Report On Banking System Practices In Dhaka Bank Bangladesh (Part-2)

SELECTION OF GOOD BORROWERS

Selecting a good borrower is an important job of a bank branch. As credit always inherent risk and therefore, the bank executive needs to be very careful in selecting a borrower. Principal of sound lending is not sufficient. Banks officer must take some important additional measures to select a good borrower.

For selecting a good borrower, a banker ought to make a study on borrower. That is he has to study at least borrower’s 3 C’s which refer to:

•       Character
•       Capacity
•       Capital

CHARACTER

Bank must “know the customer” before they make loans, and character is the place to start. Character refers to a combination of qualities that distinguishes one person or a group from another. To some extent, the words character and reputation overlap in meaning. Bank use the term character here to refer to a borrower’s honesty, responsibility, integrity, and consistency, from which bank can determine their willingness to repay loans. Evidence of character traits can be found in reports from credit bureaus and credit reporting agencies such as D & B. Bank can also analyze the character of the borrower in the following way:

•       Who the borrower is and the background of the borrower?
•       Reputation of the borrower in the business circles, both among his/her friends and competitors?
•       Are his/her dealings with other businessmen honest?
•       There any instances where he/she was not sincere in honoring his/her commitments?
•       Does he indulge in speculative activities?
•       What is the reputation of the borrower among his employees?

CAPACITY

Capacity means the ability to employ the funds profitably and repay the advance according to the terms and conditions of the sanction. The capacity of the borrower has to be determined and for this reason enquiries will be necessary to find out his qualifications and experience in the line in which he is working.  Banks generally require prospective borrowers to submit their financial statements or federal and state income tax statements in order to determine their credit worthiness. Here bankers will analyze his assts and liabilities and try to identify whether he is capable of repaying loan or not. Bankers have to collect information about the borrower as to:

•       What is his business and when did he start it?
•       Has he recently shifted to a new line of business?
•       Has he the required knowledge to carry on the business?
•       Is he well established in the business, what is the working result or is he still making experiments to make his business steady?
•       What is the popularity of his products in the market, compared to those of other units in the same industry?

CAPITAL

Capital denotes financial soundness. The borrower must have his own stake in the business; he must take a part of the risk in the business. This is to be done by putting his own money into the business. Whether the borrower has sufficient capital to repay the loan or not bankers must identify this properly.

Above these 3 C’s some author use the following C’s:

•   Collateral (Pledge Assets)
•   Conditions (Economic Conditions)
•   Compliance (Compliance with laws and regulations)

SELECTING A GOOD BORROWER

      Know his credit worthiness ( Through Loan Application)

In fact loan application is a questionnaire on borrower and from it; a clear picture on borrower will be received by the banker. While verifying loan application, banker has to enquire about Business experience, Bank account, Income tax statement, asset-liability statement, CIB, LRA, Banker’s opinion, credit report etc.

Bank gets “Exclusive” credit worthiness of borrower by way of verifying the following:

•       Mode of living of borrower
•       Visit to Business office
•       Visit to site of land and building (Securities)
•       Verify telephone bill.

CREDIT INFORMATION BUREAU (CIB)

The Credit Information Bureau (CIB) of Bangladesh Bank has undertaken the task of collecting, collating and storing detailed credit information from scheduled banks and other financial institutions in its proper prospective so that these can be exchanged among the schedule banks, financial institution and Bangladesh Bank for quick processing of new loan proposals and re-scheduling of existing loans. The CIB has also been supplying credit information to the Government and other national and international organizations who are engaged in the formulation of monetary, economic and credit policy.

As a matter of policy, all the schedule banks are required to submit data on quarterly basis and other financial institution on half- yearly basis on each borrower having outstanding credit facility of Tk. 1.00 lac and above to Bangladesh Bank on a specially designed form (CIB). In addition, Bangladesh Bank also collects information from the schedule banks in respect of big selected borrowers having outstanding of Tk. 1.00 crore and above on monthly basis.

Since the inception of CIB in Bangladesh Bank, various credit information are being collected, processed and distributed to the commercial banks, financial institutions, government officers and security exchange commission,. The information collected by CIB are:

•   Debtors/ Borrower’s Information
•   Owner’s Information
•   Group/Affiliations Information
•   Credit/Exposure Matrix or financial Information
•   Third Party Guarantors Information

CREDIT RISK MANAGEMENT (CRM)

BASEL-1 is a committee formed in Switzerland consisting of Central Bank representatives from leading western countries and chief executives from top corporate bodies who tried to enrich the banks’ credit risk management system. They recommend 5 sectors as core risk areas. Those are:

•       Credit risk
•       Asset liability risk/Balance sheet risk
•       Foreign exchange business risk
•       Internal control and compliance
•       Money laundering risk

Among these credit risk is the main risky area for a bank. So all the banks are recommended to among these credit risks is the main risky area for a bank. So all the banks are recommended to manage this risk robustly. To manage credit risk robustly, all banks have to strongly formulate:

      Credit policy guidelines

      Organizational structure

      Credit procedural guidelines

CREDIT RATIFICATION AUTHORITY OF DBL

Credit decisions are heart of all credit works. Generally branch manager and the credit in-charge of a branch are held responsible for appraising of a loan proposal. The customer request for credit limit and the credit officer prepares a credit memo and send it to the head office, credit division. After taking all the relevant information from the branch the head office credit division sent the credit memo to the credit committee. Credit committee of DBL is comprised of Managing Director and other top-level executives, that is, DMDs and EVPs. If credit committee is convinced about the merit of the proposal then it is sent the broad of directors. The board is final authority to approve or decline a proposal. The whole process takes a month or more.  In DBL broad meeting occurs once in every week.

CREDIT EVALUATION PRINCIPLES

Some principles or standards of lending are maintained in approving loans in order to keep credit risk to a minimum level as well as for successful banking business. The main principles of lending are given below:

LIQUIDITY

Liquidity means the availability of bank funds on short notice. The liquidity of an advance means it repayment on demand on due date or after a short notice. Therefore, the banks must have to maintain sufficient liquidity to repay its depositors and trade off between the liquidity and profitability is must.

SAFETY

Safety means the assurance of repayment of distributed loans. Bank is in business to make money but safety should never be sacrificed for profitability, to ensure the safety of loan. The borrower should be chosen carefully. He should be a person of good character & capacity as well as bank must have to maintain eligible number of security from borrower.

PROFITABILITY

Banking is a business aiming at earning a good profit. The difference between the interest received on advances and the interest paid on deposit constitutes a major portion of the bank income, besides, foreign exchange business is also highly remunerative. The bank will not enter into a transaction unless a fair return from it is assured.

INTENT

Banks sanction loans for productive purpose. No advances will be made by bank for unproductive purposes though the borrower may be free from all risks.

SECURITY

The security offered for an advance is an insurance to fall bank upon incases of need. Security serves as a safety value for an unexpected emergency. Since risk factors are involved, security coverage has to be taken before a lending.

NATIONAL INTEREST

Banking industry has significant roll to play in the economic development of a country. The bank would lend if the purpose of the advances can contribute more to the overall economic development of the country.

PRE-DISBURSHMENT COMPLAINCE

When the credit proposal are approved the credit officer must have to be ensured that the disbursement of the credit facilities must comply with the directions written in the credit policy and circular made by time to time along with checking all the following terms and conditions.

The officer of Loan Administration must collect the acceptance of the customer’s of the terms and conditions on the duplicate copy of the sanctioned advice.
They will thoroughly examine and ensure that the subject credit facility does not contradict

to any law, rules and regulation of the country, Bangladesh Bank and  Deed of the Mortgage and power of the Attorney to be drafted and executed under the Supervision of the Bank’s Legal Advisor.

Lawyers certificate to the effect that all the legal formalities (Equitable/Registered Mortgaged) has been properly created on the land and building in favor of the bank and bank has acquired the effective title of the property.

 Registered power of attorney has been collected form the borrower (contractor) assigning the work order favoring the DBL and the power of attorney has been registered with the work order given agency and they have agreed that they will issue all the cheques favoring DBL.

The legal documents of the vehicle have been obtained.

Collection of satisfaction certificate in respect of all the documents both legal and banking from the lawyer

 Entry has been made in the Safe -in  and Safe-out register and the documents are preserved.

After being satisfied all the above terms and conditions the credit in-charge will disburse the loan amount to the client.

