ISTT

Letter Of Credit Operation, Lodgment And Retirement Procedures as a part of Foreign Exchange Business –
A Study On Brac Bank Limited.
Chapter One
1.0 Introduction
1.1 Origin
1.2 Objective of the Report
1.3 Scope of Report
1.4 Methodology
1.5 Limitations
1.6 Report Preview
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CHAPTER-ONE
1.0 INTRODUCTION
The Banking industry in Bangladesh has flourished over the years, making double –digit profit
percentages, sustainable growth and surviving cut-throat competition while providing
attractive returns to shareholders. The Letter of Credit operation in Banking Business has
experienced phenomenon growth over the past decade. There has been an increasing
demand for Foreign Exchange from consumers who are potential investors. Foreign
Exchange plays an essential role in any International Business. Letter of Credit operation is
related with goods, because they have value and exists independently of supplier and
beneficiary. They can be further traded at different times and locations. Importer tend to
engage in more extensive search activities when import product that are more expensive or
carry more risk. There are lot of private commercial banks, foreign banks and financial
institutions doing business in Bangladesh.
The mechanisms are used by exporters and importers, and usually provided by the importing
company's bank to the exporter to safeguard the contractual expectations and particularly
financial exposure of the exporter of the goods or services. (Also called 'export letters of credit,
and 'import letters of credit'.)
A letter of credit is a guarantee from the issuing bank's to the seller that if compliant documents
are presented by the seller to the buyer's bank, then the buyer's bank will pay the seller the
amount due. The 'compliance' of the seller's documentation covers not only the goods or services
supplied, but also the timescales involved, method for, format of and place at which the
documents are presented. It is common for exporters to experience delays in obtaining payment
against letters of credit because they have either failed to understand the terms within the letter of
credit, failed to meet the terms, or both. It is important therefore for sellers to understand all
aspects of letters of credit and to ensure letters of credit are properly drafted, checked, approved
and their conditions met. It is also important for sellers to use appropriate professional services to
validate the authenticity of any unknown bank issuing a letter of credit.
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1.1ORIGIN
I have prepared the project paper to meet my degree requirement. My Course titled Fin 5202-
International Financial management has created the opportunity to prepare a report to emphasize
on the issue of “Letter Of Credit Operation, Lodgment And Retirement Procedures as a part of
Foreign Exchange Business - A Study On Brac Bank Limited”. My instructor has a great
contribution to select this topic.
1.2 THE OBJECTIVE OF THE REPORT
The general objective of preparing this is to fulfill the requirement of Internship Program as well
as completing the MBA Program through gaining the practical experience and view the
application of theoretical knowledge in the real life. The report focuses on two parts. They are:
Broad Objective
This report attempt to study the intricacies foreign exchange operations. The main purpose of
this study is to get a better idea and the comprehensive details of Letter Of Credit Operation,
Lodgment And Retirement Procedures of Brac Bank Ltd.
Specific Objective
a) To know about the history and existing product as well as service provided by Brac Bank Ltd.
b) To attain knowledge regarding procedure, requirements, Discrepancies for opening a Letter of
Credit.
c) To know about the existing policy and procedure regarding Foreign Exchange Business.
d) To get knowledge regarding Procedure of Lodgment.
e) To get the knowledge about the hedging tools used in Foreign Exchange
f) To know about the various concept and technicalities in Foreign Exchange Business.
g) To know whether Brac Bank comply the rules of Bangladesh Bank, International Chamber of
Commerce, Guidelines of UCP600 as well as rules of Bank for International Settlements.
h) To know the Foreign Exchange laws (Foreign Exchange regulation Act 1947, Foreign
Exchange Policy).
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Moreover, the objective of this report is to explore of external information regarding export &
import procedure before making Internal Trade. When selling goods, a seller must take
into account and manage the risk of not being paid. In the case of exported goods, these
risks include not just the risk that a buyer will not have enough cash to pay, or will
dispute their liability to pay, but also the risk that something will happen in the buyer’s
country that prevents payment. Letters of credit were developed as a means of payment
that, when properly structured and drawn upon, sidesteps these risks.
1.3 SCOPE OF REPORT
I have only focused on the issue of Letter of Credit (L/C) Operation as a part of foreign exchange
business to the Brac Bank Limited. This article applies to letters of credit and to certain rights
and obligations arising out of transactions involving letters of credit. Rights and obligations of an
issuer to a beneficiary or a nominated person under a letter of credit are independent of the
existence, performance, or nonperformance of a contract or arrangement out of which the letter
of credit arises or which underlies it, including contracts or arrangements between the issuer and
the applicant and between the applicant and the beneficiary.
1.4 METHODOLOGY
Data regarding the completion of this report is collected from both primary and secondary
sources. Primary data was collected through observing the daily operation of the Treasury and
Remittance Division of Brac Bank Ltd. I also discussed with the several professionals of Treasure
and Remittance Division. Different issues related to the service processing and internal record
management can be collected through direct observation.
As it is a descriptive report so I conducted experience survey study to prepare this report. Letter
of Credit operation is almost same in different countries perspective. It is followed by
international standard. So it should not possible to collect information from any single sources..
Moreover, as a Secondary sources of data collection I have collected data from Annual Report of
Brac Bank Ltd. as well as the several website viz; Bangladesh Bank, International Chamber of
Commerce etc. I also studied several books of national and international authors in relates to
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cover this topics. The data analysis was done on the basis of the information available from
various sources and brainstorming.
1.5 LIMITATION
The study was limited by a number of reasons;
• Firstly, the study was confined only to BRAC BANK LTD (BBL).
• Secondly, sample size was too small because only one bank is under considered to make
this report.
• Thirdly, time constraint led to get narrow outcomes.
• Fourthly, lacking a formal standardized system for reporting on L/C, investors, analysts,
and companies will remain captive to this game of speculation and incomplete and
inconsistent disclosures.
• Finally, I have also face a sort of difficulty to get the information because the staffs of
bank were always busy and it was difficult to get free time from them.
Every organization has their own secrecy that is not revealed to others. This might be another
problem for which the result can be manipulated.
1.6 REPORT PREVIEW
First part covers an overview of Brac Bank Ltd. and this part include organgram of BBL,
financial performance of BBL, management of human Resources. Second part covers definition
of Foreign Exchange (FOREX), principles & function of Foreign Exchange. Third part covers
definition of letter of credit (LC), forms of LC, types of LC and procedure of opening the LC.
Fourth part covers lodgment and retirement of import bill, procedure of lodgment procedure.
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Chapter Two
2.1 Introduction of Brac Bank Ltd.
2.2 Organogram of Brac Bank Ltd.
2.3 At a Glance of Brac Bank Ltd. as on 30th
June’2010
i. Bangladesh Economy – an Overview
ii. Money and Banking
iii. Brac Bank Ltd.
iv. Capital Funds
v. Deposits
vi. Loan and Advances
vii. Leading in SME Banking
viii. Quality of Risk Assets
ix. Foreign Exchange Business
x. Treasury
xi. SWIFT
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xii. Automation in Banking operation
xiii. Credit Card
xiv. Investment in Securities and Capital Market Operation
xv. Management and Human Resource
xvi. Brac Bank Training Institute
xvii. Dividend
CHAPTER- TWO
AN OVER VIEW OF BRAC BANK LIMITED
2.1 INTRODUTION OF BRAC BANK LIMITED
Brac Bank Limited (BBL) was established on 4th
July, 2001 by a group of highly successful
entrepreneurs from various fields of economic activities such as shipping, oil, finance, garments,
textiles and insurance etc. It is a full licensed scheduled Commercial Bank set up in the private
sector in pursuance of the policy of the Government to liberalize Banking & Financial services.
The Chairman of the Bank, Mr. Mr. Muhammad A. (Rumee) Ali is a Fellow of the Institute of
Bankers’ of Bangladesh. Prior to joining BRAC BANK in 2007; he served as the Deputy
Governor of Bangladesh bank from 2002 to 2006. Mr. Rumee Ali became the first Bangladeshi
to head a major international bank in Bangladesh. At present, he is the Vice President of
Bangladesh Employers federation.
