Description of foreign exchange activities/Operations
1. Opening of Letter of Credit:
Letter of Credit is an assurance of payment by the bank. It is an arrangement under which the bank at the request of the buyer or on its own undertakes to make payment to the seller provided specified documents are submitted.
Opening of L/C(import) at first importerhas to contact with the seller outside the country to obtain the pro forma invoice. Usually an indenture local agent of the seller or foreign agent of the buyer makes this communication. When the importer accepts the pro forma invoice, he/she makes a purchase contract with detailing the terms and conditions of the import. Then importers apply to the bank for opening L/C along with submission of necessary documents. To open an L/C, the requirements of an importer Bank are as follows:
- A bank account with the branch.
- Applicant has to submit IRC (Indenters Registration Certificate).
- Report on past performance with other bank. Bank collects this report from Central Bank.
- CIB (Credit Information Bureau) report from Central Bank.
- A proposal approved by the meeting of executive committee of the bank. It is necessary only when the L/C amount is small or there is no limit.
- If the L/C amount is large or there is a limit, then an approval from Central Bank is needed. Usually this approval is needed for amount more than one core
A bank also can open two types of L/Cs (Export).
a) Back-to-Back L/C
b) Export L/C
a) Back- to-back L/C:
In case of a “Back-to-Back” letter of credit, a new L/C (an import L/C) is opened on the basis of an original L/C (an export L/C). Under the “Back-to-Back” concept, the seller as the beneficiary of the first L/C offers it as a ‘security’ to the Advising Bank for the issuance of the second L/C. The beneficiary of the back-to-back L/C may be located inside or outside the original beneficiary’s country. In case of a back-to-back L/C, no cash security (no margin) is taken by the bank; bank liens the first L/C. In case of a back-to-back L/C, the drawn bill is usage/time bill. In the Bank, papers/documents required for opening of back-to-back L/C are as follows –
- Master L/C
- Valid Import Registration Certificate (IRC) and Export Registration Certificate (ERC)
- L/C Application and LCAF duly filled in and signed
- Proforma Invoice or Indent
- Insurance Cover Note with money receipt
- IMP Form duly signed.
In addition to the above documents, the following papers/documents are also required to export oriented garment industries while requesting for opening of back-to-back letter of credit –
Ø Textile Permission
Ø Valid Bonded Warehouse License
Ø Quota Allocation Letter issued by the Export Promotion Bureau (EPB) in favor of the applicant for quota items
In case the factory premises is a rented one, Letter of Disclaimer duly executed by the owner of the house/premises to be submitted. A checklist to open back-to-back L/C is as follows –
Þ Applicant is registered with CCI&E and has bonded warehouse license
Þ The master L/C has adequate validity period and has no defective clause
Þ L/C value shall not exceed the admissible percentage of net FOB value of relative Master L/C
Þ Usage Period will be up to 180 days.
Payment for back-to-back L/C
In case of back-to-back L/C for 30-60-90-120-180-360 days of maturity period, deferred payment is made. Payment is given after realizing export proceeds from the L/C Issuing Bank. For Garments Sector, the duration can be maximum 180 days. For importing machinery, without permission from Central Bank, Bank can authorize for 360 days. In such cases, the VP of the branch used to exercise his discretionary power.
Reporting to Central bank
At the end of every month, the reporting to Bangladesh Bank regarding the following information is mandatory –
Ø Filling of E-2/P-2 Schedule of S-1 category that covers the entire month’s amount of import, category of goods, currency, county etc.
Ø Filling of E-3/P-3 Schedule of for all charges, commission with T/M Form.
Ø Disposal of IMP Form that includes: (a) original IMP is forwarded to Bangladesh Bank with invoice and indent, (b) duplicate IMP is kept with the branch along with the Bill of Entry/Certified Invoice, (c) triplicate IMP is kept with the branch for office record, (d) quadruplicate is kept for submission to Bangladesh Bank in case of imports where documents are retired.
b) Export L/C:
There are a number of formalities, which an exporter has to fulfill before and after shipment of goods. These formalities or procedures are enumerated as follows:-
Obtaining Export Registration Certificate (ERC)
No exporter is allowed to export any commodity permissible for export from Bangladesh unless he is registered with Chief Controller of Imports and Exports (CCI & E) and holds valid Export Registration Certificate (ERC). After applying to the CCI&E in the prescribed from along with the necessary papers, concerned offices of the Chief Controller of Imports and Exports issues ERC.