DOCUMENTATION OF THE LOAN

Documentation is obtaining such agreement where all the terms and condition and securities are written and signed by the borrower. It specifies rights and liabilities of both the banker and the borrower. In documentation each type of advances requires a different set of documents. It also differs with the nature of securities. The documents should be stamped according to the stamp Act. There are no hard and fast rules of documentation and it varies from bank to bank. Generally, the documents are taken in the case of a secured advance by DBL:

        i.             Demand promissory note: Here the borrower promises to pay the loan as and when demand by bank to repay the loan.

      ii.            Letter of arrangement.

    iii.            Letter of continuity.

    iv.            Letter of hypothecation of goods and capital machinery.

      v.            Stock Report: This Report is used for OD and CC. In this report, information about the quality quantity of goods hypothecated is furnished.

    vi.            Memorandum of deposit of title deed of property duly signed by the owners of the property with resolution of Board of Directors of the company owning the landed.

  vii.            Personal guarantee of the owners of the property.

1. Guarantee of all the directors of the company.

    ix.            Resolution of the board of directors to borrow fund to execute documents and completes other formalities.

      x.            Form no. XVII/XIX for filling charges with the register of joint stock companies under relevant section.

    xi.            Letter of revival.

  xii.            Letter of lien for advance against FDR.

SECURITY AND ADVANCES OF DHAKA BANK LIMITED (DBL)

Security against Advances

The different types of securities that may be offered to a banker are as follows:

(a) Immovable property
(b) Movable property

i. Pratiraksha Sanchaya Patra, Bangladesh Sanchaya Patra, ICB unit certificate, wage earner development bond.

ii. Fixed Deposit Receipt

iii. Shares quoted in the Dhaka Stock Exchange and Chittagong Stock Exchange.

iv. Pledge of goods

v. Hypothecation of goods, produce and machinery

vi. Fixed assets of manufacturing unit.

vii. Shipping documents.

RELATIONSHIP BETWEEN ADVANCES WITH THE SECURITY

SECURITY

Most important function of a bank is to employ its fund by way of loans and advances to its customers. Banks strength depends considerably on the quality of its assets. Security is obtained as a lien of last defense to fall back up on. By taking security, bank acquires a claim up on the assets of the borrower if repayment is not made as planned.

Security taken by banks may be classified into two broad categories:

•       Primary security
•       Collateral security

PRIMARY SECURITY

Primary security is one which is deposited by the borrower himself and thus provides the main cover for the advance made. It can be of two types:

PERSONAL SECURITY

When personal advance is made, the borrower is personally liable to repay the advance for which he executes promissory note, accepts or endorses a bill of exchange and makes personal covenants in mortgage deed or loan agreements. It may be either primary security or secondary security.

IMPERSONAL SECURITY

It is given when a charge is created by way of hypothecation/Pledge/mortgage over the borrower’s tangible assets such as goods and commodities, fixed assets, book debts and bills receivables etc.

COLLATERAL SECURITY

A collateral security is a security belonging to and deposited by borrower himself or by a third party to secure loans and advances. Collateral security may be classified into two types. Those are:

DIRECT SECURITY

Collateral security obtained from the borrower himself to secure his own account is known as direct collateral security.

INDIRECT SECURITY

Indirect collateral security means any form of security given by a third party to secure a customer’s account. A guarantee is an indirect collateral security because it is given by one person to secure another person’s indebtedness.

MODES OF CHARGING SECURITY

A wide range of securities is offered to banks as coverage for loan. In order to make the securities available to banker, in case of default of customer, a charge should be created on the security. Creating charge means making it available as a cover for advance. The following modes of charging securities are applied in the Dhaka Bank Limited.

LIEN

A lien is right of banker to hold the debtor’s property until the debt is discharged. Bank generally retains the assets in his own custody but sometimes these goods are in the hands of third party with lien marked. When it is in the hand of third party, the third party cannot discharge it without the permission of bank. Lien gives banker the right to retain the property not the right to sell. Permission from the appropriate court is necessary. Lien can be made on moveable goods only such as raw materials, finished goods, shares debentures etc.

PLEDGE

Pledge is also like lien but here bank enjoys more right. Bank can sell the property without the intervention of any court, incase of default on loan, But for such selling proper notice must be given to the debtor. To create pledge, physical transfer of goods to the bank is must.

HYPOTHECATION

In this charge creation method physically the goods remained in the hand of debtor. But documents of title to goods are handed over to the banker. This method is also called equitable charge. Since the goods are in the hand of the borrower, bank inspects the goods regularly to judge it s quality and quantity for the maximum safety of loan.

MORTGAGE

Mortgage is transfer of interest in specific immovable property. Mortgage is created on the immovable property like land, building, plant etc. Most common type of mortgage is legal mortgage in which ownership is transferred to the bank by registration of the mortgage deed. Another method called equitable mortgage is also used in bank for creation of charge. Here mere deposit of title to goods is sufficient for creation of charge. Registration is not required. In both the cases, the mortgage property is retained in the hank of borrower.

TRUST RECEIPT

Generally goods imported or bought by bank’s financial assistance are held by bank as security. Bank may release this lien / pledge these goods against trust receipt. This means that the borrower holds goods in trust of the bank; trust receipt arrangement is needed when the borrower is going to sell these goods or process it further but borrower has no sufficient fund to pay off the bank loan. Here proceeds from any part of these goods are deposited to this bank.

CREDIT MONITORING AND REVIEW

It is the last step in credit policy and procedure framework of DBL. Credit monitoring and review is very important, because it ensures proper utilities and repayment of bank fund. Credit monitoring and review feature of DBL is concerned assessing the quality of different type of loan.

Periodic review and follow up should, inter-alia aims at ensuring:

 That conduct (turnover, regularity repayment etc) of the borrowing accounts during the period under review has been satisfactory or as expected.

The account is not having excess over limit.

The term and condition of the sanctioned letter are strictly followed.

The value of the collateral security is adequate.

There is not any unfavorable situation in market, economy and political conditions, which may endanger the reliability of the borrower account.

The analysis of borrower’s business performance and comparison of the projected and actual to find any deviations.

Apparent profitability from the loans

CREDIT RISK GRADING (CRG)

Credit Risk Grading (CRG) was an important issue in the BASEL 2 Committee. This is a uniform measurement tool for assessing potential risk involved in lending. Bangladesh Bank in 2003 issued guidelines for the commercial banks to follow those Grading System and made the CRG mandatory irrespective of loan amount other than Retail/SME/Agri/Micro Credit. CRG is in actual amended, developed and reproduced form of LRA (Lending Risk Analysis).

CRG applies in two stages

      Pre-sanction stage:  Sanctioning authority uses CRG to decide whether to lend or not, loan price, extent of exposure, appropriate credit policy, various facilities, risk mitigation tools etc.

      Post-sanction stage: To decide the depth of review or renewal, frequency of review, periodicity of grading, other pre-cautions.

CRG SYSTEM

OBJECTIVE BASIS OF CLASSIFICATION

In classifying the loan and advance there are four classes in the loan review practiced in Dhaka Bank Limited. They are as follows:

UNCLASSIFIED
The loan account is performing satisfactorily in the terms of its installments and no overdue is occurred. This type of loan and advances are fall into this class.

 SUBSTANDARD

This classification contains where irregularities have been occurred but such irregularities are temporarily in nature. To fall in this class the loan and advance has to fulfill the following factor.

Substandard

S-T Agri & Micro Credit3 months & above but less than 6 months.Continuous loan Demand LoanUn-recovered for 3 months & above but less than 6 months from the date of the loan is claimed. 

Fixed Term loanRepayable within 5years: If the overdue installment equals or exceeds the amount repayable within 6 months.Repayable more than 5years: If the overdue installment equals or exceeds the amount repayable within 12 months.

The main criteria for a substandard advance is that despite these technicalities or irregularities no loss is expected to be arise for the bank. These accounts will require close supervision by management to ensure that the situation does not deteriorate further.

DOUBTFUL

This classification contains where doubt exists on the full recovery of the loan and advance along with a loss is anticipated but can not be quantifiable at this stage. Moreover if the state of the loan accounts fall under the following criterion can be declared as doubtful loan and advance.

Doubtful

S-T Agri & Micro Credit6 months & above but less than 12 months.Continuous loan Demand LoanUn-recovered for 6 months & above but less than 12 months from the date of the loan is claimed. 

Fixed Term loanRepayable within 5years: If the overdue installment equals or exceeds the amount repayable within 12 months.Repayable more than 5years: If the overdue installment equals or exceeds the amount repayable within 18 months.

BAD AND LOSS

A particular loan and advance fall in this class when it seems that this loan and advance is not collectable or worthless even after all the security has been exhausted. In the following table the criteria to be fulfilled to fall in this category are summarized:

Bad and Loss

S-T Agri & Micro CreditNot recovered within more than 12 months.Continuous loan Demand LoanUn-recovered more than 12 months from the date of the loan is claimed. 

