C-5 Foreign Exchange Department

Chapter: 5 Foreign Exchange Department

Like, Our is a problematic country, there are a lot of country that has problem. But if we cross the boundaries we will see that the matter we see a problem for us may be used as our resources. The matter on which in our country has little prospect can create it own prospect only by crossing the geographical boundaries. Foreign trade has been born with this view. But the problem is created when two parties have corresponding need but unknown to each other. Bank provides the solution for dealing with this matter. Bank does it through “Foreign Exchange department”.

In terms of section 2(d) of the Foreign Exchange Regulations-1947, as adopted in Bangladesh foreign exchange means foreign currency and includes any instrument drawn, accepted, made or issued under clause 13 of article 16 of the Bangladesh Bank Order, 1972, all deposits, credits and balances payable in any foreign currency and draft, travellers cheque, letter of credit and bill of exchange expressed or drawn in Bangladesh currency but payable in any foreign currencies.

In exercise of the powers conferred by sec. 3 of the Foreign Exchange Regulations-1947, Bangladesh Bank issues license to scheduled banks to deal with foreign exchange. These banks are known as Authorized Dealers (AD). Licenses are also issued by Bangladesh Bank to persons or firms to exchange foreign currency instruments such as T.C., Currency notes and coins. They are known as Authorized Money Changers.

Foreign exchange department of MBL, Main Branch is divided into two sections:

L/C Operation Foreign Remittance

As more than one currency is involved in foreign trade, it gives rise to exchange of currencies which is known as Foreign Exchange. The term 'Foreign Exchange' has three principal meanings.

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Foreign Exchange Department:

Area of Foreign Exchange Department:


Firstly it is a term used referring to the currencies of other countries in terms of any single one currency. To a Bangladeshi, Dollar, Pound Sterling, etc. are foreign currencies and as such foreign exchanges.

Secondly, the term also commonly refer to some instruments used in international trade, such as Bill of Exchange, drafts, travellers cheque and other means of international remittance.

Thirdly the term foreign exchange is also quite often referred to the balance in foreign currencies held by a country.

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Functions of Foreign Exchange Department:


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Foreign Exchange

Import Export

L/C openning

Loan against imported merhandised

Loan against trust receipt

Payment against Document

Inward Bills Guarantee

Dealing Section

Realization Export Certificate

Foreign Bills for collection

Post Shipment Finance

Preshipment Finance

Export against Advising

Remittance

Quoting rate of Exchange

Forward Cover (Booking of Contract)

Guidance on rates trend to customer

Reconciliation

Inward Remittance

Outward remittance (FDD, MT,TT)

Travel Returns

Purchase of foreign currency

Issue and sale of Foreign currency

Other ReturnsReturns to Bangladesh Bank

Figure: Functions of Foreign Exchange

5.3. L/C OPERATION:Sections:


Letter of credit commonly termed as L/C is defined as “Credit Contract” whereby the buyer’s bank committed (on behalf of the buyers) to place an agreed amount of money at the seller’s disposal under some agreed conditions. Since the agreed conditions include amongst other things, the presentation of some specified documents, the letter of credit is called Documentary letter of credit. The Uniform Customs And Practices for Documentary Credit (UCPDC) published by International Chamber of Commerce (1993) publication no 500 defines Documentary Credit:

“Any arrangement however named or described whereby a bank (the issuing bank) acting at the request and on the instructions of a customs (the Applicant) or on it’s own behalf, is to make a payment to or to the order of a third party(the beneficiary) or is to accept and pay bills of exchange(Drafts)drawn by the beneficiary or Authorize another bank to effect such payment or to accept and pay such bills of exchange (Drafts) or Authorize another bank to negotiate against stipulated documents provide that terms and conditions are complied with.”

Types of Documentary Letter of Credit:

Documentary letter of credit, basically, can be classified into two segments:

a) Revocable letter of creditb) Irrevocable letter of credit

Revocable Letter of Credit: This type of letter of credit can be revoked or cancelled at any time without consent of, or notice to the beneficiary. As per article 8 (a) of UCPDC-500 “A revocable credit may be amended or cancelled by the issuing bank at any moment and without prior notice to the beneficiary”.