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The present Managing Director Mr. Sayed Mahbubur Rahman has long experience in domestic
and international Banking. The Bank has made significant process within a very short time due
to its very competent Board of Directors, dynamic management and introduction of various
customer friendly deposit and loan products. Corporate Vision of the bank is Building profitable
and socially responsible financial institution focused on Market and Business with Growth
potential, thereby assisting BRAC and stakeholders to build a just, enlightened, healthy
democratic and poverty free Bangladesh”.
2.2 ORGANOGRAM OF BBL
Managing Director (MD)
Deputy Managing Director (DMP)
Senior Executive Vice President (SEVP)
Executive Vice President (EVP)
Senior Vice President (SVP)
Vice President (VP)
Senior Assistant Vice President (SAVP)
Assistant Vice President (AVP)
First Assistant Vice President (FAVP)
Senior Executive Officer (SEO)
Executive Officer (EO)
Principal Officer (PO)
Senior Officer (SO)
Management Trainee Officer (MTO)
Junior Officer (JO)
Number of employees of BBL is 6050 (Six Thousand Fifty)
2.3 AT A GLANCE OF BRAC BANK LTD. AS ON 30th
JUNE, 2010
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The financial year 2009, banking
industry faced far greater challenge
than any of the previous years.
BRAC BANK has had a success year
despite difficult market conditions.
The bank continues to expand its
banking activities. Despite the
challenge, through efficient
management and continued effort of
dedicated staff, we made an
operating Profit of BDT 3,718
million.
Brac Bank Limited performed well in the first half despite the difficult economic environment
with an increase in operating Profit by 109% to Tk. 2242.3 million compared to the same period
last year. The Bank also made its mark in efficiently managing its loan portfolio by keeping the
Classified Loans and Advances.
Brac Bank Ltd. has committed to Boost up the export position and diminishes the import
position, raising of Gross Domestic Product (GDP) maximizing the national growth & abolishing
the unemployment percent of a educated sector of the nation .All the brunches of Brac Bank
Limited are authorized dealer of Foreign Exchange Business. The authorized dealer motivates
the importer to import Raw materials, Fabrics, Accessories, chemicals, Vegetable Fat
etc.
The imports or exports are motivated by the Brac Bank Limited to the foreign exchange
business, particularly to open the letter of credit. A letter credit offer advantages both to the
importer and exporter. The advantages accuring to either of the parties differ depending upon the
nature of credit opened There Certain Common benefit accuring from the use of credit as under.
i) Bangladesh Economy-an Overview
The economy has grown 5-6% per year since 1996 despite political instability, poor
infrastructure, corruption, insufficient power supplies, and slow implementation of economic
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reforms. Bangladesh remains a poor, overpopulated, and inefficiently-governed nation. Although
more than half of GDP is generated through the service sector, nearly two-thirds of Bangladeshis
are employed in the agriculture sector, with rice as the single-most-important product.
Bangladesh's growth was resilient during the 2008-09 global financial crisis and recession.
Garment exports, totaling $12.3 billion in FY09 and remittances from overseas Bangladeshis
totaling $9.7 billion in FY09 accounted for almost 25% of GDP.
The IMF and World Bank predict GDP growth over the next 5 years will be about 6.5%, well
short needed to lift Bangladesh to Mid Income Nations. The initial impact of the end of quotas
under the Multi-Fiber Arrangement has been positive for Bangladesh, with continuing
investment in the ready-made garment sector, which has experienced annual export growth in
excess of around 20%. Downward price pressure means Bangladesh must continue to cut final
delivered costs if it is to remain competitive in the world market.
Foreign investors in a broad range of sectors are increasingly frustrated with the politics of
confrontation, the level of corruption, the slow pace of reform and privatization and deregulation
of the public sector and the lack of basic infrastructure e.g. roads. While investors view favorably
recent steps by the interim government to address corruption, governance, and infrastructure
issues, most believes it is too early to assess the long-term impact of these developments of the
9-10% .
ii) Money and Banking
Monetary and credit policies in Bangladesh were pursued with a view to accelerate the pace of
economic activities during FY 2009. In 2009 BRAC BANK has maintained the pace and tempo
of growth for the performance. Last year, BB earned BDT13.3.58 million in net Profits which is
35% higher from the previous year. Operational profit of the Bank stood at BDT 3717.58 million
which is 17% higher from the previous year. In 2009, our Earning Per Share (EPS) improved
from BDT. 45.00 to BDT 60.98 . Book value per share is BDT. 371.55, last which was BDT
311.71.
Last year, deposit increased by BDT. 17,212 million which is 30% higher from the previous
year. Total assets increased 94,581.30 million which is higher from the previous year .As part of
business diversification; in 2009 we acquired 51% Share of BRAC EPL Investment Limited and
BRAC EPL Stock Brokerage Limited, another subsidiary company.
iii) Brac Bank Limited
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Brac Bank Limited witnessed a
considerable improvement in its overall
business performance for the period June
2010. The Bank achieved satisfactory
progress in all areas of its operation and
earned an operating Profit of Tk. 4646.342
million showing a growth of 63% over the
previous year. The Bank, as a prudent
measure, marked down the value of
investment in shares and securities to
market price as on 30-06-2010 by
complying with International Accounting
Standard (IAS-30).
After making full provision, the net pretax-
Profit of the Bank for the year stood at Tk.
2143.59 million compared to Tk. 2023.45 million in 2008. The return on Assets (ROA) was
1.56% and return on equity stood at 19.19% well above the industry average.
Up to 2009 BB have 71 branches, 180 ATM booths, 30 Cash Deposit Machine, 951 POS
terminals, 19 utility Services Bill Payment Booths and also 1900 Remittance Delivery points.
The grand total customer touch points are 3635 serving a total of 878837 customers.
iv) Capital Funds
The bank attained satisfactory adequate capital of 12.69% compared to the current regulatory
requirement of 10.00%. In 2009 the Bank’s core capital and total capital base was 10.26% &
12.69% respectively.
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v) Deposits
Deposits of the Bank grew by 44% to Tk. 7660.02 million as at June 2010 as against national
average of 14.20%. The Bank introduced several deposit schemes to encourage and mobilize
savings. Major savings schemes include the following:-
• Contributory Savings Scheme
• Monthly Benefit Deposit Scheme
• Special Deposit Scheme
• Education Savings Scheme
• 30 Day's Term FDR
• Brac Bank Money Scheme
• Brac Bank Insured Fixed Deposit
Scheme
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Our various purpose-oriented deposit schemes have been appreciated by the Public and have
gained good popularity. As on 30-06-2010, deposits under above schemes stood at Tk. 1005.57
million as against Tk. 812.37 million in the last year showing an increase of 24% over the
preceding year.
vi) Loans and Advances
Loan and advance increased by
BDT 11,474 million or 22% to
BDT 64151 million at 31
December 2009.This is a result
of continued growth in lending
business and slid growth in
banking industry reflecting a
continued focus on customers
and profitable growth.
vii) Leading in SME Banking
Brac Bank Limited is a leading Bank for consumers and small business with a commanding
presence in Consumer Credit, Hire Purchase and Lease Finance. The Consumer Credit Scheme
of the Bank, which aims to help the fixed income group in raising standard of living, has been
widely appreciated. Total 10618 customers have enjoyed Credit facility to the extent of Tk.
480.41 million under the Scheme. The rate of recovery of loan under the scheme is 96%. The
Bank also recently introduced Credit Card both domestic and international as principal member
of Master Card International.
viii) Quality of Risk Assets
In order to maintain high quality of risk assets, utmost efforts are made by the Board of Directors
and by the Management on an ongoing basis. A Credit Committee at Bank's Head Office sits
every day to monitor the quality of loans. As on 30-06-2009, the Bank's ratio of classified loans
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to total loans is only 1.63% as against 1.77% in the last year which is one of the lowest in
Bangladesh. The Bank has made full provision against classified loans in addition to making
provision of 1% against unclassified loans. Brac Bank Limited follows International Accounting
Standard (IAS-30) in assessing the value of its investment in shares at the year end.
ix) Foreign Exchange Business
In the year under review, Foreign Trade Operation of the Bank played a pivotal role in the
overall business development of the Bank. We have established relationship with as many as 30
new foreign correspondents abroad thereby raising the total number of correspondents to 230.
During the year 2009, the Bank handled Foreign Exchange transactions amounting to Tk.