Fixed Term loanRepayable within 5years: If the overdue installment equals or exceeds the amount repayable within 18 months.Repayable more than 5years: If the overdue installment equals or exceeds the amount repayable within 24 months.

PROVISIONING

SPECIFIC PROVISION

Head office credit division prepares a list of credit accounts, which are considered to be totally or partially be unrecoverable & keeps a provision against the outstanding loans.
Rate of Provisioning

Dhaka Bank Limited in the time of loan provisioning to get the real picture of the income mainly follows the Bangladesh Bank guideline. The rate of provisioning used in DBL is summarized in the following table.

RATE OF PROVISION

 LENDING RISK ANALYSIS (LRA): MODERN TECHNIQUE OF CREDIT APPRAISAL

The Financial Sector Reform Project (FSRP) has designed the LRA package, which provides a systematic procedure for analyzing and quantifying the potential credit risk. Bangladesh Bank has directed all commercial bank to use LRA technique for evaluating credit proposal amounting to Tk. 10 million and above. The objective of LRA is to assess the credit risk in quantifiable manner and then find out ways & means to cover the risk. However, some commercial banks employ LRA technique as a credit appraisal tool for evaluating credit proposals amounting to Tk. 5 million and above. Broadly LRA package divides the credit risk into two categories namely

Business risk
Security risk.

A detail interpretation of these risks and the procedure for evaluating the credit as follows:

BUSINESS RISK

It refers to the risk that the business falls to generate sufficient cash flow to repay the loan. Business risk is subdivided into two categories.

INDUSTRY RISK

The risk that the company fails to repay for the external reason. It is subdivide into supplies risk and sales risk.

SUPPLIES RISK

It indicates that the business suffers from external disruption to the supply of imputes. Components of supplies risk are as raw material, Labor, power, machinery, equipment, factory premises etc. Supply risk is assessed by a cost breakdown of the inputs and then assessing the risk of disruption of supplies of each item.

SALES RISK

This refers to the risk that the business suffers from external disruption of sales. Sales may be disrupted by changes to market size, increasing in competition, change in the regulation or due to the loss of single large customer. Sales risk is determined by analyzing production or marketing system, industry situation, Government policy, and competitor profile and companies strategies.

SECURITY RISK

 This sort of risk is associated with the realized value of the security, which may not cover the exposure of loan. Exposure means principal plus outstanding interest. The security risk is subdivided into two major heads i.e. security control risk and security cover risk.

SECURITY CONTROL RISK

This risk refers to the risk that the bank falls to realize the security because of bank’s control over the security offered by the borrower i.e. incomplete documents. The risk of failure to realize the security depends on the difficulty in obtaining favorable judgement and taking possession of security. For analyzing the security control risk the credit office is required to verify documentation to ensure security protection, documentation completeness, documentation integrity and proper insurance policy. He/she also conducts site visit to verify security existence. Assessment of security control risk requires analyzing the possibility of obtaining favorable judgement and analyzing the case with which the bank could take the possession and liquidate the securities.

SECURITY COVER RISK

This refers to the risk that the realized value of security is less than exposure. Security cover risk depends on speed of realization and liquidation value. For analyzing security cover risk, the official requires assessing the power of the customer to prolong the legal process and to analyze the market demand for the security For assessment of security control risk, the officials times the time that would require to liquidate the security and assess the risk and estimates the security value at liquidation and assess the risk.

Before completing the LRA form, the relationship manager collects data specially industry specific from published sources and company specific data that not usually published., by personally visiting the company. After collecting the necessary data he/ she prepares financial spreadsheet. This spreadsheet provides a quick method of assessing business trend & efficiency and helps to assess the borrower ability to pay the loan Obligation. Financial spreadsheet includes balance sheet, income statement, cash flow statement and ratios for the purpose of financial statement analysis. Through analyzing data and collected information, the concerned official completes the LRA form and all scores are transferred to the scoring matrix to find the overall risk of lending. The overall matrix provides four kinds of lending risk for decision making viz.  (I) Good (ii) Acceptable (iii) Marginal and (iv) Poor. The bank does not provide any credit request having an over all risk as “ marginal” and ” Poor” without justification. All credit application rated “Poor” shall require the approval of the Board of Directors regardless of purpose tenor or amount. Therefore bank can minimize the dangers regarding the bad loan and advances through using the LRA. 

MEANING OF FOREIGN EXCHANGE

Foreign Exchange means Foreign Currency. It is a process, which is converted one national currency into another and transferred money form one country to another. If we consider ‘Foreign Exchange’ as a subject, then it means all kind of transaction related to Foreign Currency, as well as currency instruments, such as Draft, MT, TT, TC, and Payment Order & Foreign Trade.

NECESSITY OF FOREIGN EXCHANGE

No country is self-sufficient in this world. Every one is more or less dependent on another, for goods or services. Say, Bangladesh has cheap manpower whereas Saudi Arabia has cheap petroleum. So Bangladesh is dependent on Saudi Arabia for petroleum and Saudi Arabia is dependent on Bangladesh for cheap manpower. People of one country are going to another country for Education, Medical Service etc. One-country export Agricultural commodities, another country exports Industrial products, all these transactions needs Foreign Currency & are related to Foreign Exchange.

FUNCTIONS OF FOREIGN EXCHANGE

The Bank actions as a media for the system of foreign exchange policy. For this reason, the employee who is related of the bank to foreign exchange, especially foreign business should have knowledge of these following functions:

•  Rate of exchange works.
• How the rate of exchange works.
• Forward and spot rate.
• Methods of quoting exchange rate.
• Premium and discount.
• Risk of exchange rate.
• Causes of exchange rate.
• Exchange control.
• Convertibility.
• Exchange position.
• Intervention money.
• Foreign exchange transaction.
• Foreign exchange trading.
• Export and import letter of credit.
• Non-commercial letter of credit.
• Financing of foreign trade.
•  Exchange Arithmetic

ACTIVITIES OF FOREIGN EXCHANGE

There are three kinds of Foreign Exchange transaction:

• Import
• Export
• Remittance

DEFINITION OF L/C

A Letter of Credit is a definite undertaking of the Issuing Banks, to make the payment for the import, on behalf on the importer; in other words, it is a letter of the issuing Bank to the beneficiary, undertaking to effect payment under some agreed conditions. It is an undertaking of the Issuing Bank to the Beneficiary to make payment or to accept bill of exchange. It is also an authorization of the Issuing Bank to effect payment or to negotiate bill of exchange, against stipulated documents, complying credit terms. L/C is called documentary Letter of Credit. Because the undertaking of the Issuing Bank is subject to presentation of some specified documents. The Uniform Customs and Practice of Documentary Credit (UCPDC), 600, govern International Letter of Credit

 CLASSIFICATION OF L/C

 In different considerations there are many kinds of L/Cs. Few of them are:

• Irrevocable L/C
• Revocable L/C
• Add-Confirmed L/C
• Back to Back L/C
• Revolving L/C
• Transferable L/C
• Restricted L/C
• Red Clause L/C
• Green Clause L/C
• Clean Letter of Credit
• Documentary Letter of Credit
• Straight Documentary Credit
• Irrevocable Negotiation Documentary Credit
• With recourse & Without recourse to drawers

DHAKA Bank Ltd, Bangshal Branch deals with the following L/C:

• Sight L/C
• Sight Local L/C
• Deferred Foreign L/C
• Back to Back L/C

PARTY INVOLVED WITH   L/C OPERATION

A letter of credit is issued by a bank at the request of an importer in favor of an exporter from whom he has contracted to purchases some commodity or commodities. The importer, the exporter and issuing bank are parties to the letter of credit. There are however, one or more than one banks that are involved in various capacities and various stages to play an importer role in the total operation of the credit.

The following parties are involved with L/C operation procedures:

• The Opening Bank.
• The Advising Bank.
• The Buyer and the Beneficiary.
• The Paying Bank.
• The Negotiating Bank.
• The Confirming Bank.