Securing the order
After getting ERC, the exporter may proceed to secure the export order. He can do this by contracting the buyers directly through correspondence.
After having the registration, the exporter applies to the Bank with the trade license, ERC and the Certificate from the concerned Government Organization gets EXP. If the bank is satisfied, an EXP is issued to the exporter.
Signing of the contract
After communicating with buyer the exporter has to get contracted for exporting exportable items from detailing commodity, quantity, price, shipment, insurance and mark, inspection, arbitration etc.
Receiving the Letter of Credit
After getting contract for sale, exporter should ask the buyer for Letter of Credit clearly stating terms and conditions of export and payment.
After receiving L/C, the following points are to be looked for:
a. The terms of the L/C are in conformity with those of the contract.
b. The L/C is an irrevocable one, preferably confirmed by the advising bank.
c. The L/C allows sufficient time for shipment and a reasonable time for registration.
d. If the exporter wants the L/C to be transferable, divisible and advisable, he should ensure those stipulations are specially mentioned in the L/C.
Procuring the materials
After making the deal and on having the L/C opened in his favor, the next step for the exporter is to set about the task of procuring or manufacturing the contracted merchandise.
Endorsement on EXP
Before the exporters with the customs/postal authorities lodge the export forms, they should get all the copies endorsed by Bank. Before shipment, exporter submits exp. form with commercial invoice. Then Bank officer checks it properly, if satisfied, certifies the exp. without it, exporter he cannot make shipment. The customer must declare all exports goods on the EXP issued by the authorized dealers
Disposal of Export Forms
v Original: customs authority reports first copy of EXP to Bangladesh Bank after shipment of the goods.
v Duplicate: Negotiating bank reports the Duplicate to Bangladesh Bank in or after negotiation date but not later than 14 days from the date of shipment.
v Triplicate: on realization of export proceeds the same bank to the same authority reports Triplicate.
v Quadruplicate: Finally, the negotiating bank as their office copy retains Quadruplicate
Shipment of goods
Exporter makes shipment according to the terms and condition of L/C.
Presentation of export documents for negotiation
Exporter makes shipment according to the terms and condition of L/C. After shipment, exporter submits the following documents to Bank for negotiation.
a. Bill of Exchange or Draft;
b. Bill of Lading
d. Insurance Policy/Certificate
e. Certificate of origin
f. Inspection Certificate
g. Consular Invoice
h. Packing List
i. Quality Control Certificate
j. Photo – Sanitary Certificate.
Cash against Document (CAD) Contract
In lieu of export LC export can also be made against execution of contract of sale and purchase between the buyer and seller. Usually a CAD contract is made in case of exporting Jute goods.
There are some Bangladesh Jute Mills Corporation (BJMC) enlisted intermediary firms. They make CAD contract with the importer. Some intermediary firms the client of Bank. After making contract, the intermediary firm (original exporter) purchases jute from a jute mill. Then, the jute mill’s bank usually an NCB sends forwarding with the following documents to Bank.
A. Commercial invoice made by the jute mill
B. Bill of exchange drawn on exporter payable to jute mills bank (authorized that bank as “ pay to the order of Bank”)
C. Mills specification
D. EXP form – triplicate and quadruplicate on which seal and signature of authorized officer of the jute mill’s bank is given.
Along with these jute mill documents exporter presents his documents, which were required by the CAD contract. Exporter presents the documents for negotiation to Bank and request to remit the amount at which he purchased jute from jute mill to the jute mill’s bank and credit the rest to his account in Bank.
Examination of Document
Banks deal with documents only, not with commodity. As the negotiating bank is giving the value before repatriation of the export proceeds it is advisable to scrutinize and examine each and every document with great care whether any discrepancy(s) is observed in the documents. The bankers are to ascertain that the documents are strictly as per the terms of L/C Before negotiation of the export bill. Bank officers assigned for examining the export documents may use a checklist for their convenience.