17855.40 million which is an increase of 67% over the last year. The Bank has also entered into
remittance arrangements with several Banks and Exchange Houses and expects to handle
increased volume of Remittance Business.
x) Treasury
Brac Bank Limited is keep great
contribution in Bangladesh to
integrate treasury dealings of
local Money-Market and Foreign
Currency under one Treasury
umbrella. The Bank has handled
significant volume of Treasury
transactions during 2009. Brac
Bank's Dealing Room is
connected with automated
Reuters Terminal facility thus
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enabling the bank to provide forward / future facilities to its corporate clients at a very
competitive rate.
xi) SWIFT
Brac Bank Limited is have become member of SWIFT (Society for Worldwide Interbank
Financial Telecommunication) in 2002. SWIFT is members owned co-operative, which provides
a fast and accurate communication network for financial transactions such as Letters of Credit,
Fund transfer etc. By becoming a member of SWIFT, the Bank has opened up possibilities for
uninterrupted connectivity with over 5,700 user institutions in 150 countries around the world.
xii) Automation in Banking Operation
(A): Information Technology in Banking Operation
Brac Bank Limited adopted automation in banking operation from the very beginning of its
operation. The main objective of this automation is to provide efficient and prompt services to
our valued clients. At present all the branches of the Bank are computerized. At branch level, we
are using server based multi-user software under UNIX operating system to provide best security
of information.
(B): On-line Branch Banking
The Bank has set up a Wide Area Network (WAN) across the country to provide On-line branch
banking facility to its valued clients. Under the scheme, clients of one branch shall be able to do
banking transaction at any other branch of the Bank. The Bank also hosted its own Web Site
(www.bracbank.com) to facilitate dissemination of information about its banking services &
facilities to outside world. The Bank is also going to provide 24 hour customer services by
installing Automated Teller Machine (ATM).
xiii) Credit Card
The Bank successfully launched Master Card-Credit Card which created a new dimension in its
customer service and consumer financing. The special feature of the Brac Bank Master Card is
that its bears the card holder's photo on the card, which is the first of its kind in Bangladesh and
adds security against misuse. Brac Bank Limited issues 4 types of cards. These are Gold Local &
International and Silver Local & International. Local cards can be used in Bangladesh only.
xiv) Management and Human Resources
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A well-educated, skilled and enterprising workforce with wide experience in banking is a
precondition for the continued growth and progress of any bank. Our aim is to recruit and retain
a competent workforce. We recruit experienced Bankers as well as fresh University Graduates
whom we train through our own Training Institute. As on 31st December 2009, our human
resources strength was 6050 approximately.
xv) Brac Bank Training Institute
Brac Bank Training Institute
was set up in July 22, 2002
with the aim to build up a
strong and skilled
workforce. During the year,
the Institute organized 4
(four) training courses on
basic foundation of
Banking, International
Trade Finance and Foreign
Exchange and Lending Risk
Analysis which were participated by 96 participants. The Institute also conducted 7 (seven)
workshops where a total of 245 participants attended. Apart from the Senior Executives of the
Bank, eminent educationists and professionals were invited as guest speakers.
xvi) Dividend
The Board of Directors of the Bank has been pleased to recommend 30% stock dividend for the
year 2009 to the shareholders of the Bank subject to approval of Bangladesh Bank.
The members of the Board of Directors of Brac Bank Limited take this opportunity to offer their
sincere thanks to the Government of the People's Republic of Bangladesh, Bangladesh Bank and
Security Exchange Commission for their valuable guidance and co-operation extended to the
Bank from time to time. The Board also places on record its appreciation for excellent services
rendered by the employees of the Bank. Finally, the Board of Directors expresses its gratitude to
the valued clients, patrons, and well wishes of the Bank for their continued support and co-
operation.
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Chapter Three
3.1Definition of Foreign Exchange
3.2 Foreign Trade and Foreign Exchange
3.3 Principles of Foreign Exchange
3.4 Function of Foreign Exchange
i. Rate of exchange.
ii. How the rate of exchange works.
iii. Forward and spot rate.
iv. Methods of quoting exchange rate.
v. Risk of exchange rate.
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vi.Causes of exchange rate.
vii. Export and import letter of credit.
CHAPTER-THREE
FOREIGN EXCHANGE
3.1 DEFINITION OF FOREIGN EXCHANGE
Foreign Exchange is a process which is converted one national currency into another and
transferred money from one country to another country.
According to Mr. H. E. Evitt Foreign
Exchange is that section of economic
science which deals with the means and
method by which right to wealth in one
country's currency are converted into rights
to wealth in terms of another country's
currency. It involved the investigation of the
method by which the currency of one
country is exchanged for that of another, the
causes which rented such exchange necessary the forms which exchange may take and the ratio
or equivalent values at which such exchanges are affected.
3.2 FOREIGN TRADE AND FOREIGN EXCHANGE
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International trade refers to trade between the residents of two different countries.
Each country functions as a sovereign State with its set of regulations and currency. The
difference in the national of the exporter and the importer presents certain peculiar problems in
the conduct of international trade and settlement of the transactions arising there from. Important
among such problems are:
(a) Different countries have different monetary units;
(b) Restrictions imposed by countries on import and export of goods;
(c) Restrictions imposed by nations on payment from and into their countries;
(d) Differences in legal practices in different countries.
Foreign exchange means foreign currency and includes:-
(i) All deposits, credits and balances payable in any foreign currency and any drafts,
travelers cheques, letters of credit and bills of exchange, expressed or drawn in Indian
currency but payable in any foreign currency;
(ii) Any instrument payable, at the option of the drawee or holder thereof or any other
party thereto. Either in Indian currency or in foreign currency or partly in one and
partly in the other. Thus, foreign exchange includes foreign currency; balances kept
abroad and instruments payable in foreign currency.
3.3 PRINCIPLES OF FOREIGN EXCHANGE
The following principles are involved in Foreign exchange:
i) The entire system
ii) The media used
iii) The monetary unit.
3.4 FUNCTION 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, specially foreign business should have
knowledge of these following functions :-
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1) Rate of exchange.
Before we look at these forces, we should sketch out how exchange rate movements affect a
nation's trading relationships with other nations. A higher currency makes a country's exports
more expensive and imports cheaper in foreign markets; a lower currency makes a country's
exports cheaper and its imports more expensive in foreign markets. A higher exchange rate can
be expected to lower the country's balance of trade, while a lower exchange rate would increase
it.
2) How the rate of exchange works.
The exchange rate (also known as the foreign-exchange rate, forex rate or FX rate)
between two currencies specifies how much one currency is worth in terms of the other.
A market based exchange rate will change whenever the values of either of the two
component currencies change. A currency will tend to become more valuable whenever
demand for it is greater than the available supply. It will become less valuable whenever
demand is less than available supply (this does not mean people no longer want money, it
just means they prefer holding their wealth in some other form, possibly another currency).
Increased demand for a currency is due to either an increased transaction demand for
money, or an increased speculative demand for money. The transaction demand for money
is highly correlated to the country's level of business activity, gross domestic product
(GDP), and employment levels. The more people there are unemployed, the less the public
as a whole will spend on goods and services.
3) Forward and spot rate.
A. Spot Market
The market for currency for immediate delivery. The price of foreign exchange in the spot
market is referred to as the spot exchange rate or simply the spot rate.
B. Forward Market
The market for the exchange of foreign currencies at a future date. A forward contract usually
represents a contract between a large money center bank and a well-known (to the bank)
customer having a well-defined need to hedge exposure to fluctuations in exchange rates.
Although forward contracts usually call for the exchange to occur in either 30, 90 or 180 days,
the contract can be customized to call for the exchange of any desired quantity of currency at
any future date acceptable to both parties to the contract. The price of foreign currency for
future delivery is typically referred to as a forward exchange rate or simply a forward rate.
4) Methods of quoting exchange rate. Method of Quotation
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They are two methods of quotation for exchange rates between the dollar and the currency of
another country. The two methods are referred to as the direct (American) and indirect
(European) methods of quotation. The exchange rate between any two non-dollar currencies is
referred to as a cross rate
A. Direct Quotation
The dollar price of one unit of foreign currency. For example, a direct quotation of the exchange
rate between dollar and the British pound (German mark) is $1.6000/£1 ($0.6000/DM1),
indicating that the dollar cost of one British pound (German mark) is $1.6000 ($0.6000). Direct
exchange rate quotations are most frequently used by banks in dealing with their non-bank
customers. In addition, the prices of currency futures contracts traded on the Chicago Mercantile
Exchange are quoted using the direct method.