1.      The Opening Bank: The opening Bank is one that issues the letter of credit at the request of the buyer. By issuing a letter of credit it takes upon itself the liability to pay the bills drawn under the credit. If the drafts are negotiated by another bank, the opening bank reimburses that bank. As soon as the opening bank, issuing a letter of credit (L/C), it express its undertaking to pay the bill or bills as and when they are drawn by the beneficiary under the credit.
2.      The Advising Bank: The letter of credit is often transmitted to the beneficiary through a bank in the letters country. The bank may be a branch or a correspondent of the opening bank. The credit is some times advised to this bank by cable and is then transmitted by it to the beneficiary on its own special form. On the other occasions, the letter is sent to the bank by mail or SWIFT and forwarded by it to the exporter. The bank providing this services is known as the advising bank. The advising bank undertakes the responsibility of prompt advice of credit to the beneficiary and has to be careful in communicating all its details.
3.      The Buyer and the Beneficiary: The importer at whose request a letter of credit is issued is known as the buyer. On the strength of the contract he makes with the exporter for the purchase of some goods that the opening bank opens the letter of credit. The exporter in whose favor the credit is opened and to whom the letter of credit is addressed is known as the beneficiary. As the seller of goods he is entitled to receive payment, which he does by drawing bills under the letter of credit.
4.       The Paying Bank: The paying bank only pays the draft drawn under the credit but under takes no opening bank, by debating the letters accounts with it there is such an account or by any other measured up, between the two bankers. As soon as the beneficiary has received payment for the draft, he is out of the picture and the rest of the operation concerns only the paying bank and the opening bank.
5.      The Negotiation Bank: The negotiating ban has to be careful in scrutinize that the drafts and the documents attached there to be in conformity with the condition laid down in the L/C. Any discrepancy may result in reused on the part of the opening bank to honor the instruments is such an eventuality the negotiating bank has to look back to the beneficiary for refund of the amounts paid to him.
6.      The Confirming Bank: Sometimes an exporter stipulates that a L/C issued in his favor be confirm by a bank in his own country. The opening this country to add its confirming to the credit the bank confirming the credit is known as the confirming bank and the credit is known as confirmed credit.

DOCUMENTS REQUIRED FOR OPEN AN L/C

The importer after receiving the preformed invoice from the exporter, by applying for the issue of a documentary credit, the importer request his bank to make a promise of payment to the supplier. Obviously, the bank will only agree to this request if it can rely on reimbursement by the applicant. The applicant must therefore have adequate funds in the bank account or a credit line sufficient to cover the required amount. Banks deal in documents and not in goods. Once the bank has issued the credits its obligation to pay is conditional on the presentation of the stipulated documents with in the prescribed time limit. The importer should submit the following documents for opening L/C:

• Valid Import Registration Certificate (commercial/industrial).
• Tax Identification Number Certificate (TIN)
• VAT Registration Certificate.
• Membership Certificate of a recognized Trade Association as per IPO.
• A declaration, in triplicate, that the importer has paid income-tax or submitted income tax returns for the year preceding year.
• Pro-forma Invoice or Indent duly accepted by the importer.
• Insurance Cover Notice with money paid receipt covering value goods to the imported.
• L/C Application form duly signed by the importer.
• Letter of Credit authorization Form (LCAF) commercial or industrial as the case may be duly signed by the importer and incorporation new ITC number of at least 6 digits under the Harmonized system as given in the import Trade Control schedule 1998.
• IMP (DHAKA BANK LTD – 170) Form duly signed by the importer.

PROPOSAL OF L/C

Preparing a L/C proposal is fundamental function of a letter of credit operation. Preparing a L/C proposal a lot of information is needed. For this purpose the client should co-operate the bank. Otherwise the bank will not able to complete the proposal successfully. However, the following papers/documents are required to process L/C proposal.

Completion of A/C opening as per Bank’s form under terms and condition stipulated thereon.

• Completion of L/C agreement form as per bank’s format.
• Valid trade license.
• VAT Registration Certificate.
• TIN Certificate.
• Valid/Renewed IRC – IRC to be properly Transferred/N.O.C from previous bank.
• Membership Certificate form Chamber of Commerce.
• Undertaking bearing Exchange Fluctuation.
• Undertaking having no overdue liability with bank’s / financial institute.
• Indent/P.I having address, Tel, Fax, E-mail address of Exporter/Indenter & Importer duly to be signed by both with acceptance and mentioning actual date of delivery, shipment date, ports with terms and condition.

L/C OPERATION OF DHAKA BANK LTD

Today DHAKA BANK LTD is one of the leading and most successful Banking enterprises in the country. It plays great role in the economy of the country. By export-import business the bank play a great role to the economy of Bangladesh. DHAKA BANK LTD is one of the greatest bank in export – import business.

Foreign trade plays a vital role in the economic advancement process of a nation. So the trend of country’s foreign trade, i.e. import & export is of a great concern to the government of a country. Fluctuation in the parameters of foreign trade immediately brings about some impact on the total economy. As such the nature, trend and the volume of foreign trade are required to keep peace with the national economic needs and objective. There may be some areas where emphasis is to be given while there may be others which deserve restrictions or discouragement. Moreover the items of import & export value and volume of the same, the corresponding time period, sources

of fund far payment and receipt, all these factors are to be considered very carefully for making necessary adjustment to match with the national economic policies as well as achieve balanced economic growth through the inter policy and inter policy co-ordination.

International trade policy relates to commercial policy, which has two main components of Import policy relates to commercial policy, which has two main components of Import policy and Export policy. With a view to achieving favorable balance of payment position as well as to encouraging or well to encouraging or well regulated and need based foreign trade of the country, the government formulated the national commercial policy i.e. import and export policy for a certain period considering all the favorable & unfavorable aspects of the nation’s previous trade performance as well as the future requirement and prospects.

The main purpose of the policy is to conserve scare foreign exchange & to ensure its utilization for the import of goods and services, which have national priority. The selected persons on institutions those who have got valid Import Registration Certificate (IRC) form the Chief Controller of Import and Export (CCI & E) can import and they are known as importers.

These importers can import goods as entitled in each year as per import policy by opening letter of credit (L/C) through bank i.e. Authorized Dealer (AD). Authorized Dealer means the

Branches of commercial banks, those that are authorized by the Bangladesh Bank to deal in foreign exchange. Letter of Credit may be defined as the letter of undertaking or letter of guarantee issued by the L/C opening bank on behalf of the importer submits all the documents as mentioned in the L/C submits all the documents as mentioned in the L/C within the time schedule to his bank i.e. exporters bank.

Before opening L/C in favor of the exporter the entitlement of the importer to be registered with Bangladesh Bank. For this purpose the importer is to apply through L/C Authorization form. After filled up and signed up the appropriate column of the LCA form, the importer will submit it to Authorized Dealer who in turn forward the same to Bangladesh Bank for registration where fund is purchased from Bangladesh Bank. After registration Bangladesh Bank forward the 1^st and 2^nd copy of LCA form to the Authorized Dealer, 3^rd and 4^th copy to CCI & E and keep the 5^th copy as their office copy.

Now the importer will come to his bank with a request to open a L/C along with the following documents:

• L/C application and agreement form with adhesive stamp of Tk. 150.
• Indent / Pro-forma Invoice/ Contract- 3 copies.
• Insurance cover note with premium paid receipt.
• IMP form one set duly signed by the importer.
• Any other documents if necessary.

Authorized Dealer will scrutinize the documents and open the L/C in favor of the exporter by converting the Bangladesh Taka into foreign currency at the existing B.C selling rate of exchange. Care must be taken so that the limit of Bangladesh Taka is not exceeded in any way. The foreign currency value of the L/C must correspond the equivalent amount of Bangladesh Taka if LCA registered with Bangladesh Bank.

The Authorized Official of the Authorized Dealer will check the L/C very carefully and signed the same jointly and forward the 1^st and 2^nd copy to their foreign correspondent situated at the nearest place of the exporter. Thus Bank is known as Advising Bank. On receipt of the L/C the Advising Bank after verification of the duplicate copy at their end.

On getting the L/C the exporter prepares the goods and ship the same as per instruction of the L/C and obtain a Bill or Lading from the shipping Authority. The exporter will prepare bill of exchange, invoice and other documents as specified in the L/C and submits the same along with the original copy L/C to his bank within the time mentioned in the L/C. The Bank with whom the exporter submits the documents is known a Negotiating Bank as this negotiates the documents i.e. makes payment to the exporters.

The negotiating bank will scrutinize the documents with terms and conditions of the L/C very carefully. If every thing is in order the bank will make payment of the amount of L/C to exporter in their local currency by debiting to their own account. Subsequently the negotiating bank will claim the L/C with whom the Head Office of L/C opening bank maintained foreign currency.

This is known as Reimbursing Bank. Reimbursing Bank will make payment to the negotiating bank by debit to L/C opening bank’s head office A/C. Simultaneously the negotiating bank will forward all the documents submitted by the exporter to the L/C opening bank as per instruction of the L/C. The date of forwarding letter of negotiating bank should be date of negotiating of documents.

After taking delivery of documents from the L/C opening bank, the importer will clear the goods which has already been arrived or due to arrive from the customs authority on submission of these documents along with the custom purpose copy of LCA from.