2. Shipping Guarantee:
Shipping Guarantee (SG) is an indemnity given by the customer, countersigned by the Bank, to a shipping company or its agent to allow the shipping company to release the goods to the customer (consignee named in the Bill of Lading) without the presentation of the original Bill of Lading. However against the issuance of a letter of indemnity, the bank should obtain a counter indemnity signed by the importer in favor of the issuing bank whereby they assume full responsibility for any obligation the bank assume in issuing the shipping guarantee and also undertake acceptance/payment of documents/draft under the related Letter of Credit irrespective of whether those are discrepant or not. Before Issuing the Shipping Guarantee:
v Head Office approval is essential in cash where the customer has not adjusted the related import liabilities or do not have approved LTR facility limit.
v The Branch shall obtain counter indemnity from the customer in favour of the Bank.
v The customer shall submit an unconditional undertaking to accept the related shipping documents even with any discrepancies.
v The Shipping Guarantee/Letter of indemnity must be signed jointly by two authorized signatories.
3. Amendment of L/C:
Parties involved in aL/C, particularly the seller and the buyer cannot always satisfy the terms and conditions in full as expected due to some obvious and genuine reasons. In such a situation, the credit should be amended. Bank transmits the amendment by SWIFT, airmail or courier service to the advising bank. In case of revocable credit, it can be amended or cancelled by the issuing bank at any moment and without prior notice to the beneficiary. But in case of irrevocable letter of credit, it can never be amended nor cancelled without the agreement of the issuing bank, the confirming bank (if any) and the beneficiary. If the L/C is amended, amendment charge and telex charge, as per HO circular, are debited from the party’s A/C accordingly.
4. Lodgement of the Documents:
After receiving the documents from the exporters, at first Bank write it in the PAD Registrar. PAD Register contains date, PAD number, L/C number, and name of the drawer, name of the drawee, amount, and number of copies of various documents, name of the imported items. This written procedure is called Lodgement.
Bank makes the payment to the reimbursing bank against the documents. For payment, Bank deposits the money at the miscellaneous account. And sends an Inter Branch Credit Advice (IBCA) to credit the amount to a nostro account maintained in a bank of exporters’ country from which payment will be made.
5. Retirement of the Documents:
The process of collecting documents from bank by the importer is called retirement of the documents. The importer gives necessary instructions to the bank for retirement of the import bills or for the disposal of the shipping documents to clear the imported goods from the customs authority. On the due date of payments of import bills has been arisen after acceptance of the documents the exporter, the following voucher are to be prepared. If the exporter the goods within the validity of export L/C due to any reasons, the L/C issuing bank must pay the Import Bills. The importer may instruct the bank to retire the documents by debiting his current account with the bank or by creating Loan against Trust Receipt (LTR). Following steps are taken while retiring the documents –
v Calculation of interest.
v Calculation of other charges.
v Passing vouchers.
v Entry in the register.
v Endorsement in the Bill of Lading and other transport documents and in the bill of exchange.
6. Post-Import financing:
If there is no available in cash in importer’s hand, he can request the bank to grant loan against the documents for the purpose of post import finance. There is one following forms of post import finance available in Bank.
LTR (Loan against trust receipt).
On the arrival of goods and lodgement of import documents, importeer may request the bank for clearance of goods from the port (custom) and keep the same to bank godown. Propeer sanction from the cxompetent authority is to be obatained before clearance of consignment. For giving these types of loan, officer makes loan proposal and sends it to H/O for approval. After getting approval from H/O, bank grants loan in the form of LTR.
Loan against Trust Receipts (LTR):
1. Advance against a Trust Receipt obtained from the Customers are allowed to only first class tested parties when the documents covering an import shipment or other goods pledged to the Bank as security are given without payment. However, for such advances prior permission/sanction from Head Office must be obtained.
2. The customer holds the goods or their sale-proceeds in trust for the Bank, till such time, the loan allowed against the Trust Receipts is fully paid off.
3. The Trust Receipt is a document that creates the Banker’s lien on the goods and practically amounts to hypothecation of the proceeds of sale in discharge of the lien.