B. Indirect/European Quotation
The number of units of a foreign currency that are required to purchase one dollar. For example,
an indirect quotation of the exchange rate between the dollar and the Japanese yen (German
mark) is ¥125.00/$1 (DM 1.6667/$1), indicating that one dollar can be purchased for either
125.00 Japanese Yen or 1.6667 German Marks.
C. Cross Rates
The exchange rate between any two non-dollar currencies is referred to as a cross rate. A
relatively large number of cross rates would be required to trade every currency directly against
every other currency. For example, N currencies would require N x (N-1)/2 separate cross rates.
For this reason, most exchange rates are quoted in terms of dollars and by far the greatest volume
of trading directly involves the dollar. This reduces the number of cross-currency quotes that
dealers must keep track of and reduces the potential losses associated with mispricing currencies
relative to one another (which permit Triangular Arbitrage).
5) Risk of exchange rate.
Because formulae exist to quantify, at least to a degree, the risks that accompany any investment
decision, it is logical to assume that a similar formula exists to quantify what is called both
exchange rate risk and currency risk. Such logic is flawed, for no such formula exists. Currency
exchange rates can be just as volatile, and this clearly poses risks to any enterprise conducting
business in foreign markets and any investor holding either stock in a foreign-based company or
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an interest in a mutual fund that invests in foreign companies. The effects on a company’s
earnings, cash flow, and balance sheet can be significant.
6) Causes of exchange rate.
An appreciation in the Exchange rate can occur for various reasons. The most significant reasons
include higher interest rates and lower inflation. An appreciation of the exchange rate can have a
significant impact on a country's economic growth and inflation therefore it is important to
understand what can cause an appreciation in the exchange rate.
7) Export and import
letter of credit.
The foreign trade
business of the Brac
Bank was upbeat during
the year. Import business
increased to
BDT.16,773.21 million
from BDT. 10,148.60
million in 2008.
Export business
increased to BDT. 56.84
million in 2008 and
Bank Guarantee
Business increased to
BDT. 687.30 million in
2009 from BDT. 240.50
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million in 2008. Inward remittance (Private & Commercial) handled by the Bank increased and
reached BDT. 8,349.97 million in 2009 compare to BDT, 5,389.07 million in 2008.
8) Participants in foreign exchange market
The main players in foreign exchange market are as follows:
1. CUSTOMERS
The customers who are engaged in foreign trade participate in foreign exchange market by
availing of the services of banks. Exporters require converting the dollars in to rupee and
importers require converting rupee in to the dollars, as they have to pay in dollars for the
goods/services they have imported.
2. COMMERCIAL BANK
They are most active players in the forex market. Commercial bank dealing with international
transaction offer services for conversion of one currency in to another. They have wide network
of branches. Typically banks buy foreign exchange from exporters and sells foreign exchange to
the importers of goods. As every time the foreign exchange bought or oversold position. The
balance amount is sold or bought from the market.
3. CENTRAL BANK
In all countries Central bank have been charged with the responsibility of maintaining the
external value of the domestic currency. Generally this is achieved by the intervention of the
bank.
4. EXCHANGE BROKERS
forex brokers play very important role in the foreign exchange market. However the extent to
which services of foreign brokers are utilized depends on the tradition and practice prevailing at
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a particular forex market center. In India as per FEDAI guideline the Ads are free to deal directly
among themselves without going through brokers. The brokers are not among to allowed to deal
in their own account all over the world and also in India.
5. OVERSEAS FOREX MARKET
Today the daily global turnover is estimated to be more than US $ 1.5 trillion a day. The
international trade however constitutes hardly 5 to 7 % of this total turnover. The rest of trading
in world forex market is constituted of financial transaction and speculation. As we know that the
forex market is 24-hour market, the day begins with Tokyo and thereafter Singapore opens,
thereafter India, followed by Bahrain, Frankfurt, paris, London, new york, Sydney, and back to
Tokyo.
6. SPECULATORS
The speculators are the major players in the forex market.
A) Bank dealing are the major pseculators in the forex market with a view to make profit on
account of favorable movement in exchange rate, take position i.e. if they feel that rate of
articular currency is likely to go up in short term. They buy that currency and sell it as soon as
they are able to make quick profit.
B) Corporation’s particularly multinational corporation and transnational corporation having
business operation beyond their national frontiers and on account of their cash flows being large
and in multi currencies get in to foreign exchange exposures. With a view to make advantage of
exchange rate movement in their favor they either delay covering exposures or do not cover until
cash flow materialize.
C) Individual like share dealing also undertake the activity of buying and selling of foreign
exchange for booking short term profits. They also buy foreign currency stocks, bonds
and other assets without covering the foreign exchange exposure risk. This also result in
peculations.
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Chapter Four
4.1 Definition of Letter of Credit
4.2 Form of Letter of Credit
4.3 Types of Letter of Credit
4.4 Parties to a Letter of Credit
4.5Conternts of the Letter of Credit
4.6 Procedure of Opening the Letter of Credit
4.7 Documentary Letter of Credit
4.8 Letter of Credit Operation of Brac Bank Ltd.
4.9 Avoiding Discrepancies
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CHAPTER-FOUR
LETTER OF CREDIT (L/C)
4.1 DEFINITION OF L/C
On behalf of the importer if the bank undertakes to make payment to the foreign bank is known
as documentary credit or letter of credit. A letter of credit is an instrument issued by a bank to a
customer placing at the letters disposal such agreed sums in foreign currency as stipulated. An
importer is a country requests his bank to open a credit in foreign currency in favor of his
exporter at a bank in the letters country.
The letter of credit is issued against payment of amount by the importer or against satisfactory
security. The L/C authorizes the exporter to draw a draft under is terms and sell to a specified
bank in his country. He has to hand over to the bank, will the Bill of exchange, shipping
documents and such other papers as may be agree upon between the exporter and the importer.
The exporter is assured of his payment because of the credit while the importer is protected
because documents in respect of export of goods have to be delivered by the exporter to the
paying bank before the payment is made.
4.2 From of letter of credit
A letter of credit (L/C) may be two forms. These as below :
i) Revocable letter of credit.
ii) Irrevocable letter of credit.
(i) Revocable L/C : If any letter of credit can be amendment or change of any clause or canceled
by consent of the exporter and importer is known as revocable letter of credit.
A revocable letter of credit can be amended or canceled by the issuing bank at any time without
prior notice to the beneficiary. It does not constitute a legally binding undertaking by the bank to
make payment. Revocation is possible only nntil the documents have been honoured by the
issuing bank or its correspondent. Thus a revocable credit does not usually provide adequate
security for the beneficiary.
(ii) Irrevocable L/C : If any letter of credit can not be changed or amendment without the
consent of the importer and exporter is known as irrevocable letter of credit.
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An irrevocable credit constitutions a firm undertaking by the issuing bank to make payment. It
therefore, gives the beneficiary a high degree of assurance that he will paid to his goods or
services provide he complies with terms of the credit.
4.3 TYPES OF LETTER OF CREDIT
Letter of Credit are classified into various types according to the method of settlement employed.
All credits must clearly indicate in major categories.
i) Sight payment credit.
ii) Deferred payment credit.
iii) Acceptance credit.
iv) Negotiation credit.
v) Red close credit.
vi) Revolving credit.
vii) Stand by credit.
viii) Transferable credit.
(i) Sight payment credit: The most commonly used credits are sight payment credits. These
provide for payment to be made to the beneficiary immodestly after presentation of the stipulated
documents on the condition that the terms of the credit have been complied with. The banks are
allowed reasonable time to examine the documents.
(ii) Deferred payment credit: Under a deferred payment credit the beneficiary does not receive
payment when his presents the documents but at a later date specified in the credit. On
presenting the required documents, he received the authorized banks written undertaking to make
payment of maturity. In this way the importer gains possession of the documents before being
debited for the amount involved.
In terms of its economic effect a deterred payment credit is equivalent to an acceptance credit,
except that there is no bill of exchange and therefore no possibility of obtaining money
immediately through a descant transaction. In certain circumstances, how ever, the banks
payment undertaking can be used as collateral for an advance, though such as advance will
normally only be available from the issuing or confirming bank. A discountable bill offers wider
scope.