IMPORT

Import Trade of Bangladesh is controlled under the Import & Export control Act 1950. Authorized Dealer Banks will import the goods into Bangladesh following import policy, public notice, F.E circular & other instructions from competent authorities from time to time. Goods are being imported for personal use, commercial purpose or industrial use.

IMPORT PROCEDURE

Registration of importer: In terms of the importers, Exporters and Indenters order, 1981 no person can import goods into Bangladesh unless he is registered with the Chief Controller of Import & Export from the provisions of the said order. Only commercial & industrial importer must have registration from CCI & E.

To obtain import Registration certificate (IRC), the applicant will submit the following paper/documents to the CCI & E through this nominated Bank.

• Questionnaire duly filled in & signed by applicant.
• Trade license.
• Membership certificate from chamber of commerce or any other trade Association.
• Nationality certificate.
• Income tax registration certificate.
• Partnership deed/Certificate of registration with the register of joint stock companies where applicable.

On being satisfied the CCI & E issues IRC obtaining original copy of treasury Challan for payment of registration fee.

Import Policy: At the beginning of each financial year, the Chief Controller of Imports and Exports announces the Import policy covering various aspects of imports in the coming year. The main points covered by the Import Policy are the following:

• Items eligible for imports during the shipping period.
• Items importable against – Cash foreign Exchange, Foreign aid and barter, Wages Earners Scheme.
• The Procedure for induction of new comers into the import trade.
• The procedure for imports by industrial consumers and commercial importers and for import under Wages Earners scheme.
• Procedure for formation of groups.
• The procedure for submission of application for Repeat License.
• The dates for opening Letter of Credit, and shipment and the rules for revalidation of the License/LCA and the L/C.

Licensing for Imports: Most imports into Bangladesh require a license from the licensing authority. In recent years, however, the task of licensing has increasingly been delegated to the commercial banks. Beginning from the shipping period 1983-84, the commercial banks have been entrusted with the responsibility of licensing imports in both industrial and commercial sectors. Licensing is done by the commercial banks by means of a specially designed form known as Letter of Credit Authorization or simply LCA. The following documents are required to be submitted by the importer to his banker:

• LCA form properly filled in and signed.
• LC application.
• Purchase contract in the shape of an indent or pro-forma invoice.
• Insurance cover note.
• Membership certificate from a Chamber of Commerce and Industry or registered Trade Association.
• Proof of renewal of Import Registration Certificate for the current year.

Making the purchase contract:  After being licensed, the next task for the importer is to make a contract with an overseas supplier or the letter’s local agent. The contract usually consists of a pro-forma invoice issued by the supplier or his local agent and signed by the importer in token of having accepted the contractual terms.

Amendment of Letter of Credit: Not infrequently, the letter of credit opened by a bank needs amendment either because the terms and conditions incorporated in the L/C conflict with those of the underlying contract between the buyer and the seller or the buyer and seller agree, at a later date, to vary terms keeping in view the emerging circumstances.

Scrutiny and Lodgment of Documents: On shipping the contracted goods the beneficiary sets about the task of collecting and preparing the documents stipulated in the L/C. He collects Bill of Lading etc. from the carrier company, prepares the invoice, certificate of origin, packing list, bill of exchange and so on and present these to his banker. Unless the L/C restricts negotiation through any particular bank, the bank receiving the documents from his customer would negotiate these keeping in view the terms of the L/C. After that, the negotiating bank forwards the shipping Documents to the opening bank, simultaneously realizing payment by debiting the opening bank’s account.

Verification and Lodgment of Document by the opening Bank: On receipt of the shipping documents from the negotiating bank, the L/C opening bank should carefully examine these to ensure that they confirm to the terms of the credit; in particular, the following are the main points that should be looked into:

• The documents have been negotiated within the stipulated dates.
• The amount drawn dose not exceeds the amount authorized in the credit.
• The Bill of Exchange is drawn in the manner stipulated in the credit; the amount is written in figures and words and corresponds to that of the invoice, and properly endorsed.
• The merchandise in properly invoiced in the name of the opener of the credit i.e. the buyer or the importer with full description of the merchandise indicating, where applicable, the unit price. The invoice is signed and bears Bangladesh Bank’s Registration number.
• The Bill of Lading is clean, shipped ‘on board’ showing freight prepaid and endorsed to the order of the issuing bank.
• The certificate of origin given by the supplier is in conformity with that mentioned in the credit.
• Other documents like weight list, packing list, pre-shipment inspection certificate etc. have been received and are in accordance with the terms of the credit.

PREPARATORY STEPS FOR OPENING L/C

Before opening the L/C DHAKA BANK LTD will takes the following steps:

  Applicant to be Bank’s A/C Holder: Bank will open the L/C on behalf of a person who has an account with the Bank. Unknown person will not be allowed to open L/C.

  Registered Importer: Before opening the L/C Bank must confirm that the L/C applicant is a registered importer or personal user and the IRC of the importer has been renewed for the current year.

  Permissible Item: The item to be imported must be permissible and not banned item. If the item is from conditional list the condition must fulfill to import the same.

              Market Report: Bank will verify the marketability of the item & market price of the goods. Some times the importer may misappropriate the Bank’s money through over invoicing.

  Sufficient Security or Margin: Price is some items fluctuate frequently. In case of those item Bank will be more careful to take sufficient cash margin or other security.

  Business Establishment: Bank should not open an L/C on behalf of a floating businessman. The importer must have business establishment, particularly he must have business network for marketing the item to be imported.

  Restricted Country: Goods not to be imported from Israel. Credit report of the beneficiary. In the amount of L/C in one item exceeds Tk. 500 Lac. Suppliers credit report is mandatory. Bank will collect credit report of the beneficiary through its correspondent in abroad.

Applicant of the client to open the L/C: The client will approach to open the L/C in Bank’s prescribed form duly stamped & signed along with the following paper & documents.

• Indent/Pro=forma invoice.
• Insurance cover note with money receipt.
• LCAF duly felled in & signed.
• Membership certificate from chamber of commerce/Trade Association.
• Tax payment certificate/declaration.
• IMP & TM form signed by the importer.
• Charge documents.
• IRC pass book, Trade license, Membership certificate & VAT registration certificate in case of new client.
• Export L/C in case of Back-to-Back L/C.

Permission from ministry of Commerce: If the goods to be imported under CIF (cost insurance & finance), then permission from ministry of commerce to be obtained.

Creditability of the Client: In consideration of all the above points, if Bank become satisfied regarding the client then L/C may be opened on behalf of the client. Before opening the L/C Bank will issue & authenticate a set of LCAF in the name of the importer.

IMPORTER POINTS TO PREPARE AN L/C

To prepare an L/C the Ads should take care on the following points:

L/C Number, Place & Date of issue, Date & Place of expiry, Shipment date, Presentation period, Applicant, Beneficiary, Advising Bank Account, Part-shipment & Transshipment, Availability, Port of Shipment, & Port of destination, Tenure of the Draft, Documents required, Payment, UCP, Bill of lading, Bill of Exchange, Pre-shipment Inspection, Data content, Special Conditions, Authenticity of the credit.

SCRUTINY OF IMPORT DOCUMENTS

After shipment of the goods, the exporter will submit the export documents to the negotiating Bank. Negotiating Bank will check & will send the documents to the Issuing Bank after negotiation. Upon receipt of the import documents Issuing Bank will examine the documents. Bank will decide within 7 banking days, following the day of receipt of the documents. Whether it will accept the documents or will reuse. If the Issuing Bank fail to communicate the refusal to the negotiating Bank writhing 7 days, the documents deems to be accepted.

At the time of scrutiny the following points to be checked specially:

• Scrutiny of Draft
• Whether the Draft is drawn on the Issuing Bank or not?
• Whether the amount of draft with the invoice & credit value and not over drawn.
• Scrutiny of Invoice
• Whether the description of the goods as per credit terms.
• Whether the data contain such as, HS code number, unit price, quality & quantity of the goods, LCA number, Importer & Inventor’s Registration Number, country of origin and any other information are as per credit terms.
• Custom Invoice and /or consular invoice to be presented as per credit terms.

 SCRUTINY OF TRANSPORT DOCUMENTS

            Transport documents must ensure that:

• It is presented in full set as called for the L/C. In how many number of documents are issued for mentioned.
• The date of shipment on the transport documents must not later than the date stipulated in the L/C.
• ‘Shipped on Board’ ‘Freight Prepaid’ notations must be appeared on the B/L as called for in the L/C.
• B/L must be ‘clean’ not ‘caused’.
• Transshipped B/L not to be acceptable unless allowed by the L/C.
• Stale B/L is not acceptable, if not permitted in the L/C.
• The port of shipment & destination must be as per credit terms.
• B/L must bear the name of carrying vessel and the flag.
• Carrier must sign L/C.