7. Export Letters of Credit advising:
Advising depicts the proof of authenticity of the credit to the seller/ beneficiary. The advising process consists of forwarding the original credit to the beneficiary. Before forwarding the advising bank has to verify the signature (s) of the L/C opening bank. In addition, it ensures that the terms and conditions of the L/C are not inconsistent with the existing regulations. In such a case, advising bank does not undertake any liability.
8. Negotiation of export documents:
Negotiation stands for payment of value to the exporter against the documents stipulated in the L\C. If documents are in order, Bank purchases (negotiates) the same on the basis of banker- customer relationship. This is known as Foreign Documentary Bill Purchase (FDBP). Bank purchases the bill and collects the money from the exporter. Bank will send the documents to the L/C opening Bank for payment with a forwarding letter detailing the enclosures. Upon realization of proceeds the Negotiating Bank would pass the vouchers.
If the bank is not satisfied with the documents submitted to Bank gives the exporter reasonable time to remove the discrepancies or sends the documents to L/C opening bank for collection. This is known as Foreign Documentary Bill for Collection (FDBC)
Bank forwards the documents for collection due to the following reasons:-
Ø If the documents have discrepancies.
Ø If the exporter is a new client.
Ø The banker is in doubt.
Bank check the documents forward to the issuing bank. FDBC signifies that the exporter will receive payment only when the issuing bank gives payment. Bank make regular follow-up with the L/C opening Bank in case of any delay in getting payment. The exporter submits duplicate EXP Form and Commercial Invoice. Subsequently, the value of the bill is calculated.
After passing the vouchers, an Inter Branch Exchange Trading Debit Advice is sent for debiting the NOSTRO account. An FDBC Register is maintained, where first entry is given when the documents are forwarded to the issuing bank for collection and the second one is done after realization of the proceeds.
9. Settlement of local bills:
Bank only purchase the local bill is known as Inland documentary bills for purchase (IDBP)
The Inland documentary bills for purchase (IDBP) is done in the following ways,-
- The customer submits the L/C to Bank.
- Then Bank officer advising the L/C.
- Customers then present the documents for negotiation to Bank.
- Bank official scrutinizes the documents to ensure the conformity with the terms and conditions.
- The documents are then forwarded to the L/C opening bank.
- The L/C issuing bank gives the acceptance and forwards an acceptance letter.
- In the acceptance letter there is a maturity date when they will payment the bill.
- After receiving the acceptance letter, payment is given to the customer on by purchasing the document.
An IDBP Register is maintained to record the acceptance of the issuing bank. Until the acceptance is obtained, the record is kept in a collection register.
10. Mode of payment of Export bill under L/C:
As per UCP 500, 1993 revision there are four types of credit Bank is as follows mode of payment of export bill under L/C:
a. Sight Payment Credit:
In a Sight Payment Credit, the bank pays the stipulated sum immediately against the exporter’s presentation of the documents.
b. Deferred payment Credit:
In deferred payment, the bank agrees to pay on a specified future date or event, after presentation of the export documents. No bill of exchange is involved. In Bank, payment is given to the party at the rate of D.A 60-90-120-180 as the case may be. But the Head office is paid at T.T clean rate. The difference between the two rates us the exchange trading for the branch.
c. Negotiation Credit:
In Negotiation credit, the exporter has to present a bill of exchange payable to him in addition to other documents that the bank negotiates.
d. Acceptance credit:
In acceptance credit, the exporter presents a bill of exchange payable to him and drawn at the agreed tenor (that is, on a specified future date or event) on the bank that is to accept it. The bank signs its acceptance on the bill and returns it to the exporter. The exporter can then represent it for payment on maturity. Alternatively he can discount it in order to obtain immediate payment.
