L/C Breakdown of Mutual Trust Bank Limited

L/C Breakdown of Mutual Trust Bank Limited

Letter of Credit breakdown means analysis on it. In this report, analysis on letter of credit of Mutual Trust Bank Limited has been described. How letter of credit work in this bank has also been described. The Mutual Trust Bank Limited is one of the popular banks which are working in Bangladesh for fourteen years. Some especial analyses have been done on letter of credit.

These are SWOT, STP and PESTLE analysis on letter of credit. This is totally a new analysis on letter of credit, where L/C is shown as a service and a marketing analysis has done on it. Some journal entries of letter of credit have also been described in this report. These journal entries include some new accounting treatment. Letter of credit is actually a mode of export and import business. Any country is very much dependent on its international trade. So in international trade letter of credit is a very important document. But for bank letter of credit is treated as service. All the employees of foreign exchange department of Mutual Trust bank try their best to improve this service. As Bangladesh is a developing country the opportunities of export import is increasing over years. But the problems are complicated bureaucracy, political unrest, corruption, high inefficiency cost, absence of autonomous regulatory bodies, erratic power supply, lack of administrative coordination, inefficient customs processing, etc faced by the exporter and importer. So, letter of credit is affected indirectly by the above mentioned problem. Although there is various problem in international trade, letter of credit is doing great effort to expand the business globally.

Introduction

“Letter of Credit” a common word mostly used in bank especially in foreign exchange department. Foreign exchange department is responsible for dealing with and managing the purchase and sell of foreign currencies and is a highly specialized business. One of the largest businesses carried out by the commercial bank is foreign trading. The bank, which provides such operation, is referred to as rending international banking operation. Mainly transactions with overseas countries are respects of import; export and foreign remittance come under the preview of foreign exchange transactions. International trade demands a flow of goods from seller to buyer and of payment from buyer to seller. In this case the bank plays a vital role to bridge between the buyer and seller.

Letter of credit is a documentary credit which is the classic form of international trade payment, especially in trade between distance partners. This method substantially reduces payment related risk for both exporter and importer.

In this report some analysis on letter of credit has been done. SWOT analysis, PESTLE analysis and STP analysis has been done on letter of credit. Some accounting treatment has been shown in this report. Mutual Trust Bank Limited has a strong foreign exchange department which works on export, import and remittance. All those work is too broad. Among all those work letter of credit is a small but very important part of foreign exchange department.

There are many modes of international trade payment. These are cash with order, cash with delivery, documentary credit, bills for collection, open account. The documentary credit method is less risky than other methods. Now this method is becoming popular day by day.

In the Mutual Trust Bank Panthapath Branch there are ten peoples are working continuously with great effort and teamwork. They develop the branch with their skill and talent day by day. There are more than 70 clients and 25 countries they are dealing with. They believe in teamwork and extreme hard work.

Objective of the Report

Broad Objective:

To get an overall idea about the Letter of Credit of Mutual Trust Bank Limited.
To relate the theoretical knowledge to the original banking process of Mutual Trust Bank Limited.

Specific Objective:

To know the marketing strategy of letter of credit service of Mutual Trust Bank Limited.
To know the procedure of letter of credit
To know the documents which are needed to open a letter of credit.
To know advantage of letter of credit
To know the risk in documentary credit method
To know the basic working system of export like issuing of EXP, balancing source tax.
To know the uses of different type of registers used for export and import.
To present my observation and suggestion to the bank.

Methodology

This report contains both primary and secondary data. The sources that have been used to gather and collect data is given below-

Primary Source

Personal interview
Observation

Secondary Sources

Annual Report of Mutual Trust Bank Limited from 2011-2012
Web site of Bangladesh Bank
Other Web sites

Overview of Mutual Trust Bank Limited

Mutual Trust Bank Limited (MTBL) is one of the leading private sector commercial banks that started its banking operation in Dhaka on 24th October 1999. It has focused on the established and emerging markets of Bangladesh. Concentrating hard on the activities of its area of specialization, MTBL has been able to achieve excellent market standard with competent customer service. The bank makes pure effort to accomplish its share in community responsibilities. By means of such measures the bank intends to grow and increase shareholders’ value. Mutual Trust Bank pledges to maximize customer satisfaction through services and build a trusting relationship with customers, which has stood in the test of time for the last 14 years.