SCRUTINY OF PRE-SHIPMENT INSPECTION REPORT

Bank will examine and scrutinize the following:

• Whether the entire document required by the credit is submitted.
• Documents to be consistent with one another.
• Documents to be presented with in the stipulated time.
• Documents to be issued by the authorized person as stipulated in the credit.
• Documents to be examined as per credit terms & international standard Banking practice.

After examination, if the documents become discrepant. Issuing Bank will serve refusal notice to the negotiation/presenting Bank with seven banking days. The notice must stale all discrepancies and must also state whether it is holding the documents at the disposal of or is returning them to the presenter.

LODGMENT OF IMPORT DOCUMENTS

If import documents found in order, it to be made entry in the bill register and necessary voucher to be passed, putting Bill number on the documents, this process is called Lodgment of the bill. The word ‘Lodgment’ means temporary stay. Since the documents, stay at this stage for a temporary period i.e. up to retirement of the documents, the process is called Lodgment, Bank must lodge the documents immediate after receipt of the same, not exceeding 7 banking days, following the day of receipt of the documents.

PROCEDURES OF LODGMENT

• Bill register: Bank wills entry the documents in the bill register. Bill register must include date of Lodgment, Bill No., Bill of Exchange No, Amount, and Name of the Negotiation Bank, B/L no & date, merchandise, retirement date & other particulars.
• Application of rate: Foreign Currency would be converted at B.C selling rate ruling on the date of Lodgment.
• Exchange Control Form: IMP & Tm form must be filed in and signed by the importer at the time of Lodgment.
• Endorsement of LCAF: LCA form must be endorsed showing utilization of shipment.
• Noting on the File: Utilized amount showing bill no to be noted on the printed format of L/C file.

RETIREMENT  OF DOCUMENTS

Importer is to be advise on the date of lodgment of documents with full particulars of shipment to entire the documents against payment or to dispose the import documents as per pre-arrangement, if any. Subsequent reminders are also to be issued very week till retirement of the bill. Such bills will be considered and be reported as overdue if the importer fails to retire the documents with 21 days of arrival of the relative import-consignments at the port of destination.

When the importer intends to retire the documents, the branch will prepare following retirement vouchers for adjustment of PAD liabilities there against:

            Dr. Party’s A/C

            Cr. PAD A/C

            Cr. SWIFT charges

            Cr. Income A/C: Interest on PAD

Thereafter the documents may be handed over to the importer against proper acknowledgement after certification endorsement

ISSUANCE AND DISPOSAL OF LCAF

All imports transacted through the bank shall require LCA form. The LCAs are issued in sets of six (6) copies each. Of these, the one marked, “For Exchange Control Purchase” should be used for opening L/C and for effecting remittance.

• The branch should not issue blank LCAFs to their clients. The importer should himself sign the LCAF in the presence of an officer of the branch. An authorized official of the branch should put his signature with date and seal on the LCAF, evidencing verification of the importer’s signature and import entitlement as per current IPO.
• If foreign exchange is intended be bought from the Bangladesh Bank against an LCAF it has to be registered with Bangladesh Bank’s Registration Unit.
• Where no F.C fund is required from Bangladesh, LCAFs are need not to be the registered with Bangladesh Bank, the branch will send the third & fourth copies LCAF along with the copy of the L/C and amendments thereto to the area office of the CCI & E within 15 days retaining other copies with the branch.
• LCAFs issued for import of capital machinery and spares will remain valid for remittance for 18 months subsequent to the month of issuance.
• When L/Cs are opened, full particulars thereof must be endorsed on the bank of the Exchange Control copy of the LCAF under the stamp and signature of the branch.
• LCAFs can normally be utilized on CRF basis. Full LCAF value is therefore not remittable as F.O.B value goods. The branch should also give a certificate to the importers to the effect that the amounts of freight, handling charges. Etc. has been endorsed on the relative LCFA.

BACK-TO-BACK L/CS

The branch may open back to back import L/Cs against export L/Cs received by export oriented industrial units opening advise the beneficiary under the bonded warehouse systems, subject to observance of domestic value addition requirement prescribed by the NBR/Ministry of Commerce from time to time. The following instructions should be complied with while opening Back-to-Back Import L/Cs:

• The unit requesting for this facility should process valid IRC, ERC and valid bonded warehouse license.
• The branch shall hold the Master Export L/C affixing bank lien stamp thereon and be kept in safe for security purpose.
• The master export L/C should have validity period adequate to the time needed for importation of inputs, manufacture of merchandise, and shipment to consign.
• The Back-to-Back L/C value shall not exceed the admissible percentage of net FOB value of the relative mater export L/C.
• The Back to Back import L/C shall be opened on up to 180 days usance (DA) basis except in case of those opened against Export Development Fund administered by Bangladesh Bank in which case the back to back L/C will be opened on sight (DP) basis.
• Interest for the usance period shall not exceed LIBOR or the equivalent interest rate in the currency of settlement.
• All amendments of the master export L/C should be noted down carefully to rule out chances of excess obligation under the back-to-back import L/C.
• Back-to-Back L/C can either be local or foreign. Inland BTB L/Cs denominated in foreign exchange may be opened in favor of local suppliers or manufacturer under bonded warehouse system up to value limits applicable as per prescribed value additional requirement.

ACCOUNTING PROCEDURE

1. Creation of L/C liability:

Dr. Customer’s liability on BTB L/C

Cr. Banker’s liability on BTB L/C

2. Commission and other charges:

Dr. Customers A/C: Commission for 180 days + FCC+ Postal/SWIFT + Misc.

Cr. Income A/C: Commission on L/C foreign

Cr. Income A/C: Postal/SWIFT Recoveries

Cr. Income A/C: Miscellaneous earning (handling charges, stationary etc.)

Cr. Sundry deposits A/C: F.C.C.

Cr. Stamp in hand.

3. Amendment Charges:

a) If the L/C value is increased:

Dr. Customer’s liability on BTB (for increased amount)

Cr. Banker’s liability on BTB L/C; then,

Dr. Customer’s A/C: commission for increased amount + other charges

Cr. Income A/C: Postal/SWIFT Recoveries

Cr. Income A/C: Miscellaneous earning (handling charges if any)

Cr. Sundry deposits A/C: F.C.C.

b) If L/C expiry time is extended beyond 180 days:

Dr. Customer’s A/C: Commission for further one quarter

Cr. Income A/C: Commission on L/C (Foreign)

EXPORT

Export means law fully carrying out any thing from one country to another country for sale. No person can export anything from Bangladesh, unless he is registered with the CCI & E, under the registration order 1952.

LEGAL REQUIREMENTS

Although payment aspects of export are Bangladesh Bank’s concern, the Export policy Order announced by the Ministry of Commerce controls physical aspects. Bangladesh has set out elaborate procedure and laid down detailed rules and regulations concerning Export and Export payments. All exports, to which the requirement of declaration applies, must be declared on the EXP form. The branch should before certifying any export form, consider and take notice of the following:

• The intended exporter shall have valid Export registration Certificate.
• Payment for goods exporter from Bangladesh should be received through the branch in freely convertible foreign currency or in Taka form a non-resident Taka account of a bank branch or correspondent abroad.
• Commission, brokerage and other trade charge are admissible only up to a maximum of 5% the value of goods. The charges beyond 5% may be admissible subject to prior approval of the Bangladesh Bank.
• In respect of export of goods by land route or by sea, the Bill of Lading, Railway Receipts, and other documents of title to cargo should be drawn only to the order of DHAKA Bank Ltd.
• In respect of export goods by air, the Airway Bill and any other documents of title to cargo should be drawn the order of a bank in the country of import nominated by the bank.

PROCEDURE FOR OBTAINING EXPORT REGISTRATION CERTIFICATE (ERC)

For obtaining Export Registration Certificate from CCI & E the following documents are requited:

• Application for ERC.
• Nationality Certificate.
• Trade License.
• Income Tax Certificate.
• Memorandum & Articles of Association and Incorporation Certificate, in case of company.
• Bank Certificate.
• Copy of rent receipt of the Business Firm.
• Treasury Challan for payment of fees.

EXPORT L/C ADVISING

Advising Bank shall take reasonable care to check the apparent authenticity of the credit, which it advises. If the Bank elects not to advice or can not establish apparent authenticity, it must inform to the issuing Bank without delay. The Bank also may advise unauthenticated credit, informing the beneficiary that it has not been able to establish the authenticity of the credit, (UCP Article-7).