11. Export financing:
Financing exports constitutes an important part of a bank’s activities. Exporters require financial services at four different stages of their export operation. During each of these phases’ exporters need different types of financial assistance depending on the nature of the export contract, Bank play a vital role in performing such jobs and help the business men to carry on their business operation the activities are:-
I. Pre-shipment credit.
II. Post-shipment credit.
Pre-shipment credit, as the name suggests, is given to finance the activities of an exporter prior to the actual shipment of the goods for export. The purpose of such credit is to meet working capital needs starting from the point of purchasing of raw materials to final shipment of goods for export to foreign country. Before allowing such credit to the exporters the bank takes into consideration about the credit worthiness, export performance of the exporters, together with all other necessary information required for sanctioning the credit in accordance with the existing rules and regulations. Pre-shipment credit is given for the following purposes:
v Cash for local procurement and meeting related expenses.
v Procuring and processing of goods for export.
v Packing and transporting of goods for export.
v Payment of insurance premium.
v Inspection fees.
v Freight charges etc.
An exporter can obtain credit facilities against lien on the irrevocable, confirmed and unrestricted export letter of credit in form of the followings:
1. Packing credit.
2. Export cash credit
3. Export cash credit against trust receipt.
4. Back to back letter of credit.
Packing Credit is essentially a short-term advance granted by a Bank to an exporter for assisting him to buy, process, manufacture, and pack and ships the goods. Generally for movement of goods from the hinterland areas to the ports of shipment the Banks provide interim facilities by way of Packing Credit. Packing credit is a given against the security of Railway receipt, Steamer receipt etc
Export cash credit (ECC):
Pre-shipment loan in the form of ECC is also allowed in a pre-agreed proportion (Up to 15% of import bill) to the amount of import bills lodged/Shipping guarantee allowed under the Back to Back L/C to enable the exporter meet related working capital requirement.
Export Cash Credit against Trust Receipt:
In this case, credit limit is sanctioned against trust receipt (TR). Here also unlike pledge, the exportable goods remain in the custody of the exporter. He is required to execute a stamped export trust receipt in favor of the bank, he holds wherein a declaration is made that goods purchased with financial assistance of bank in trust for the bank. This type of credit is granted when the exporter wants to utilize the credit for processing, packing and rendering the goods in exportable condition and when it seems that exportable goods cannot be taken into bank’s custody. This facility is allowed only to the first class party and collateral security is generally obtained in this case.
Back to back letter of credit:
Under this arrangement the Bank financed an exporter by opening a letter of credit on behalf of the exporter who has received an export letter of credit from the overseas buyer but who is not the detail manufacturers or produces of the exportable goods. The letter of credit is opened in favor of the actual producers or suppliers with or outside the country. The need for back to back credit arises because the beneficiary of the original letter of credit may have to procure the goods from the actual producer who may not supply the goods unless its payment is guaranteed by the bank in the form of a letter of credit.
Post Shipment Credit:
This type of credit refers to the credit facilities extended to the exporters by the banks after shipment of the goods against export documents. Necessity for such credit arises, as the exporter cannot afford to wait for a long time for without paying manufacturers/suppliers. Before extending such credit, it is necessary on the part of banks to look into carefully the financial soundness of exporters and buyers as well as other relevant documents connected with the export in accordance with the rules and regulations in force. Banks in our country extend post shipment credit to the exporters through:
1. Negotiation of documents under L/C;
2. Foreign Documentary Bill Purchase (FDBP):
3. Advances against Export Bills surrendered for collection
Negotiation of documents under L/C:
After the shipment of the goods in terms of L/C, the exporter presents the relative documents to the negotiating bank. The documents in the set generally include
a) bill of exchange
b) bill of lading
c) marine insurance policy
d) commercial invoice
e) certificate of origin
f) inspection certificate
g) Packing list or any other documents specified in the L/C.
When the documents are received under a letter of credit for negotiation, the negotiating bank in that case is acting as agent of the overseas who has opened and established a letter of credit and has requested the advising bank or a bank in possession of such L/C to verify the shipping documents presented and correlate them with terms and conditions laid down in the letter of credit. So, the negotiating bank should thoroughly examine L/C from the point of view of correctness and completeness in all respect in all respects of terms and credit. Every clause in the L/C should be carefully compared with the export documents to ensure that the documents comply with L/C. When the bank is satisfied that the documents satisfy the requirement of the credit, they may be negotiated and amount is paid to the exporter. The rate to be applied for payment to the customer is the bill buying rate.