The corporate head office is in Gulshan 1 Dhaka. The Bank has 86 branches, 14 SME Branches, 107 ATMs Booth all over Bangladesh. The bank has no overseas branch as on December 2011. It has one booth which is located at Hazrat Shahjalal International Airport, Dhaka from where the customer can exchange their money. The bank carries out international business through a Global Network of Foreign Correspondent Banks. . The total number of employees of the bank is 1200. The management of the bank is vested in 13-member board of directors. The managing director is its chief executive.

The bank conducts all types of commercial banking activities including foreign exchange business and other financial services. During the first two years of operations, the bank’s main focus was on the delivery of personalized customer services and expansion of its clientele base.

Break Down of Letter of Credit

Letter of Credit

Letter of Credit id a most recognizable word used in financial institution like banks. A letter of credit is a document issued by a financial institution, or a similar party, assuring payment to a seller of goods and provided certain documents have been presented to the bank. These are documents that prove the seller has performed the duties under an underlying contract and the goods have been supplied as agreed. Moreover through letter of credit an exporter is to be assured to get the payment if the importer is not able to pay.

Types of Letter of Credit

Import/export Letter of Credit

Commercial letter of credit can be termed as import and export LC depending on whose perspective it is being looked upon. For the importer it is termed as Import LC and for the Exporter of goods, Export LC.

Revocable Letter of Credit

Revocable letter of Credit, importer and the bank who established the LC, can be manipulated or made any kinds of corrections without informing the exporter and getting permissions from him. Now there is no more use of this type of letter of credit.

Irrevocable Letter of Credit

Any change (amendment) or cancellation of the LC (except it is expired) done by the Applicant (importer) through the issuing Bank must be authenticated by the beneficiary (exporter) of the letter of credit. Whether to accept or reject the changes depends on the exporter.

Confirmed Letter of Credit

A letter of credit is said to be confirmed when another bank give a confirmation or guarantee to honor a complying presentation at the request or authorization of the issuing bank.

Unconfirmed Letter of Credit

Unconfirmed letter of credit does not require the other bank’s confirmation.

Transferrable Letter of Credit

A Transferable Credit is the one under which the importer has the right to make the credit available to one or more subsequent beneficiaries. This means, under one letter of credit importer can buy good from more than one exporter.

A letter of credit can be transferred to the second beneficiary at the request of the first beneficiary only if it expressly states that the letter of credit is “transferable”. In this case a bank is not forced to transfer a credit.

Untransferable Letter of Credit

In untransferable letter of credit seller does not allow the buyer to buy from other sellers by opening one letter of credit. In international commerce, it is required that the credit will be untransferable.

Back to Back Letter of Credit

This is the most commonly used letter of credit by the garments exporter. This type of LC consists of two separated and different types of letter of credit. First one is established in the benefit of the seller to export the goods. For producing exported goods the manufacturer needs to buy some raw materials. In this case, the manufacturer opens another letter of credit against of master letter of credit. This type of letter of credit is known as back to back letter of credit. Back-to-back letter of credit is issued in case of intermediary trade. Intermediate companies such as trading houses are sometimes required to open letter of credit by supplier and receive export letter of credit from buyer. Bank will issue a letter of credit for the intermediary company which is secured by the export letter of credit (Master letter of credit). This letter of credit is called “Back-to-back letter of credit”.

Usance Letter of Credit

Usance letter of credit, bank did not pay to the exporter immediately after checking the valid documents. The payment is given after a certain duration which is accepted by both of the buyer and seller. In reality, seller will give an opportunity to the buyer to pay the required money after taking the related goods and selling them. The duration of this letter of credit is 90, 120, 180 days etc.

At Sight Letter of Credit

Another name of At Sight Letter of Credit is Cash LC. It is a kind of credit that the announcer bank after observing the carriage documents from the seller and checking all the documents immediately pays the required money.