Bank will make entry of the L/C, in the L/C advising register, with its full particulars, putting separate serial number under different Issuing Bank. Subsequent amendment also to be recorded under correspondent L/C.

Bank will advise the photocopy of the L/C, keeping the original in the records, in case of L/C in SWIFT L/C advising commission to be realized accordingly.

VERIFICATION OF L/C

Upon receipt of an export L/C, Exporter will verify the L/C carefully, particularly the following points:

• Bill of Lading must not allow blank endorsement. B/L to be endorsed favoring a Bank, other than the Issuing Bank, is also risky & should avoid accepting such kinds of B/L clause. B/L must not be to the importer in abroad.
• Name & Description of the goods to be cleared 7 the item to be available and not banned by the export policy.
• Unite price to be consistent to total value of the L/C considering the quantity of the goods.
• Payment clause must be unconditional & specific.
• Required documents to be easily prepared able.
• L/C must be subject to UCPDC publication No: 500, 1993 revision or amendment there of from time to time.
• L/C to be freely negotiable.
• Place of Expiry of the credit must be in Bangladesh.

GENERAL RULES FOR EXPORT

There are some rules, which are mandatory for export of any goods from Bangladesh. The rules are as under:

• No person can export any goods from Bangladesh, unless he is duly registered as an exporter with the CCI & E.
• All export must be declared on the EXP form, which is consisting of 4 copies.
• Export must be against any of the following:

      * Export L/C

      * Firm Contract

      * Advance Payment

• Transport documents related to land route or sea and any other documents of title to cargo, should be drawn only to the order of an Authorized Dealer. The Airway bill and any other documents of title to cargo may be drawn to the order of a bank in the country of import.
• The exporter must submit ‘EXP’ to the Bank & Bank will submit the Duplicate Copy to the Bangladesh Bank with in 14 days from the date of shipment.
• Payment for goods exported should be received through an authorized dealer in freely convertible currency.
• The exporters must receive export proceeds within 4 Months.
• Overdue export bill statement to Bangladesh Bank should be submitted by the 15^th of the month, following the quarter to which it relates.
• In case of short shipment, exporter should give a notice of short shipment on the prescribed form in duplicate to the customer, who will forward a Certified Copy of the notice, to the Bangladesh Bank.

ISSUANCE OF EXP FORM

Banks will certify EXP form only after confirming the following:

• Arrangements have been made for realization of Export proceeds.
• Bonfires of the importer/consignees abroad.
• Authorized dealer of documents of title to goods has made arrangements for receipt.
• The exporter has signed the EXP.

STAGES and MECHANISM OF EXPORT

There are some stages and mechanisms are mention below:

• Exporter will make the goods ready for shipment.
• Arrangement has to be taken for inspection of the goods by the competent authority as per credit terms.
• Exporter will declare export on EXP form against export L/C firm contract/advance payment.
• Exporter have to arrange approval for export from custom authority on EXP form by submitting Export L/C, Export permission from CCI & E, Quota clearance from EPB, U.D in case of garments, invoice, packing list along with shipping bill prepared by C & F agent.
• After completion of custom formalities, shipping company will receive the goods and will issue B/L.
• Exporter will collect visa/license and certificate of origin for final documentation.
• Negotiating Bank will dispatch the documents to the issuing Bank for clearance of the goods from port of destination against payment as per credit terms.

EXPORT FINANCING

To meet up the cost of the goods to be exported, the exporter may require Bank finance. Besides, he may require finance for go down rent, freight etc. Even after shipment of the goods, exporter may require Bank finance to meet-up his current expenditure up to repatriation of the export proceeds. There are two types of export finance:

• Pre-shipment finance.
• Post shipment finance.

a) PRE-SHIPMENT FINANCE

Pre-shipment investment (PSI) is finance, allowed by a Bank to an exporter, to meet the cost up to the shipment of the goods to overseas buyer. The purpose of the investment is to purchase raw materials or finished goods or manufacturing, processing, packing and transporting the goods.

Limit of Pre-shipment Finance-

• As per existing rule Banks can extend pre-shipment facility up to 90% of export L/C value (FOB value)
• Bank will finance within the Head office sanction limit for the concerned Client.
• Other liabilities of the client with the Bank also to be considered for extending Pre-shipment facility.

b) POST SHIPMENT FINANCE

There is a time gap between export of the goods and realization of the proceeds. So exporter may require finance in that period to continue his business. So Bank may finance against export documents ensuring the following.

• Export documents comply the credit terms.
• Buyer is bonafide.
• Party’s past performance is satisfactory.
• Any other security in case of export under contract.

a)      EXPORT BILL SECURITY CHECKLIST

General:

• Late shipment
• Late presentation
• Early shipment
• L/C Expired
• L/C over-drawn
• Partial shipment or transshipment beyond L/C terms.

             Bill of exchange:

• Amount of B/E differ with Invoice
• Not drawn on L/C issuing Bank
• Not signed
• Tenor of B/E not identical with L/C
• Full set not submitted

  Invoice:

• Not issued by the beneficiary
• Not signed by the beneficiary
• Not made out in the name of the applicant
• Description, Price, Quantity, sales terms of the goods not correspond to the credit
• Not marked one fold as original
• Shipping marks differ with B/L & Packing List.

Packing List:

• Gross Wt. Net Wt. & Measurement, Number of cartons/packages differ with B/L
• No marked on as original
• No signed by the beneficiary
• Shipping marks differ with B/L

Bill of Lading/Airway Bill etc.:

• Full set of B/L not submitted
• B/L is not drawn or endorsed to the order of Dhaka Bank Limited.
• “Shipped on Board”, “Freight Prepaid” or “Freight Collect” etc. Nations are not marked on the B/L.
• Name & Address of the Notify Parties are not mentioned or differ with L/C.
• B/L not indicate the name and the capacity of the party i, e carrier or master, on whose behalf the agent is signing B/L
• Shipped on Board nation not showing name of pre-carrier vessel/intended vessel.
• Shipped on Board nation not showing port of loading and vessel name.
• Short From B/L
• Charter party B/L.
• Description of goods in B/L both agrees with that invoice, B/L & P/L
• Alteration in B/L not authenticate
• Loaded on Deck.

b) NEGOTIATION

If the documents are found in order or if the discrepancies are covered by the indemnity of the exporter or by negotiation authorization of the issuing bank, a proposal sheet for negotiation would be prepared as per bank’s format indicating the full particulars of shipment/export and discrepancies, if any. Under the signature of authorize person and should be placed to the manager for disposal instruction/sanction.

Particulars of export bills and negotiation are to be recorded in the foreign bill purchase register assigning a number to each export bill. The branch then, may make payment to the party by passing the vouchers as per calculation as shown in the negotiation proposal at O.D sight buying rate or at usance buying rate as per respective of the usance bills. The branch will realize overdue interest @ 16% per annum from all export bills after 21 days from the date of negotiation of proceeds.

c) MAILING OF EXPORT BILL

The branch shall mail export bills under a Forwarding schedule enclosing all documents as per export L/C by DHL or any other internationally reputed courier service to the issuing bank. The branch also incorporates appropriate payment instruction in the forwarding schedule mentioning number of bank’s Nostro account with bank name and address. Acknowledgement receipt of the courier service and the office copy of the export bill to be field and are dept in safe for reporting and inspection purpose.

TRANSFER OF L/CS

The branch at the request of the original beneficiary (first beneficiary) may execute transfer of L/Cs to the subsequent beneficiary (second beneficiary), for doing so, the first beneficiary must maintain an accounting relationship with the branch and the branch will verify his signature on the request letter.

A letter of credit can be transferred once only if it is expressly stated, as “transferred” only on the terms and conditions specified in the original L/C with the exception of L/C amount, unit price, expiry date, presentation time of documents and shipment validity, any or all of which may be reduced or curtailed. In addition, the same of first beneficiary can be submitted for that of the applicant, but if the name of the applicant is specially required by the original L/C to appear in any documents other that the invoice, such requirement must be fulfilled.

A transferable credit can be transferred once only i.e., second beneficiary cannot transfer the L/C to any subsequent third beneficiary. However, a credit can be transferred to more that one-second beneficiary and when transfers are made in part it should be verified that the original L/C permits part shipment and the aggregate of such transfer must not exceed the original L/C.

The branch shall verify the signature of the transferor and authenticate the transfer under seal and signature of an authorized officer expressly stating that the bank does not assume any responsibility/obligation in this behalf. The branch shall check the apparent authenticity of the L/Cs with the L/C at their custody. Each and every transfer must be enclosed on the bank of this original L/C so as to avoid transfers of amount beyond the credit value.