In case of seller (beneficiary), revocable credit involves risk, as the credit may be amended or cancelled while the goods are in transit and before the documents are presented, or although presented before payments has been made. The seller would then face the problem of obtaining payment on the other hand revocable credit gives the buyer maximum flexibility, as it can be amended or cancelled without prior notice to the seller up to the moment of payment buy the issuing bank at which the issuing bank has made the credit available. In the modern banking the use of revocable credit is not widespread.

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Irrevocable Letter of Credit : An irrevocable credit is a documentary credit, which cannot be revoked, varied or changed/amended or cancelled without the consent of all parties- buyer (Applicant), seller (Beneficiary), Issuing Bank, and Confirming Bank (in case of confirmed L/C). As per Article 9(a) of UCPDC 500, an irrevocable credit constitutes a definite undertaking of the Issuing Bank, provided that the stipulated documents are presented to the Nominated Bank or to the Issuing Bank and that the terms and conditions of the credit are complied with. Irrevocable Credit gives the seller greater assurance of payments, but he/she remains dependent on an undertaking of a foreign bank.

5.3.1 Classification of Letter of Credit(_L/C )

Form Of L/C: L/C

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Letter of Credit (LC)

Cash LC ( Paid in Cash)

Back to Back L/C

At the sight L/C

Deffered L/C

Figure: Classification of Different types of L/C


DOCUMENTS USED IN L/C OPERATION:

Documents Particulars in Document1. Bill of Exchange - Bill of Exchange is one of the important negotiable instruments in the mercantile world and used as a vital document facilitating settlement of payments between buyer/importer and seller/exporter at home and abroad

There are 3 parties o Drawer- The person who

draws the bill.o Drawee- The person on

whom the bill is drawn

o Payee- The person on whom the amount is payable

Payment is made under the sales contract or condition of L/C

2. Bill of Lading – A bill of lading is a document that is usually stipulated in a credit when the goods are dispatched by sea. It is evidence of a contract of carriage, is a receipt for the goods, and is a document of title to the goods. It also constitutes a document that is, or may be, needed to support an insurance claim.

Bill of Lading includes-o A description of the goods

in general terms not inconsistent with that in the credit.

o Identifying marks and numbers.

o The name of the carrying vessel.

o Evidence that the goods have been loaded on board.

o The ports of shipment and discharge.

o The names of shipper, consignee and name and address of notifying party.

o Whether freight has been

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Mail L/C:The L/C which is mailed to Beneficiary

SWIFT L/C:The L/C which is automatically sent to beneficiary


paid or is payable at destination.

o The number of original bills of lading issued.

o The date of issuance.

3. Commercial Invoice -A commercial invoice is the accounting document by which the seller charges the goods to the buyer.

Commercial Invoice include-o Dateo Name and address of buyer

and sellero Order or contract number,

quantity and description of the goods, unit price and the total

o Price o Weight of the goods,

number of packages, and shipping marks and numbers

o Terms of delivery and payment

o Shipment details

4. A certificate of origin is a signed statement providing evidence of the origin of the goods.

5. Inspection Certificate- This is usually issued by an independent inspection company located in the exporting country certifying or describing the quality, specification or other aspects of the goods, as called for in the contract and/or the L/C. The buyer who also indicates the type of inspection he wishes the company to undertake usually nominates the inspection company.

6. Packing List -This is a unique document and not combined with other document. This is a listing of the contents of each packages, cartoon etc. and other relevant information.

o Gross Wt., Net Wt. & Measurement, Number of Cartons/Packages differ with B/L

o Not marked one fold as Original

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o Not signed by the Beneficiary

o Shipping marks differ with B/L

7. Insurance Document:Insurance is a contract whereby the insurer is undertaking to indemnify the assured to the agreed manner and extent against fortuitous losses

. Insurance document generally contains the following information:

The name of the insurer or his agent

The name of the ship/carrier The name of assured The subject matter of

insurance The time and/or voyage

insured The peril(s) insured against The date and subscription The valuation The stamp etc.