Foreign Documentary Bill Purchase (FDBP):
Sometimes the client submits the bill of export to bank for collection and payment of the BTB L/C. In that case, bank purchases the bill and collects the money from the exporter. Bank subtracts the amount of bill from BTB and gives the rest amount to the client in cash or by crediting his account or by the pay order.
Advances against Export Bills surrendered for collection:
Banks generally accept bills for collection of proceeds when they are not drawn under an L/C or when the documents, even though drawn against an L/C contain some discrepancies. The bank generally negotiates bills drawn under L/C, without any discrepancy in the documents, and the exporter gets the money from the bank immediately. However, if the bill is not eligible for negotiation, the exporter may obtain advance from the bank against the security of export bill. In addition to the export bill, banks may ask for collateral security like a guarantee by a third party and equitable/registered mortgage of property.
12. Issuance of FDD:
Bank issues the Foreign Demand Draft for the charges for TOEFL, SAT, GMAT, registration fee, membership fee and also for the application or processing fee for the student who are interested to study abroad. Bank opens Student Files to issue Foreign Demand Draft following the permission of Central Bank. Before issuance of FDD, Bank asks the students to fill up the TM Form; which contains the following particulars--
o Name of the student
o Full address of the student
o Amount of FDD in Foreign Currency
o Purpose of Remittance
o Address of the Institution to which the FDD will be favored
o Country receiving payment
o Passport no. of the student with date of issue
o Signature of the student
The TM Form is sent to Central Bank with photocopies of the Passport of the student and the FDD issued.
13. Collection of FDD:
If a person has FC account with our branch and he received remittance from another bank then it is sent for collection to the branch of the bank on which it is drawn. It is sent to Bank Head office through Central bank clearing house. After receiving credit advice the vouchers are passed.
14. Open foreign currency account (FC):
All local and foreign banks in the Country, who are authorized by Central bank to deal in foreign exchange, may maintain FC (Foreign Currency) accounts in the name of the Country nationals or persons of the Country origin working and earning abroad including self-employed the Country migrants.
Bank issues exporters retention quota account and resident & non-resident foreign currency deposit account. Before opening FC account the officer checked the following thing of the prospective account holder-
I. The account holder is a Bangladeshi national.
II. He is ordinarily resident abroad.
III. He does not receive any foreign exchange from Bangladesh source.
Procedures of FC account:
a) Account can be opened on bank prescribed form by person going abroad with attested photocopy of first 7 pages of valid passport and valid visa. Wage earners living abroad may open accounts by sending the account opening form duly filled in and attested by the the Country mission abroad.
b) Photocopy of work permit.
c) Accounts may be opened in US dollar, Pound-sterling or Euro at the option of the prospective account holder desires.
d) Accounts can be operated by the account holder or any other person in Bangladesh nominated in writing by the account holder to the bank.
e) Where account is operated by nominee, letter of authority for operation by nominee is to be furnished by account holder along with three passport size photographs and specimen signature on signature card of nominee duly attested by account holder.
f) Foreign currency instruments like bank drafts, traveler’s cheques or bank notes can be deposited with the accounts. Deposits can also be made by sending remittance from abroad in the form of TT by account holders themselves. Over and above funds sent by other wage earners may be placed to the credit of such account.
g) Funds in foreign currency account are freely transferable from one foreign currency account to any other foreign currency account at the request of account holder or his nominee.
h) Eligible persons may also open such FC account even after their return but within 6 (six) months of the date of return to Bangladesh.
15. Issuance of traveler’s cheque:
First, the party will fill up the form (purchase agreement) and sign it. Again he will sign the T/M form. After that the banker will endorse the party’s passport and ticket declaring the amount of foreign currency issued in cash and in the form of TC.
Then, entry is made in the TC issue register. Original copy of the purchase agreement, photocopy of the ticket and passport are kept with the T/M form and the purchase agreement copy along with the TC, passport and ticket are handed over to the party after getting after getting his “received” signature in the TC issuing register.
The yearly quotas are mutually exclusive to each other. But for the FC A/C hold a special advantage is prevailing there and that is the person can get TC for any amount as much as his FC A/C balance permits.