. EXP Form,
2. ERC (valid)
3. Customs Duty Certificate,
4. Shipping Instruction,
5. Transport Documents,
6. Insurance Documents
7. Invoice,
8. Other Documents,
9. Bills of Exchange (if required),
10. Certificate of Origin,
11. Inspection Certificate,
12. Quality Control Certificate,
13. G.S.P. Certificate,
14. Phyto-sanitary Certificate.

Presentation of Documents to Bank:

The beneficiary while making presentation of documents should ensure that the same are exactly as called for by the credit and not on their face inconsistent with one another; and that the documents be presented to the bank as possible and, in any case, within the validity of the credit and within the period of time specified or applicable.

The beneficiary must remember that any non-compliance with terms and conditions of the letter of credit or any irregularity in the documents will invite refusal by the bank undertaking responsibility under the credit.

Examination of Documents by Bank:

The issuing bank’s undertaking under a letter of credit to pay, accept or negotiate is conditional to the presentation of documents, which are strictly as per the terms and conditions of the credit. A careful examination of documents is, therefore the major plank on which the whole edifice of documentary credits rests.

Banks, therefore, must examine all documents stipulated in the credit with reasonable care. The word ‘reasonable care’ has not been defined in the UCP. Nonetheless there are commonly of UCPDC.

Check List for Examination of Export Documents by Banks:

1. Documents should appear on their face to be compliant with the stipulation in the documentary credit.
2. Documents are not to be inconsistent with each other.
3. Unstipulated documents should not be presented Banks should either return such papers to the presenter or pass them on without responsibility.
4. Examination of documents is completed within seven banking days following the day of receipt of documents.
5. Documents dated prior to the date of credit are acceptable, unless specifically prohibited by the credit.
6. If documents other than transport documents, insurance documents and commercial invoice are called for, the name of the issuer, and content (wording or data) are clearly specified If not, banks will accept documents as presented. Even the beneficiary himself may be the issuer.
7. Issuers of documents are not described as first class, well know, qualified, independent official, competent, local if used, any issuer other than the beneficiary will be accepted.
8. Original credit accompanies the presentation.
9. Documents must be presented within the banking hours.
10. If credit says “original documents” documents produced by reprographic, automated or computerized systems, carbon copies are acceptable if marked ad original and appear to have been signed if required.
11. Signature can be by handwriting, perforation, stamp, facsimile, symbol, or any mechanical or electronic method of authentication.
12. If credit requires copy (ies), accept documents marked as copy or not marked as original. Copy need not be signed unless specifically stipulated otherwise.
13. If multiple documents requires like “Duplicate”, “Two Fold”, “Two Copies”, only one original and rest copy (ies) is acceptable.
14. If credit requires documents to be authenticated, validated, legalized, certified etc. accept any signature, stamp or label which appears to satisfy it.

Negotiation of Export Documents:

The term ‘negotiation’ is broadly defined as “the giving of value” and can be applied to transactions of any tenor (sight or issuance).

The issuing bank must reimburse the bank, which negotiates drafts and / or documents drawn under its documentary credit. The credit may be made freely negotiable with any bank or negotiation may be restricted to a bank nominated by the issuing bank.

When the negotiating bank “gives value”, it does not receive immediate value it. Consequently, the negotiating bank deducts interest from its payment to cover the period between paying the exporter and receiving payment from the issuing bank.

Accounting Procedure for Negotiation:

If the documents are drawn strictly in compliance with the terms and conditions of the credit, bank may negotiate and pay value of the export bill to the exporter at OD Sight

Export Rate (for sight draft), issuance rate (for issuance draft) and passed the following vouchers:

FBP (FC……..Rate………Taka…….)                               Dr.

Packing Credit                                                             Cr.

            Project Loan                                                                Cr.

Agent Commission                                                      Cr.

            FBPAR (for garments)                                     Cr.

            Other Charges (id any)                                     Cr.

            Party’s Account.                                                          Cr.