Red Clause Letter of Credit

An exporter can take the pre-paid and parts of the money from the bank before sending the products through Red Clause Letter of Credit. The first part of the credit is to attract the attention acceptor bank. The terms and conditions are written by red ink, so this letter of credit is named as red clause letter of credit.

Back to Back Letter of Credit Mostly Used in MTBL

Mutual Trust Bank, Panthapath Branch mainly works for back to back letter of credit because most of the customers are garments factory of this branch.

Generally a standard, commercial letter of credit is a document issued mostly by a financial institution, used primarily in trade finance, which usually provides a permanent payment process. Back to back letter of credit issued for an exporter who is already holding an L/C in his or her favor.

Two letters of credit used together to help a seller finance the purchase of equipment or services from a subcontractor. An exporter of readymade garments needs to buy some other ingredients to make the exporting goods. In that case the exporter issue another letter of credit against of the export letter of credit (master letter of credit), is known as back to back letter of credit. Moreover it can be stated like that one letter of credit serves as the collateral for another.

Documents Required for BTB Letter of Credit

As back to back letter of credit is mostly used in Mutual Trust Bank Panthapath branch as an intern I got the opportunity to know about back to back letter of credit more than the other types of letter of credit. Letter of credit is a set of documents. Bank actually works with documents not with goods. All the documents are equally important for credit.

Documents Submitted at the Time of BTB Letter of Credit Opening

Demand promissory note – 2 copies.
L/C application – 1 copy
LCAF (Letter of Credit Authorization Form) – 6 copies (LCAF in lieu of import license)
Insurance cover note with money receipt
Request letter of opening L/C – 1 copy
Declaration of an importer – 1 copy
Authority to debit account – 1 copy
Request letter of amendment – 1 copy (needed for amendment only)
Pro- forma invoice
IMP Form (foreign Exchange regulation act. 1947) – 4 copies

Documents Submitted after BTB Letter of Credit Opening

L/C Copy- 6 copies
2 copies for advising bank- 1 for advising bank and other for exporter
2 copies to importer – 1 as officer copy and other for customs clearance
2 copies for opening bank – 1 copy as office copy and other for CCI &E
L/C forwarding letter – 1 copy
Reimbursement authorization – 3 copies

Negotiation of export documents

Negotiation stands for payment of value to the exporter against the documents fixed in the L/C. If documents are in order, MTBL purchases (negotiates) the same on the basis of banker customer relationship. This is known as Foreign Documentary Bill Purchase (FDBP).

Payment of Bill

Bank sends the documents to the L/C opening Bank for payment with a forwarding letter detailing the enclosures. Upon realization of proceeds Mutual Trust Bank pass the following vouchers.

Mutual Trust Bank Panthapath branch only purchase the local bill which is known as Inland

Documentary Bills for Purchase (IDBP). The bank has to purchase the local bills through some process. The Inland documentary bills for purchase (IDBP) is done in the following ways,-

MTBL gets L/C from other Bank.
Then MTBL officer advising the L/C to the party/Beneficiary.
Customers then present the documents for negotiation to MTBL.
MTBL officials examine the documents to confirm the terms and conditions of L/C.
The documents are then forwarded to the L/C opening bank.
The L/C issuing bank gives the acceptance and forwards an acceptance letter,
In the acceptance letter there is a maturity date when the will payment the bill.
After receiving the acceptance letter, payment is given to the customer on by purchasing the bill of Acceptance.

SWOT Analysis on Letter of Credit

SWOT Analysis

SWOT analysis is a measurement tool to identify the strength, weakness, opportunities and threats of a business or an organization. SWOT analysis can be done on place, product, person, industry etc.

Strength and weakness are the part of internal environment of the product or service.
Opportunities and threats are the external environmental part of product or service.

Strength

Guarantee of payment

Letter of credit works as a guarantee of payment. Through letter of credit issuing bank assured that the payment will be given. If the buyer failed to pay the bill the bank would pay it to the seller.

Works on behalf of buyer

Issuing bank works on behalf of buyer. Since buyer is the holder of Letter of credit, Bank acts on behalf of buyer. Opening bank remits amount only after satisfaction of all terms and conditions of letter of credit with documentary proof. This arrangement protects importer and minimize time, as bank acts on behalf of him.