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(iii) Acceptance Credit: With an acceptance credit payment is made in the form of a tern bill of
exchange drawn on the buyer, the issuing bank or the pendent bank. Once he has fulfilled the
credit requirements, the beneficiary can demand that the bill of exchange be accepted and
returned to him. Thus the accepted bill takes the place of a cash payment.
The beneficiary can present the we accented bill to his own bank for payment at maturity or for
discounting, depending on whether or not he wants cash immediately. For simplicities sake the
beneficiary usually gives on instruction that the accepted bill should be left in the safekeeping of
one of the banks involved until it matures. Bill of exchange drawn under acceptances credit
usually have a term of 60-180 days.
The purpose of an acceptance is to give the importer time to make payment. It he sells the goods
before payments fall due, he can use the proceeds to meet the bill of Exchange in this way, he
does not have to borrow money to finance the transaction.
(vi) Negotiation Credit: Negotiation means the purchase and sale of bill of exchange or other
marketable instruments. A negotiation credit is a commercial letter of credit opened by the
issuing bank in the currency of its own country and addressed directly to the beneficiary. The
letter is usually delivered to the addressee by a correspondent bank. This credit is sometimes also
as Hand on credit.
The letter of credit empowers the beneficiary to draw a bill of exchange on the using bank, on
any other named drawer or on the applicant for the credit. The beneficiary can them present this
bill to a bank for negotiation, together with the original letter of credit and the documents
stipulated therein.
Payment of the bill of exchange is guaranteed by the issuing bank on the condition that the
documents presented by the beneficiary are in order. The most common form of negotiation
credit permits negotiation by any bank. In rare case the choice is limited to specified banks.
(iv) Red clause Credit : In the case of a red clauses credit, the seller can obtain an advance for
an agreed amount from the correspondent bank, goods that are going to be delivered under the
documentary credit. On receiving the advances, the beneficiary must give a receipt and provide a
written undertaking to present the required documents before the credit expires.
The advance is paid by the correspondent bank, but it is the using bank that assumes liability. If
the sellers does not present the required documents in time and fails to refund the advance, the
correspondent bank debits the issuing bank with the amount of the advance plus interest. The
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issuing bank, in turn, has reveres to the applicant, who therefore bears the risk for the advance
and the interest accursed.
(v) Revolving Credit: Revolving credit can be used when goods are to be delivered in
installment at specified intervals. The amount available at any one time is equivalent to the value
of one partial delivery.
A revolving credit can be cumulative or non-cumulative means that amount from unused or
incompletely used portions can be carried forward to subsequent period. If a credit is non-
cumulative, portions not used in the prescribing period case to be available.
(vi) Stand by Credit: Standby credit are encountered principally in the US. Under the laws of
most US states, banks are prohibited from issuing regular quarantines, so credits are used
instead. In Europe, too the use of this type of credit is increasing by virtue of their documentary
credit, stand-by credit are governed by the UCP. However, their function is that of a grantee.
The types of payment and performance that can be guaranteed by stand-by credits include the
following :
- Payment of thorium bill of exchange
- Repayment of bank advance
- Payment of goods delivered.
- Delivery of goods in accordance wets contract and
- Execution of construction contracts, supply and install contracts.
In order to enforce payment by the bank, the beneficiary merely presents a declaration stating
that the applicant for the credit has failed to meet his contractual obligation. This declaration may
have to be accompanied by other documents.
(vii) Transferable Credit : Transferable credit are particularly well adapted to the requirements
of international trade. A trader who receives payment from a buyer in the form of a transferable
documentary credit can use that credit to pay his own supplier. This enables him to carry out the
transaction with only a limited and lay of his own funds.
The buyer supplies for an irrecoverable credit issued in the traders favour. The issuing bank must
expressly designate the credit as transferable. As soon as the trader receives the confirmation of
credit he can request the bank to transfer the credit to his supplier. The bank is under no
obligation to effect the transfer except in so far as it has expressly consented to do so.
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The costs of the transfer are usually charged to the trader and the transferring bank is entitled to
delete them in advance.
4.4 PARTIES TO A LETTER OF CREDIT
A letter of credit is issued by a bank at the request of an importer in favour of an exporter from
whom he has contracted to purchases some commodity or commodities. The importer, the
exporter and the issuing bank are parties to the letter of credit. There are however, one or more
than one banks that are involved in various capacities and at various stages to play an important
role in the total operation of the credit.
i) The opening Bank.
ii) The Advising Bank.
iii) The Buyer and the Beneficiary.
iv) The paying Bank.
v) The negotiating Bank.
vi) The confirming Bank.
i) 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 the 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
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pay the bill or bills as and when they are drawn by the beneficiary under the credit. When the
bills are presented to or when antic is received that bills have been presented to a paying or
negotiating Banks its liability matures.
ii) 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 sometimes 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 telex 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.
iii) 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 that he makes with the exporter for the
purchase of some goods that the letter of credit is opened by the opening bank.
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 (L/C). As soon as he has shipped the goods and has
collected the required documents, he draws a set of papers and presents it with the documents to
the opening bank or some other bank mentioned in the L/C.
iv) The paying Bank : The paying bank only pays the drafts drawn under the credit but under
takes no opening bank, by debating the letters accounts with it if 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.
v) The Negotiating bank : The negotiating bank has to be careful in scrutinize that the drafts
and the documents attached there to are in conformity with the condition laid down in the L/C.
Any discrepancy may result in refused on the part of the opening bank to honour the instruments
is such an eventuality the negotiating bank has to look back to the beneficiary for refund of the
amounts paid to him.
vi) The Confirming Bank : Sometimes an exporter stipulates that a L/C issued in his favour be
confirm by a bank in his own country. The opening this country to add its confirming to the
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credit the bank confirming the credit is known as the confirming bank and the credit is known as
confirmed credit.
4.5 CONTENTS OF THE LETTER OF CREDIT
Banks normally issued letter of credit (L/C) on forms which clearly indicate the banks name and
extent of the banks obligation under the credit. The contents of the l/c of different Banks may be
different .In general L/C contain the following information:-
i) Name of the buyer: who is also known as the accounted since it is for his account that the
credit has been opened.
ii) Name of the seller: Who is also known as the beneficiary of the credit.
iii) Moment of the credit: Which should be the value of the merchandise plus any shipping
charges intent to be paid under the credit.
iv) Trade terms : Such as F.O.B and CIF
v) Tenor of the Draft which is normally dependent upon the requirements of the buyer.
vi) Expiration date : Which is specified the latest date documents may be presented. In this
manner or by including additionally a latest shipping date, the buyer may exercise control over
the time of shipment.
vii) Documents required : Which will normally include commercial invoice consular or
customers invoice, insurance policies as certificates, if the source is to be effected by the
beneficiary and original bills of lading.
viii) General description of the merchandise : Which briefly and in a general manner duly
describes the merchandise covered by a letter of credit.
4.6 PROCEDURES OF OPENING THE L/C
The importer after receiving the proforma 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. As a rule accepted as the sole security for the credit particularly if they are not the
short of commodity that can be traded on an organized market, such an arrangement would
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involve the bank in excessive risk outside its specialist field. 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 applicant cannot prevent a bank from honouring the documents on the grounds that the
beneficiary has not delivered goods on redder reissues as contracted.
The importer submit the following documents before opening of the L/C :
a. Tax Identification Number (TIN)
b. Valid Trade License.
c. Import Registration Certificate (IRC)
The Bank will supply the following documents before opening of the L/C :
a. LCA form.
b. Application and Agreement form.
c. IMP form
d. Necessary charge documents for documentation.
The above documents / papers must be completed duly signed and filled in by the party
according to the instruction of the banker.
4.7 DOCUMENTARY LETTER OF CREDIT (IMPORT/EXPORT DCUMENTATION)
Documentary letter of credit is such kinds of commercial letter which a bank issue on behalf of
foreign seller (exporter) according to the direction of the (importers) purchasers. The documents
shown under are known as export documents form the importer's side. These are :-
(i) Bill of exchange : The bill of exchange is that particular instrument through which payment is
effected in trade deals internal and international. The payment for the goods is received by the
seller through the medium of a bill of exchange drawn on the buyer for the amount depending on
the contract. It is a negotiable instrument. There are five main parties involved in a bill of
exchange. They are :-
(a) Drawer
(b) Drawee
(c) Payee
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(d) Endorser
(e) Endorsee
(ii) Bill of lading : A bill lading is a document of title to goods entitling the holder to receive the
goods as beneficiary or endorsee and it is with the help of this document on receipt from the
exporter that the importer takes possession of the goods from the carrying vessel at the port of
destination.