FOREIGN REMITTANCE

DHAKA BANK LTD Foreign Exchange Branch has no authority to open FCA. This Branch is depended on Dhaka Main Branch. Convertibility of Taka in current account transactions symbolized a turning point in the country’s exchange management and exchange rate system. Now the operations of foreign currency accounts have been more liberalized. Funds from these A/Cs are freely remittable to any county according to the needs of A/C holder. Foreign Remittance is classified into two way-Outward Remittance and Inward Remittance

OUTWARD REMITTANCE

On March 24, 1994 Bangladesh Taka was declared convertible for current account international transaction. As a result remittance becomes more liberalized. Outward remittance include sale of Foreign Currency by T.T, M.T, Draft, T.C or in cash for private, official and commercial purpose.

PRESENT LIMIT FOR OUTWARD REMITTANCE

A) Private Remittance

1. Family Maintenance:

• Foreign nationals working in Bangladesh may remit 50% of salary and 100% of leave salary as also actual saving and admissible pension benefits for their family maintenance.
• Moderate amount of Foreign Currency for maintenance abroad of family members (spouse, children, parents) of Bangladesh nationals are allowed.

2. Member ship/Registration fees etc.: ADS are allowed to remit membership fees of foreign professional and scientific institutions and fees for application, registration, admission, examinations in connection with admission into foreign education institute, supported by demand notice letter of the concerned institution.

3. Education:  ADS may release foreign exchange favoring Bangladeshi students studying abroad or willing to proceed abroad for study according to the following drill:

• Application by the student as per prescribed formant.
• Admission letter issued by the concerned institution.
• Estimate relating to Tuition Fee, Lodging and Incidental Expenses issued by the concerned institution.
• Attested copies of Education Certificates.
• Valid passport.

4. Travel: Private travel quota entitlement of Bangladesh national is set at USD 3000 per year for visit to countries other than SARC member countries and Myanmar. Quota for SARC member countries and Myanmar is USD 1000 for travel by Air and USD 500 for travel by Overland route.

5. Health & Medical: The ADS may release up-to USD 10,000 for Medical Treatment abroad on the basis of the recommendation of the Medical Board.

6. Foreign Nationals: The ADS may issue T.C to foreign nationals without any limit & currency notes up-to USD 300 against surrender of equivalent Foreign Currency.

7. Remittance for Hajj: ADS may release F.C to the intending pilgrims as per instructions circular to be issued by the Bangladesh bank each year.

PROCEDURE OF T.C ISSUE

a)      Insure that the intending traveler is a client of the Authorized Dealer (AD) Bank or is sufficiently well known to the AD Bank.

b)      The intending travelers must come to the Bank with the following documents to have the T.C.

• Valid Passport.
• Confirmed Valid Air Ticket.

1. Verification of the Passport & Air Ticket regarding validity, Illegibility, status etc. of the same.
2. Filling up the T/M form by the purchaser and signing on that T/M.
3. Realization of required fund.

  f) Fill up the purchase Agreement Form (PAF) regarding the name, address etc.of the purchaser, T.C series no. Date of issue, amount etc, and give endorsement on the passport.

g) Be sure that purchaser signed all cheques in the upper left side of the cheque, only one person may sign any cheque.

h) Use original P.A.F. for settlement and retain duplicate for records.

i) Two sets of Photographs of Passport and Air Ticket to be obtained.

PRCEDURE OF ENCASHMENT

Travelers Cheques (T.C) to be Encashment Observing the following Formalities,

• Compare the counter signature with the original signature. Cheque will not be honored if signatures differ.
• Additional signature may be obtained if the signature differs.
• Blank cheque-should not be Encashed.
• Previously counter signed cheques not be Encashed.
• Be aware of large Encashment & take caution against hurry.
• Check the passport endorsement, purchase contract of the purchaser if available.

If the dealing Officer is satisfied regarding the genuineness of the purchaser and the T.C. then he can pay equivalent Local Currency to the customer. And record the T.C. in inward Remittance Register.

INWARD REMITTANCE

The term inward remittance includes not only purchase of Foreign Currency by TT.MT. Draft etc. but also purchase of Bills, purchase of Traveler’s Cheque. Utmost care should be taken while purchasing currency, Notes, T.C, DD, & similar instrument for protecting the Bank from probable loss as well as safety of the Bank officials concerned.

Purchase of foreign Currency Notes T.C & DD

Following General observations are required to purchase the above:

• Currency notes to be checked very carefully so as to avoid risk of purchasing counterfeit notes.
• While purchasing T.C signature of the holder to be obtained on the Travelers and should be verified with the signature of the holder given at the time of issuance of T.C passport of the seller as well as purchase contract of the T.C to be asked for to ensure genuineness.
• Draft should not be purchased unless the holder is a regular customer of the Bank. Indemnity bond to be obtained for recovering the amount paid to the holder in case of dishonor.
• Private cheque should not be purchased without prior approval of head office.
• Bangladeshi nationals working with the Foreign/International organization operation in Bangladesh if salary is paid in Foreign Currency.
• Bangladeshi nationals who are ordinarily resident in Bangladesh may open FC account will Foreign Exchange brought in at the time of their return to in Bangladesh from visit abroad.

Recommendations

As per earnest observation some suggestions for the improvement of the situation are given below:

• To attract more clients DBL has to create a new marketing strategy, which will increase the total export import business.

• Effective and efficient initiatives are necessary to recover the default loans.

• Document could be kept in the branch and until the PAD is adjusted by CPC branch can not hand over the document to client. If this procedure is accepted, certainly loss of time could be minimized. SAM ID could be provided to the concerned officer of the desk so that he/she could print the same from the branch. This will also minimize consumption of time.
• Branch management has to persuade clients to give an L/C or document requisition within a specified time so that everything could be done smoothly.
• Attractive incentive packages for the exporter will help to increase the export and accordingly it will diminish the balance of payment gap of DBL.

•  Long term training very much required for the foreign exchange officers.

• In our country financial problem is a great constrain in foreign trade. DBL is very conservative for post shipment finance. If it stays in liberal position the exporters can easily overcome their financial constrains.

• Bank can provide foreign market reports, which will enable the exporter to evaluate the demand for their products in foreign countries.

• Segregation of International Trade transaction from the existing situation i.e. Credit aspects to be looked after by credit analysis department.

• DBL can expand their export business in the frozen fish, fish, and jute sector.

• New investment sector is booming rapidly. DBL should identified those untapped areas of business and invest in those sector such as Gas plant, condensed milk project, ship breaking etc.

• It is noted that “delay in service” is one of the problems faced by the clients. Attempts should be made to straighten the banking procedure.

• Effective Management Information System must be evolved by DBL so that correct decisions may be taken at correct time at policymaking level.

• Proper communication needs to establish with clients.

• Proper incentive system should be introduced to motivate bank employees for rendering better services.

• DBL should open more ATM Booth.

• All out efforts may be in place to reduce overhead costs as minimum as possible.

• Effective and efficient initiatives are necessary to recover the default loans.

I believe these steps will be helpful to improve the performance of Dhaka Bank Limited and the financial sector of Bangladesh.

CONCLUSION

Proper financial system of a country can contribute towards the development of that country’s economy. In our country Bangladesh, banks have a leading power to its financial system. For this reason, the banks should have a potential role to make our financial system. In this arena, private commercial banks are playing a vital role in the development of our economy. But Govt. and Bangladesh Bank play a crucial role to the private commercial banks through imposition of deposit restriction, lending role and other banking operations. In recent years of banking business, Dhaka Bank Limited has shown better performance comparing with other first generation banks.

We expect the Dhaka Bank Limited may hold its prospect in future and can contribute a vital role in the socio-economic prospective.

It is a great pleasure for me to have practical exposure to Dhaka Bank limited, Bangshal Branch. Without practical knowledge, it is not possible for me to compare the academic Knowledge and practical knowledge. Since the time is very limited to learn the all the sectors of a bank. If the duration of internship can be increased, then it is possible to learn the entire banking activities mere properly.

To complete in the environment of advancing technology and faster communication the DBL should depend more heavily on the quality service and information technology. DBL should be connected through wide area network. So that all the informational and service can be accessed from any branch of the country.

No doubt about it that DBL achieved superior position in our banking industry but to cope with customer DBL should think how to make its service proactive. To compete with other Banks operation in Bangladesh, DBL should introduce easier way for faster processing of credit analyses.

As a leading bank f Bangladesh, DBL contributes in the business with promising future. I can hope so that DBL can spread their business with increasing various scheme and other utility services.

First Part of the Post

Report On Banking System Practices In Dhaka Bank Bangladesh (Part-1)