Secure Payment

No payment is made until all the documents are received. Bank is responsible for documents. After checking all those documents bank made the payment.

Weakness

More expensive

Letter of credit is more expensive than other methods of payment. Compared to other payment mode of transactions, cost of operating letter of credit procedures and formalities are more, which may be an additional expenses to an importer especially on amendment, negotiation etc.

Take long time to payment

Strict compliance is required of payment. The payment is given after the shipment. So the exporter has to wait a long time for the payment.

Time Consuming

Paper work can be very time consuming. There is a lot of paper work for issuing letter of credit. This is time consuming. In foreign exchange department there many registers books. The employees should keep record of every single work on letter of credit in these registers books.

As a result they have to do a lot of paper works. They also have to keep record of letter of credit as soft copy. This all works are really very time consuming.

Opportunities

Easy way

The foreign trader might unknown to the letter of credit opener. Letter of credit makes an easier way to do business with unknown seller and buyer. Through the help of bank the local product is becoming popular in international market. All the legal formalities are done by the bank to help the local trader.

Global Expansion

Trough Letter of credit a businessman can step up to expand the business globally. For international trade exporter and importer may not know each other. In this case on the basis of letter of credit the local trader can expand their business.

Threats

Political risk

Political risks of the country hamper the shipment process. As letter of credit is a document the political instability does not hamper it directly. But for the exporter and importer it brings desolation by making the shipment of goods delay.

More emphasize on documents

One of the major disadvantages of letter of credit is that L/C is processed or operated on the basis of the documents. The bankers give more emphasize on documents not the quality of goods. So if the quality of goods is lower it will cause loss to the importer. The parties under letter of credit do not have any right to physically verify the contents of goods.

Currency fluctuation

Currency fluctuation is another disadvantage of Letter of credit. Normally buyer/importer places purchase orders once in a year and opens letter of credit accordingly. The exchange rate may differ at the time of effecting payment. So, if any loss due to fluctuations in foreign currency contracted under letter of credit, need to be beard by exporter. This is also one of the major demerits of LC.

STP Analysis

STP analysis is a process of segmentation, targeting and positioning of a product or service in the market. This is an analytical approach that helps a firm where (target market) and how (the product or service) to make market strategy.

Segmentating

Segmentation is a process of dividing the entire market into smaller groups and the needs of the consumers are same.

(a) Determine the Actual and Potential Customers

As foreign exchange department is related with banking sector it provides service to the customer. The services are issuing letter of credit, working with remittance, working with export and import business. For export and import business letter of credit is the most important document which is provide by Mutual Trust Bank, Panthapath branch as one of its services. So to provide letter of credit as a service the potential and actual customers for this bank is all the people related with export import business.

(b) Identify the Segments

The foreign exchange department of Mutual Trust Bank, Panthapath branch divided the whole market into two segments. The individual related with export import known as commercial group and companies related with export import known as industrial group.

(c) Analyzing the Intensity of the Competitor in the Market

As foreign exchange department is related with banking sector all the banks are competitors. Mr. Fazlul Haque, the foreign exchange department head of Mutual Trust Bank Panthapath branch, stated that the location of other banks, capital and reserve of foreign currency might be the intensity of other banks. But mutual trust bank consider the location of other banks authorized dealer branch as the main strength of the competitors.

(d) Selecting the Attractive Customer Segments

As it was mentioned above that the foreign exchange department of Mutual Trust Bank Panthapath branch divided the market into two groups, the commercial and the industrial groups. The commercial group has been segmented by the product they imported or exported. Commercial export and import tiles, sanitary items, color which are used in producing cloths, item of fire extinguisher, electronic goods, dry fish etc. Industrial group are also segmented by their product such as garments factory, pharmaceuticals industry, ceramic industry, jute industry, frozen food, leather goods exported companies etc.

Targeting

As Mutual Trust Bank panthapath branch is an authorized dealer branch, it works with each industry. Product like jute, pharmaceuticals, and machineries are imported and exported through letter of credit. From their two segments commercial and industrial groups they targeted two major groups.