(iii) Airway bill / Railway receipt : When goods to be transported are small in bulk or requiring
speedy delivery or those are perishable in nature on the deal is in between the neighboring
countries then mode of transports other than shipping may be resorted to far the carriage of the
goods Airways bill / Railway receipt take place of Bill of lading depending on the nature of the
carrier.
(iv) Commercial invoice : It is the seller's bill for the merchandise. It contains a description of
goods, the price per unit at a particular location, total value of the goods, packing specifications,
terms of sale, letter of credit, bill of lading number etc. There is no standard form far a
commercial invoice. Each exporter designs his own commercial invoice form. The invoice is
made out by the seller under his signature in the name of the buyer and must be submitted in a
set of at least 3 copies. Its main purpose is to check whether the appropriate goods have been
shipped and also that their unit price, total value, marking on the package etc. are consistent with
those given in other documents.
(v) Insurance policy : In the international trade insurance policy is a must to cover the risk of
loss on consignments while they are on seas, roads, airways. The insurance is the responsibility
of the buyers (consignee) under FAS, FOB and C&F contracts and of the seller (consignor)
under CIF contract. The policy must be of the type as specified in the relative contract / credit.
The policy would be for the value of CIF price plus 10 (ten) percent to cover the expenses and
that is required to be obtained in the same currency as that of the credit and dated not later than
the date of shipment with claims* being payable at the destination. It must be properly stamped.
Like a bill lading it must be negotiable and be endorsed where it is payable to order.
(vi) Certificate of origin : This is a certificate issued by a recognized authority in exporting
country certifying the country of origin of the goods. It is usually by the Chambers of commerce.
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Sometimes, it is certified by local consul or Trade Representative of the importing country as per
terms of the credit.
(vii) Packing list : The exporter must prepare an accurate packing list showing item by item, the
contents of the consignment to enable the receiver of the shipment to check the contents of the
goods, number and marks of the package, quality, per package net weight, gross weight,
measurement etc.
(viii) Weightment and Measurement: Issued by recognized authority (like chambers of
commerce and industry) in exporting country certifying correct weightment and measurement of
the goods exported.
(ix) Bill of entry : A bill of entry is a document which contain the particulars of the imported
goods as well as the amount of customs duty payable.
The exporter submit the following papers/documents to the Negotiating bank :
i) Bill of exchange / Draft.
ii) Bill of lading.
iii) Airway bill / Railway receipt.
iv) Commercial invoice.
v) Insurance policy.
vi) Certificate of origin.
vii) Packing list.
viii) Weightment & measurement list.
ix) Other etc.
The negotiating bank after received the above documents / papers then this bank scrutiny the
documents. The negotiating bank sends the original shipping documents to the L/C opening bank
and keeping the second copy with the negotiating bank.
Payment Against Documents (PAD)
Banks deal in documents and not in goods. If the shipping document against the L/C is in order
then the L/C opening bank must have to payment to the foreign bank within 3 days or 72 hours
according as Uniform Customs and Practice for Documentary Credit (UCPDC) 500 of revision
of ICC.
If the shipping documents have any discrepancy, then the L/C opening bank informed to the
negotiating bank within 7 days. Otherwise, the shipping documents have not discrepancy. If the
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importer have not adequate founds in the bank account then the bank payment to the foreign
bank against the shipping documents.
4.8 L/C OPERATION OF BRAC BANK LTD.
Today BBL is one of the leading and most successful Banking enterprises in the country. If pay a
great role in the economy of the country. By export-import business the bank play a great role to
the economy of Bangladesh. BBL 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 interpolicy and interpolicy 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 formulates 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.
As the policy matter and the operational of import & export trade are quite different, two
separate policies for import & export trade are formulated by the government. Import policy
refers to government policies account for a particular fiscal period envisaging the allocation of
fund available from various sources for import of certain quantity of certain goods. 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
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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.
Now the importer will come to his bank with a request to open an L/C along with the following
documents / papers :-
1) L/C application and agreement Form (Bank's prescribed application form) with adhesive
stamp of Tk. 150 (Flexible) [From June 3rd 1998]
2) Indent / Proforma Invoice / Contract - 3 copies.
3) Insurance cover note with premium paid receipt.
4) IMP From one set duly signed by the importer.
5) Any other documents if necessary.
Authorized Dealer will scrutinize the documents and open the L/C infavour 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 1st and 2nd 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 as 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 everything 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
amount.
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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 negotiation of
documents.
On receipt of the shipping documents from the negotiating bank, the L/C opening bank will
carefully scrutinize the documents with terms and conditions of the relative L/C. If there is no
discrepancy, the documents will be lodged. Lodgment of documents means the entry of the
particulars of the documents in the Register and preparation of vouchers by converting the
foreign currency amount into Bangladesh Taka as the exchange rate prevailing on that date. This
amount is due to the importer. The importer will be asked to take delivery documents by making
payment of the bill amount excluding the margin deposited at the time of opening L/C. Payment
of bill amount and to take delivery of documents by the importers is known as Retirement of
Import Bills.
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.
4.9 Avoiding Discrepancies
While the documents required under letters of credit may vary, most LofCs commonly call for
the presentation of a draft, commercial invoices, and transport documents. The nominated bank
is expected to examine these and any other specified documents with care, to be certain they
appear on their face to comply with the terms and conditions of the credit. The Uniform Customs
and Practice for Documentary Credits provides a set of guidelines banks use for examining
documents. (See the article “Understanding the UCP600” for further information.)
These are some of the most common discrepancies found in LofC documents:
• Documents contain inconsistent data.
• Documents were presented more than 21 days after date of shipment (or other
presentation period specified in the LofC).
• Full set of transport documents was not presented or other required documents are
missing.
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• Draft is drawn incorrectly or for the wrong amount.
• Draft is not signed or not endorsed.
• Invoice does not describe merchandise in exact accordance with the letter of credit. Note:
If the letter of credit describes merchandise in a foreign language, then the seller must
describe the merchandise in that language on the invoice; translations are not acceptable.
• Invoice does not show the same shipping terms as specified in the LofC.
• Invoice includes charges inconsistent with the shipping terms in the LofC.
• Invoice is not made out in the name of the applicant shown in the LofC.
• Insurance coverage is insufficient or does not include the risks specified by the LofC.
• Insurance certificate or policy is not endorsed.
• Insurance certificate is dated later than the shipment date (acceptable if coverage is stated
to be warehouse-to-warehouse).
• Transport document is not clean (defective condition of goods or packaging is indicated).
• Transport document does not clearly indicate the name and capacity of the signer and
who the carrier is (must be signed “ABC Co. as carrier” or “XYZ Co. as agent for ABC
Co., the carrier”).
• Transport document is not consigned correctly or is not endorsed (if endorsement is
required).
Chapter Five
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5.1 Lodgment of Import Bill
5.2 Procedure of Lodgment
5.3 Retirement of Documents
5.4 Security of Documents
CHAPTER – FIVE
LODGMENT AND RETIREMENT OF IMPORT BILLS
(UNDER CASH L/C)
5.1 LODGMENT OF IMPORT BILL
The documentary letter of credit (L/C) constitutes of the important methods of financing trade.
Because of the phenomenal growth in world trade and commodity wise diversification of trade
its importance has significantly increased.
On receipt of the documents from the negotiating Bank, the L/C opening bank will make entry
the particulars of the documents into Inward Foreign Bill Register and prepare the voucher by
converting the foreign currency into Bangladesh Taka. This stage is known as lodgment of
import bills.
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The full sets of documents which are submitted by the exporter to his bank as per terms and
conditions of the L/C is known as shipping documents.
The L/C opening bank may receive these shipping documents from his foreign correspondent
(Bank) in two ways.
i) Documents on collections basis.
ii) Negotiated Documents.
i) Documents on collection Basis :-
The shipping documents which are not negotiable by the exporter's bank due to some
discrepancies will be sent to L/C opening bank on collection basis. The collection bank
(exporter's bank) will mention the discrepancies on their forwarding schedule.