Handling of Discrepant Documents:

Discrepancies are a fact of life in documentary credit operations. In two separate surveys carried out by a UK company, SITPRO (the Simpler Trade Procedures Board), during the 1980’s involving HSBC (former Midland Bank), the result showed that between 50 and 55 per cent of documents presented under Documentary Credits were rejected upon first presentation. Current worldwide publications quote a percentage rate of between 50 and 75 per cent.

It is quite evident from these figures that the exporters are still incurring extra administration costs, bank charges, loss of interest or additional interest costs and/or more importantly lost income.

By taking care with the production a presentation of documents these losses can be reduced. It is a fact that many exporters do not consult their bank where doubt exists as a consequence of which documents are rejected. 

Options for Handling Discrepant Documents.

1. Correcting the Documents:

If time permits the exporter should re-present their documents with suitable corrections or supply fresh documents to replace those that are discrepant. When altering documents they should be signed by the issuer(s) to denote the correct amendment(s).Most freight forwarders/shipping companies will arrange to call at the bank themselves to correct any problems with the transport documents rather than have them returned for alteration.

2. Telex for Permission to Pay:

The exporter requests the advising/confirming bank to telex the issuing bank for permission to pay despite the discrepancies noted. As the issuing bank will only be able to authorize such payment on the agreement of the applicant, it is usually wise for the exporter to telex the applicant direct to advise them of the situation and request to respond to their bank. The documents remain with the advising bank until payment is authorized.

3. Negotiation under Reserve:

If Credit available by negotiation, the negotiating bank may negotiate discrepant documents under reserve and send the documents to the issuing bank or any other nominated bank. Such reserve concerns only the relations between the negotiating bank and the party towards whom the reserve was made and the issuing bank or confirming bank, if any, shall not be thereby relieved from any of their obligations.

4. Send the Documents to the Issuing Bank for Settlement:

The exporter requests the sending of the document to the issuing bank on the basis that they represent a presentation under the UCP n and that the documents are not to he released to their customer without an authority to effect payment. This option can be beneficial if there is lengthy discrepancy notice it is not practicable to conduct detailed correspondence by fax or telex. The exporter should, however, remember that not only are their goods stranded in a foreign country but are his documents if he chooses this option.

5. Direct Presentation to Issuing or Confirming Bank for Settlement:

In this case, the bank gives up its rule and returns the discrepant documents to the beneficiary for direct presentation to the issuing bank or confirming bank. This option is expensive and may create a fresh set of problems for the exporter, if this bank too does not sympathies with him.

6. Payment under Indemnity:

The exporter can offer to indemnify the advising bank against the risk of non-payment of the discrepant documents. Such indemnity concerns only the relations between the bank and the party from whom the indemnity was obtained and the issuing bank or confirming bank, if any, shall not be thereby relieved from any of their obligations. This works best if the exporter has presented documents to his own banker and they have a facility allowing the issuing of indemnity of this type. Some banks will not accept indemnities at all, so this option may have limited application.

An exporter requires finance at two stages, namely –

1. Pre-shipment stage &
2. Post-shipment stage

We may classify export finance into two categories

1. Pre-shipment credit &
2. Post-shipment credit.

      Pre-shipment credit:

Pre-shipment credit, as the name suggests, is given 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. Before allowing such credit to the exporters the bank takes into consideration the credit worthiness, export performance of the exporters, together with all other necessary information required for sanctioning the credit in accordance with the existing rules and regulations. Pre-shipment credit is given for the following purposes:

1.    Cash for local procurement and meeting related expenses.
2. Procuring & processing of goods for export.
3. Packing and transporting of goods for export.
4.   Payment of Insurance Premium.
5. Inspection fees.
6. Freight charges etc.

1. Export Cash Credit (Hypothecation):

Such credit facility is allowed against pledge of exportable goods or raw materials. In this case cash credit facilities are extended against pledge of goods to be stored in go-down under bank’s control by signing letter of pledge & other pledge documents. The exporter surrenders the physical possession of the goods under Bank’s effective control as security for payment of Bank dues. In the event of failure of the exporter to honor his commitment, the bank can sell the pledge merchandise for recovery of the advance.