(a) RMG Sector

This branch mainly targets the RMG sector. More than thirty garments companies are its potential client. Almost 60% of letter of credits are issued for these garments companies. Other 40% letters of credit are issued for other industrial sector pharmaceuticals, ceramics, frozen food etc. All those garments company issued export, import letter of credit. But more or less all companies open back to back letter of credit for the purpose of buying accessories; yarn, fabrics etc against of the export letter of credit.

(b) Exporter and Importer of Tiles and Sanitary Items

There are many segments in the commercial groups. As the authorized dealer branch of Mutual

Trust Bank located in Panthapath area so it has targeted its commercial group on the basis of location. As the green road, hatirpool area is popular for tiles and sanitary items the bank targeted the exporter and importer of tiles and sanitary item. So this group is major targeted group. From the commercial segment most of the letter of credit is issued of tiles and sanitary items.

Positioning

Positioning can be defined as a way the market creates an impression in the customers mind. Positioning concept means sell the benefit of a product or service to the buyer. The positioning concept focus on the emotional benefit that the buyer will feel it by using the service or product.

(a) Product Positioning Process

As the target groups of Mutual Trust Bank, Panthapath Branch, are RMG sector and Commercial of tiles and sanitary item the bank is giving some extra benefits to them. Mutual Trust Bank, Panthapath branch always state that the whole work of letter of credit is its work. This bank does all the letter of credit related work on behalf of its client.

(b) The Emotional Benefits

Emotional benefit means the feelings of a customer about the product or service of a company. The emotional benefits given to the customer by Mutual Trust Bank are given below:

Low schedule of charge

Mutual Trust bank offer low charge for issuing letter of credit. For letter of credit cancellation this bank doesn’t offer any charge where other banks charge BDT 200 -500.

Short term loans on letter of credit

MTBL give short term loan with a fixed repayment date. Bank allows this credit for buying, processing, manufacturing, packing and shipping of the goods meant for export. The bank gives this credit to exporter when he gets the foreign order. The first step is to fix a packing credit limit based on the need of the borrower and the exporter is permitted to calculate a part or whole of the amount of limit according his requirements. It gets repaid with the proceeds of the bill drawn on the foreign buyer. a packing credit advances does not normally extend beyond 180 days and has to be liquidated by negotiation or purchase of the export bills covering the particular shipment for which the packing credit was granted. The packing credit facility may be extended in form of hypothecation of goods, pledge, and export trust receipt

MITS Service (MTBL International Trade Service)

MITS (MTBL International Trade Service) a centralized service for letter of credit. This is a centralized branch for all the letter of credit of mutual trust bank. For opening a letter of credit the customer need to go head office for the confirmation for any bank. But in this bank all branches do this work on behalf of their customer. So the customers don’t need to go head office and waste their valuable time.

Discounting facilities for the client

This discounting facility on letter of credit is quite different from the discounting concept of marketing. In Mutual Trust Bank, at the time of purchasing documents this facility has been offered. If the seller of bill wants a partial payment the bank give this facility. This discounting facility especially offered for back to back letter of credit.

Case to case letter of credit

Case to case letter of credit is facility, offered by Mutual Trust Bank for the small trader. If any client wants to open letter of credit for a very small amount such as $2000, $5000 the bank is giving a very quick service for that letter of credit. In this way small trader are benefited by Mutual Trust Bank to expand their business globally.

PESTLE Analysis on Letter of Credit

PESTLE analysis is a tool used by companies to track the environment they are operating in to launch a new product or service. The expended form of PESTLE is P for Political, E for Economic, S for Social, T for Technological, L for Legal and E for Environmental. It gives a bird’s eye view of the whole environment from many different angles that one wants to check and keep a track of while thinking on a certain idea or plan.

Political

Elements of Political Factor

In political factor the tax policy, tariff and political stability are included.

Effect on Letter of Credit

As letter of credit is a set of documents the tax policy and tariff does not have that much influence. The tax policy and tariff of government affect the goods which are imported or exported.
Political instability indirectly affect the letter of credit, because of political instability the importer or exporter is not able to shipment the goods.

Economical

Elements of Economical Factor

The economic factor includes exchange rate, interest rate and economic growth.