8. Proforma Invoice/ IndentPro Forma Invoice/indent is the sale contract between seller and buyer in import- export business. There is slight difference between indent and Proforma invoice. The sales contract, which is direct correspondence between importer and exporter, is called Proforma invoice

Proforma Invoice/ Indent contains-

Name of the Beneficiary company

Address of Beneficiary Mode of Payment and

Payment terms and condition.

Sales amount and price Types of goods. Bill number. Mode of transport.

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5.3.2 DIFFERENT ACCOUNTS RELATED TO FOREIGN EXCHANGE TRANSACTION:


In L/C operation different accounts are maintained which are needed for foreign exchange transaction. These are:

NOSTRO ACCOUNT:

Nostro account means “our account with you”. A Nostro account is a foreign currency account of a bank maintained its foreign correspondents abroad. For example, US Dollar Account of MBL maintained with Citibank, N.A, New York, USA is a Nostro account of MBL.

VOSTRO ACCOUNT:

Vostro account means “your account with us”. The account maintained with foreign correspondent in a bank of a particular country is known as Vostro account.

What is the nostro account for a bank in a particular country is a vostro account for the bank abroad maintaining the account thus the account of MBL with Citi Bank N.A, New York is regarded as it’s nostro account held with Citi Bank, while Citi Bank N.A, New York regards it as a it’s vostro account held for MBL.

LORO ACCOUNT:

Loro account means “their account with you”. Account maintained by third party is known as loro account; suppose MBL is maintaining an account with Citi Bank N.A, New York and at the same time Janata Bank is also maintaining a nostro account with Citi Bank N.A, New York. From the point of view of MBL Janata Bank’s account maintained with Citi Bank N.A New York is the loro account.

5.3.3 PARTIES INVOLVED IN L/C OPERATION:

The documentary credit is an essential implement for conducting world trade today. With the third party assurance the whole process is covered. Documentary credit substantially reduces payment related risks for both exporter and importer. So in the whole L/C operation there are many parties involved. The parties are given in a chart in the following page:

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Table : Parties Involve in L/CParties involving L/C Description1. Importer/Applicant Importer wants to import goods from other countries. In

terms of the Importers (Registration) Order-1981 no person can import goods into Bangladesh unless he is with the Chief Controller of Import And Export (CCI&E). he is also called applicant. The bank opened L/C on the importer’s application.

2. Issuing Bank/Opening Bank

The bank which opens L/C on behalf of the importer is called issuing bank. Issuing bank’s obligation is to make payment against presentation of documents drawn strictly as per terms of L/C.

3. Advising Bank The bank through which the L/C is advise / forwarded to the beneficiary. It is situated in the beneficiary’s country. The most important function of this bank is to make sure the beneficiary about the authenticity of the documents.

4 Beneficiary/Exporter/Seller Beneficiary is the party in whose favor the L/C is issued. Usually he is the seller or exporter.

5. Negotiating Bank The bank that negotiates the bill of exporter drawn under the credit is known as negotiating bank. If the advising bank is also authorized to negotiate the bill drawn by the exporter, he becomes the negotiating bank.

6. Reimbursing Bank The bank nominated in the credit by the issuing bank to make payment stipulated in the document, complying with the reimbursement bank. In reimbursing bank the issuing bank maintains its nostro account.

7. Confirming Bank Confirming bank is a bank that adds its confirmation to the credit and it is done at the request of the issuing bank. It provides the credit report of the exporter of his country. If the advising bank also adds its own undertaking to honor the credit while advising the same to the beneficiary, he becomes the confirming bank, in addition, becomes liable to pay for documents in conformity with the L/C’s terms and condition.

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5.3.3 Mechanism for L/C opening:

The L/C operation section is divided into two. They are a) Import andb) Export.