3. Export Cash Credit against Trust Receipt:

In this case, credit limit is sanctioned against Trust Receipt (T.R.). In this case also unlike pl the exportable goods remain in the custody of the exporter. He is required to execute a stamped export trust receipt in favor of the bank, where in a declaration is made that goods purchased with financial assistance of bank are held by him in trust for the bank. This type of credit is granted when the exporter wants to utilize the credit for processing, packing & rendering the goods in exportable condition and when it seems that exportable goods can not be taken into bank’s custody. This facility is allowed only to the first class party and collateral security is generally obtained in this case.

4. Packing Credit:

In this case credit facility are extended against security of Railway Receipt/Steamer/Receipt/Barge Receipt/Truck Receipt evidencing transportation of goods to the port for shipment of the goods in addition to the usual charge documents and lien of export letter of credit. This type of credit is sanctioned for the transitional period from dispatch of the goods till negotiation of the export documents. The drawings under Export cash credit (Hypothecation/Pledge) limit are generally adjusted by drawings in packing credit limit which is, in turn, liquidated by negotiation of export documents.

5. Back to Back Letter of Credit:

Under this arrangement the bank finances export business by opening a letter of credit on behalf of the exporter who has received a letter of credit from the overseas buyer but is not the actual manufacturer or producer of the exportable goods. The letter of credit is opened in favor of the actual producer or supplier within or outside the country. Since the second letter of credit is opened on the strength of and backed by another letter of credit it is called “Back to Back credit”. The need for a back to back credit arise because the beneficiary of the original (export) letter of credit may have to procure the goods from the actual producer who may not supply the goods unless its payment is guaranteed by the bank in the form of letter of credit collateral security before opening the letter of credit. The back to back letter of credit must conform to the terms and conditions of the original letter of credit with the following exceptions:

1.      Name of the original beneficiary shall be substituted by that of the actual supplier.

2.      The credit amount shall normally be lower than that of the original letter of credit, the differences being the amount of profit the exporter expects to earn from the deal.

3.      The back to back letter of credit shall be made valid for shipment arid negotiation prior to expiry of the corresponding date.

         Post Shipment Credit:

This type of credit refers to the credit facilities extended to the exporters by commercial banks after shipment of the goods against export documents. Necessity for such credit arises as the exporter can not afford to wait for a long time for payment to local manufacturers/suppliers. Before extending such credit, it/is necessary to obtain report on creditworthiness the exporters and financial soundness of the buyers as well as other relevant documents connected with the export in accordance with the rules and regulations in force. Banks in our country extend post-shipment credit to the exporters through:

1. Negotiation of Documents under L/C

2. Purchase of DP & DA bills

3. Advance against Export Bills surrendered for collection.

1. Negotiation of Documents under L/C:

Under this arrangement, after the goods are shipped, the exporter submits the concerned documents to the negotiating bank for negotiation. The documents should be negotiated strictly in accordance with the terms and conditions and within the period mentioned in the letter of credit.

2. Purchase of DP & DA Bills:

In such a case, the banks purchase/discount the DP (Documents against Payment) and DA (Documents against Acceptance) bills at rate published by the Exchange Rate Committee of authorized dealers. While doing so, the banks should scrutinize all the export documents separately and minutely and clear instructions are to be obtained from the drawer of the bill in regard to all important issues related to the negotiation of the bills.

3. Advance against Bills for Collection:

Banks generally accept export bills for collection of proceeds when they are not drawn under a L/C or when the documents, even though drawn against an L/C contain some discrepancies. Bills drawn under L/C, without any discrepancy in the documents, are generally negotiated by the bank and the exporter gets the money from the bank immediately. However, if the bill is not eligible for negotiation, he may obtain advance from the banks against the security of export bills. Banks may give advance ranging from 50 to 80 percent of the document’s value. In addition to the export bills, banks may ask for collateral security like a guarantee by a third party and equitable/registered mortgage of property.