On receiving the documents the L/C opening bank will further scrutinize the documents with the
L/C and inform the importer regarding discrepancies found in the documents. If these are
acceptable to the importer and or permissible with the existing exchange control Regulation, the
documents will be lodged and L/C opening bank will send the payment instruction to the
collecting bank.
ii) Negotiated Documents
The documents which has already been negotiated i.e. the exporters bank (this bank is known as
negotiating bank) has made payment to the exporter against the documents submitted by him
may be termed as negotiated documents. Generally these documents are free from discrepancies.
Though these documents are supposed to be free from any discrepancy, the L/C opening bank
must scrutinize and confirm that there is no discrepancy in the documents.
Incase of documents which has no discrepancy and documents with minor discrepancy (if
accepted by the importer) are to be lodged, where the major discrepancy is found, it is the duty of
the L/C opening banks to send a cable / Telex to the negotiating bank with instruction to credit
the amount to the L/C opening banks A/C which was paid to the exporter, because the
documents are not accepted and also to seek instruction regarding disposal of the documents.
The particulars of these documents to be entered is separate column or separate Inward Foreign
Bill Register under the head Foreign Bill under Reserve.
5.2 PROCEDURES OF LODGMENT
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After scrutinization, if it is fund in order the officer concerned will brand a rubber stamp
"Checked and Found Correct" which will be followed by his initial.
Amount in foreign currency to be converted into Bangladesh Taka with the exchange rate (B.C
selling) prevailing on the date of lodgment.
Particulars of documents to be entered in the "Inward Foreign Bills Register"
Preparation of Vouchers : The following vouchers are to be prepared :-
a) Lodgment voucher :
Dr. PAD / Draft amount + Negotiation commission (if any)
Cr. H.O, I.D / (Reimbursing Bank) A/C
B) Liability voucher to be reversed which was originated at the time of opening L/C
Dr. Barkers liability on L/C (Cash)
Cr. Customers liability on L/C (Cash)
5.3 RETIREMENT OF DOCUMENTS
On receipt of the copy of lodgment voucher from the bank, the importer will deposit the required
amount and taka delivery of the shipping documents. This stage is known as Retirement of
Impart Bills.
Before retirement of impart bills, the L/C opening bank will calculate the charges which are to be
realized from the importer.
Retirement vouchers to be prepared :
Dr. Opener A/C
Dr. Sunday Deposit A/C (Margin on L/C)
Cr. PAD / Draft Amount
Any other charges vouchers if necessary.
5.4 SCRUTINY OF DOCUMENTS
The L/C opening bank being received the documents from the negotiated bank will scrutinize the
documents with the respective L/C terms and condition.
i) Forwarding schedule of Negotiating Bank
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- Whether there is any instruction.
- Whether these instruction can be complied with.
- whether the negotiating commission realised.
ii) Bill of Exchange (Draft)
- Whether it is drawn in order.
- Whether the amount of draft corresponds with the L/C amount.
- Draft amount should be equal or less than the L/C amount.
- whether the date of the draft of the within the date as per L/C etc.
iii) Bill of Lading (B/L)
- Whether the B/L is clean i.e. there is no clause like some cartons are broken or any other
clause.
- Whether there is signature of shipping Authority.
- Whether the date of B/L is within the date of shipment as per L/C.
- Whether the freight is prepared or not as per L/C terms.
- Whether the part of shipment and part of destination are similar as per L/C.
- Whether the title of B/L belongs to L/C opening bank.
- Whether the full sets of B/L dispatched by negotiating bank etc.
iv) Commercial Invoice
- Whether the full particulars of goods have been incorporated.
- Whether the amount of invoice corresponds with the amount of Bill of Exchange and as per the
L/C terms.
- Whether IRC No. LCA No etc. have been incorporated.
- Whether it is signed by the beneficiary.
v) Other Documents
- Whether all other documents are prepared as per L/C.
After scrutinisation, the official concerned may found the following :-
i) Documents are in order i.e. no discrepancy.
ii) Minor discrepancy-Acceptable to the importer.
iii) Major discrepancy-May be acceptable to the Regulation or those are irremovable.
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After performing necessary formalities & entry in respective registers documents to be handed
over to the importer on proper acknowledgement after certification and endorsement of the
documents.
Chapter Six
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6.1 Definition of LIM (Loan against Imported Merchandise)
6.2 Cases of LIM Account
6.3 Disposal of LIM Stocks
CHAPTER – SIX
LOAN AGAINST IMPORTED MERCHANDISE - LIM
(POST IMPORT FINANCE)
6.1 DEFINITION OF LIM
Import Finance plays vital role in a country's foreign trade business. Import of goods and service
are needed no only for export production but also to supply domestic industry with the necessary
inputs which are not locally available or available at uneconomic cost and are needed for
expansion and development.
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Loan Against Imported Merchandise (LIM) is a facility provided by the bank to the importers
who are in shortage of fund to retire the import bills and thus to clear the goods from the post
authority. In other works it may be referred as an advance against merchandise.
6.2 CASES OF LIM ACCOUNT
LIM Accounts may be created in the following two cases :-
a) LIM Account on importer's request.
b) Forced LIM Account.
a) LIM Account in importer's request
After lodgment of documents, the importers concerned to be intimated for early retirement of the
documents by paying outstanding bill amount including other charge. If the importer is not in a
position to retire the bill out of his own sources at that moment may request the bank to clear the
goods by creating LIM Account. On receipt of the importer request the official of the import bills
section will prepare an office note by calculating the total landed cost of the consignment. To
ascertain the landed cost the following points to be considered.
Efforts should be taken so that at least 20% to 30% margin of the landed cost may realise from
the importer. Realization of margin will depend on the banker customer relationship and also on
the marketability of the goods.
The following charge documents have to executed by the importer :-
i) DP Note (Demand Promissory note).
ii) Letter of Arrangement.
iii) Letter of Disbursement.
iv) Letter of pledge.
v) Any other document of necessary.
The branch Manager are not empowered to sanction the LIM A/Cs in favour of the importers for
clearance the goods without obtaining the approval from Head Office.
On getting approval from Head Office on the Office Note the branch will send the documents to
the port city branch by indorsing the bill of lading infavour of them with certification of invoice
for clearance the goods through importer's nominated as well as Bank's approval C & F agent. In
the forwarding letter clear instructions to be given for dispatching the goods either by train or by
truck duly insured Branch Managers will have to take prior approval from International Division,
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Head Office to create LIM Account in favour of importers. Before sending the documents to the
port city branch and under taking on prescribed from with special adhesive stamp of Tk. 80/-
(Flexible) regarding the stipulated period sanctioned to the importer to be obtained.
The following accounting entries and vouchers are generally to be passed in the set of
Retirement Vouchers on the same day at the branch :-
Dr. Customer A/C
Dr. LIM
Cr. IBTA / Pay order
Cr. PAD
The particulars of LIM A/C must be entered and voucher to be posted in the LIM Register.
After clearance, the goods should be stared either in Bank's go down or in importer's go down
under bank's lock and key and the particulars of goods to be entered in the space provided in the
LIM Register. At the same time issuance of goods covering fire and other risk to be made. Go
down staff salary, go down rent (if the goods stored at the Bank's go down) and other
miscellaneous charges in connection with the LIM A/C will be paid by debit to party's LIM A/C
under advice to the importer.
b) Forced Lim Account
Immediately after lodgment of documents the branch incumbent and concerned dealing official
shall vigorously persue importers far retirement of bills. PAD should not remain outstanding fare
more than 30 days from the date of lodgment on as per norms.
If the party fails to retire the documents within 30 days or within the date of arrival of ship
whichever is earlier the branch should sent the documents for clearance the goods. Other
formalities in connection with the forced LIM A/C will be the same as in the case of LIM A/C
created on importer's request.
No further L/C's of the party for whom the bank was forced to clean the consignment and the
party failed to take delivery of the goods within the time specified below under the head disposal
of LIM stocks should be opened without prior approval from Head Office even if the same is
within the discretionary power of branch Manager.