Another activity of Foreign Trade- Foreign Remittance:

Foreign remittance, in simple term, means money remitted in foreign currency. Foreign Remittance represents remittances in foreign currency that are received in and made out abroad. In broader sense, Foreign Remittance is purchase and sale of freely convertible foreign currencies. Purchase of foreign currencies and bills constitute Inward foreign remittance and sale of which constitute outward foreign remittances the foreign remittance are affected either through the respective banker’s foreign branches or correspondents.

Two types of foreign remittance:

a)         Foreign Inward Remittance

b)         Foreign Outward Remittance.

Remittances of foreign currency being received in the Country from abroad are called inward foreign remittance.

Modes of Foreign Inward Remittance:

(i)         T.T. – Telegraphic Transfer

(ii)        M.T.  Mail Transfer

(iii)       D. D – Demand Draft

(iv)       T.C- Travelers cheque

Besides these, foreign Inward Remittance also includes remittances on account of export, purchase of bills, and purchase of T.C, Foreign currency notes and coins, Cheques issued on foreign banks in favor of beneficiaries in Bangladesh etc.

T.T.:

Cable or telex instructions of payment are called as Telegraphic Transfer, where a foreign bank issues a T.T in favor of some one in Bangladesh. it credits the amount, received from the remitter to the NOSTRO A/C of its correspondent bank. On receipt of the TI’ the Paying bank in Bangladesh will make payment of the proceeds of the T.’I’. in foreign currency or in equivalent Bangladeshi Taka to the beneficiary.

        M.T.

M.T. is an instrument issued by a remitting bank to the paying bank advising in writing to make payment of certain amount to specific beneficiary.

        D.D.

A Demand Draft is a negotiable Instrument issued by a hank drawn on other hank with the instruction to pay a certain amount to the beneficiary on demand.

T.C.

It is an instrument issued by the Banks/company’s payable to the purchaser on presentation.

Definition:

Foreign currency being made out abroad may be termed as foreign outward remittance. That means remittance in foreign currency that goes out abroad is called foreign outward remittance.

Modes of Foreign Outward Remittance:

(i)         T.T.

(ii)        M.T.

(iii)       D.D.

(iv)       T.C.

Authorized Dealer’s Power:

Authorized Dealers can issue foreign currency remittance in respect of the following:

(a)        Travel Quota per year:

(i) SAARC Countries:

By ROAD = US $. 500/- & BY AIR US $. 1000/-

(ii) Other than SAARC countries: US $. 3000/-

(iii) Minor will get half of the above mentioned amount.

(b)        AD. can issue US $200 for SAARC countries & US $. 250/- for other countries per dime allowance to attend seminar, conference and workshop arranged by recognized bodies.

(c)        Fore medical treatment abroad, US $. 10,000/- can be issued as expenses.

(d)        Examination fees, foreign education fee & evaluation fee for immigration at actual amount.

(e)        A.D. can remit membership fees, annual fees, registration fees of International Bodies.

(f)        AD. can remit of foreign currency required for current expenses of Foreign offices of Bangladesh Biman, Bangladesh Shipping Corp

(g)        AD. can remit consular fees of foreign Embassies, Pre-shipment Inspection fees & genuine export claims up to 10% of the proceeds realized.

(h)        AD. can remit surplus earnings of foreign Airlines, Shipping lines & courier services.

(i)         AD. can remit cost of ships bought in private sector.

Conclusion:

Foreign remittances are made out abroad by way of the above mentioned modes and may be issued by Authorized Dealers (A.D) in Bangladesh drawn on their foreign correspondents. Outward remittances may also be affected by selling T.C. & foreign currency notes by AD. to travelers.Besides these Local currency credited to Non Resident Taka account of Foreign banks or convertible Tab account constitutes outward remittance of foreign Exchange. Outward remittance also comprises remittance on account of import and private remittance on sundry items.