6.3 DISPOSAL OF LIM STOCKS
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a) The LIM liability should be adjusted within a maximum period of 45 days from the date of
storage for commercial importer and 60 days for industrial importers. (It may very as per
circular)
b) Part delivery against payment may also be allowed if so desired by the party to clear the LIM
liability within the aforesaid time, after recovery margin over the landed cost if possible, but
such payment should be proportionate with outstanding LIM liability taking into account the
interest, go down rent and other charges up to eventual date of final delivery. This should be so
arranged that with the last delivery the entire LIM liability is fully adjusted. Special care should
however to taken to protect bank's interest in case where all the packets / bundles are not of equal
size quality and price.
c) Additional 30 days may be allowed to both commercial and industrials, if so approached by
them for final adjustment. In the event of importer's failure to lift the goods on payment of bank's
dues in full even within the extended period of 30 days, the following steps shall be taken by the
branch incumbent :
i) Final notice shall be issued on importer's giving 15 days time for payment.
ii) Incase on response is received from importer legal notice shall be served on the party giving
another 15 days time for payment.
iii) In case the concerned borrowers do not liquidate the liability within the stipulated time limit,
but come forward with prayer for further time, in such cases branch incumbents may allow
further 30 days time only provided he is satisfied that importer will be in a position to repay the
outstanding dues within the extended period under advice to Head Office.
iv) In case the party fails to liquidate their liability within the extended time granted as
mentioned in the proceeding paras the goods should be disposed off in public auction.
v) For disposal of the import consignment, a Disposal Committee shall be constituted by Head
Office on receipt of a report from Branch incumbent that the consignment need to be disposal off
by public auction as per Head Office standing instruction. The Disposal Committee shall be
concerned with the Head Office as Chairman, Manager of main Branch and Manager of
concerned branch or as decided by the H.O.
vi) A notice for public auction of the goods should be published by the Disposal Committee at
least in two National Dailies (one Bengali and English). In all cases of public auction required
earnest money shall be 5% to be fixed by Head Office of the quoted amount in the farm of
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Demand Draft / Payment Order. This condition must invariably be mentioned in the public
notice inviting quotations for sale of import consignments. The Disposal Committee should open
the tenders and select the highest bidder.
Chapter Seven
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7.0 FINDINGS
8.0 RECOMMENDATION
9.0 CONCLUSION
7.0 FINDINGS
• Partiality Service -
Brac Bank somehow taken the view that, they have a huge customer base, they do not need
to serve each customer with same intensity. It is true some extent. Priority customers,
account holders and non account holders are not supposed to be treated in the same way.
But still they should maintain a minimum level of service.
• e-Banking –
Brac Bank provides Internet Banking service only for Retail Banking clients but it has a
great demand among Wholesale Banking clients or Corporate clients.
• Credit Card Service –
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Corporate Customers often require Credit Card for their massive business purpose but Brac
Bank provides this service only single users.
• Statement of Accounts –
Customers often complain about the delay to issue of bank statement. Duplicate statements
are issued from the bank at high charge. For the statement with duration of less than a year,
It can be printed from the branch for the cost of Tk.575. For the statement with the time
period more than one year, it will require three working days and Tk. 1150 and will be
issued from the head office. This long procedure may arouse dissatisfaction of the
accountholders.
• Fees and Charges –
In Brac bank the rate of interest against deposited amount is comparatively lower than the
other bank and the rate of interest against the loaned amount is more than that of other
bank. It is true that banking service is a credence good, which consumers do not understand
fully. Online balance transfer, SWIFT charge, Letter of Credit (L/C) margin, L/C
commission is comparatively high than that of other bank.
• Speculation -
For conducting international business Brac Bank sometimes face difficulties due to some
speculative business by the clients. For example conversion of foreign exchange at a higher
rate, under invoice, amendment of L/C is requiring due to negligence’s of the bank
employee.
8.0 RECOMMENDATION
From the above discussions, Perceived knowledge proves to be a significant factor for
consumers’ external information search in investment service industry to adopt banking service.
Therefore, banks selling investment products should provide authentic and as much as
information’s they can to take a safe decision and for the well being of the customers. So Brac
Bank should take more initiative to follow all rules & laws regarding those matters. In order to
improve in these areas, I have tried to make some recommendations for Brac Bank Gulshan
Branch.
• Revise interest rates:
The foremost demand of the majority of customers was to reduce the interest rates. Some of
the local banks such as Bank Asia, Dhaka Bank, planned to offer their customers similar kind
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of product with a lower interest rate. Brac Bank should take precautionary measures to keep
their product viable to customers both new and old. So the suggestion to Brac Bank would be
to set charges consistent with competitor's charges pattern.
• Change the Stance:
Brac Bank needs to understand that, though they have got a big customer base, which gives
them immense competitive advantage, but if they don't hold them, it will not be a sustainable
advantage. It is true that Brac Bank has a high brand recognition, but it will be foolish of them
to think that it cannot deteriorate, especially when other banks are so focused on customer
service now a days.
• Lessen monthly and other related charges:
Reducing existing charges can successfully attract a huge number of customers to Brac Bank.
If charges are made considerable, Brac Bank can capture a big portion of middle class society
who can be proved to be better customer than any other class of the society. Brac Bank should
lower their charges immediately so as to prevent the loss of customers.
• Make hassle-free procedure:
People of our country usually do not want to step in those systems that are tricky and
multifaceted. And it has been seen that customers of Brac Bank mostly complain about their
procedure. To hold on to a large number of customers Brac Bank should understand that they
have to make their service availing procedures, like to get a card; to seal it and other others
related procedures, easier and tranquil.
• Ample Legal protection:
Money Laundering Prevention Act should be implemented by the respective authority. Internal
control department and compliance division should be strengthening to abide by domestic as
well as international rules for exchange operation. Brac Bank should abide by the procedure
& laws of Bangladesh Bank, International Chamber of Commerce, Bank of International
Settlement and UCP 600 for L/C operation.
• Educate customers more about credit card:
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Many customers do not understand many terms and procedures of credit card although they are
using the card. So, in this case Brac Bank as a whole or if it not possible than it would at least
provide the customer with some informative bruiser
• Train the Customer Relation Officers (CRO) more:
Recruit or train the existing workforce. Brac Bank should recruit more qualified, skilled and
smarter staffs, who will be able to plead with eligible clients to have a banking relationship
with Brac Bank. The present staffs do not seem to lack the quality, but Brac Bank needs to
understand that there is a limit of taking work load in every person. To keep pace with the
increased competition, it is advised to Brac Bank to raise the skill level of the CROs. In that
case employee trainings and workshops should be administered in order to give them
knowledge and professionalism in operation interactions. Along with that, Brac Bank senior
officials should be more cooperative to their subordinates and arrange for workshops to keep
them motivated in their work.
• Provide service on time:
It is seen that CRO tells exactly when services will be performed according to the respondents.
However, this totally contradicts with the actual scenario. Most of the customers said that,
services are not performed as when it is being told. CROs should be more trained in regard to
the actual processing and capturing time of the head office, so that there is no communication
gap between them and the customers.
9.0 CONCLUSION
Modern Commercial Banking is exacting business. The reward are modest, the penalties for bad
looking are enormous. And Commercial banks are great monetary institutions, important to the
general welfare of the economy more than any other financial institution. It has a vastly sobering
and exacting responsibility. Brac Bank Limited (BBL) playing a vital role in financing import
and exports of the country. Without Bank's co-operation, it is not possible to run any business or
production activity in this age. Exports and import need finance in various stages of their
activities. Export and import financing are Letter of Credit (L/C), Payment Against Documents
(PAD), Loan against imported merchandise (LIM) etc. All these facilities are provided by BBL.
For this purpose Bank's consider the borrower's business standing, integrity, liability with the
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bank term and conditions of the L/C. There are lots of risks involved in foreign business. So, the
Brac Bank Limited (BBL) has to clearly justify the customers from a neutral point and gather the
current information about the market.
Moreover, there are a huge number of private banks that are in the competition. Brac Bank
keeps great contribution to develop our economy by providing service in several business
sectors like Ready-made Garment Industry (RMG), Power Sector, Agricultural Machineries
Industries and Pharmaceuticals sectors etc. Therefore, it is better for Brac Bank not to let the
situation be worse, and from now on Brac Bank should emphasize on serving clients more
effectively, efficiently and economically.
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