5.4.1 IMPORT:

Import means purchase of goods and services from the foreign countries into Bangladesh. Normally consumers, firms, industries and Government of Bangladesh import foreign goods / materials to meet their various necessities. So, in brief, we can say that import is the flow of goods and services purchased by economic agent staying in the country from economic agent staying abroad.

REGULATION OF IMPORT:

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Issuing Bank Advising Bank (against of the issuing bank)

Negotiating Bank (Exporter has an

account with this bank)

Reimbursement Bank (The bank that debit the importers account

Add confirming Bank (Confirmation of the L/C opening bank if wanted by the negotiation Bank)

5.4 Operation of L/C:


Import of goods into Bangladesh is regulated by the Ministry of Commerce in terms of the Import and Export (Control) Act-1950 with Import Policy Order issued periodically and public notices issued time to time by the office of the Chief Controller of Import and Export (CCI&E). At present, it is regulated by the Import Policy (1997-2002), which was come into effect on June14, 1998. And Import Policy directs certain Import Procedure, which administers the whole activity.

5.4.2 IMPORT PROCEDURE FOLLOWED BY MBL:

As an Authorized Dealer, MBL, Main Branch is always committed to facilitate import of different goods into Bangladesh from the foreign countries. Import Section, which is under Foreign Exchange Department of the branch, is assigned to perform this job. And to serve its client’s demand to import goods, it always maintains required formalities that are collectively termed as The Import Procedure are given in the next page..

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The importer must obtain Import Registration Certificate (IRC) from the CCI&E submitting the following papers:Up to date Trade License.Nationality and Asset Certificate.Tax Indification NumberVAT Registration Number In case of company, Memorandum & Articles of Association and Certificate of Incorporation.Bank Solvency Certificate etc.

Step -1

Step-2

After that the importer has to collect a proforma Invoice/Indent or sales contract which will meet his demand. An indenter is the local agent. Other sources are: Trade fair.Chamber of Commerce.Foreign Missions in BangladeshJournals etc.

Step-3 After importer has to accept the terms and condition of the Proforma Invoice/Indent.

Step-4

Then the importer has to settle about the means of payment. They are:

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

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

Collection Method- Collection methods are either clean collection or documentary collection. Again, Documentary Collection may be Document against Payment(D/P) or Document against Acceptance(D/A). The collection procedure is the exporter ships the goods and draws a draft/ bill on the buyer. The exporter submits the draft/bill (only or with documents) to the remitting bank for collection and the bank acknowledges this. Then the remitting bank sends the draft/bill (with or without documents) and a collection instruction letter to the collecting bank. Acting as an agent of the remitting bank, the collecting bank notifies the importer upon receipt of the draft. The title of goods is released to the importer upon full payment or acceptance of the draft/bill.

Continuation to next Page


Import section deals with L/C opening and post import financing i.e. LIM & LTR. Now the procedure from opening L/C to disbursement against L/C is given below:

5.4.3 APPLICATION FOR OPENING L/C:

At first, an importer will request banker to open L/C along with the following documents.

An application Indent or Pro forma Invoice Import Registration Certificate (IRC) Taxpayer’s Identification Number (TIN) Insurance cover note with money receipt A bank account in MBL, Main Branch Membership of chamber of commerce

5.4.4 DELIVERED FORMS BY BANKER TO IMPORTER:

After scrutinizing above-mentioned documents carefully, officer delivers the following forms to be filled up by importer and the banker should check:

a) Whether the goods to be imported is permissible or not.

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Step-4(Rest )

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

Step-5Requesting the concerned bank (importer’s bank /issuing bank) to open a L/C(irrevocable) on behalf of importer favoring the exporter/seller.

Fig: Import procedure


b) Whether the goods to be imported is demanding or not.

5.5.Different forms involved in L/C :

5.5..1 L/C APPLICATION FORM (LCAF):

L/C Application Form is a sort of an agreement between customer and bank on the basis of which letter of credit is opened. MBL, Main Branch provides a printed form for opening of L/C to the importer. Special adhesive stamp of value Tk.150.00 is affixed on the form in accordance with Stamp Act. While opening, the stamp is cancelled. Usually the importer expresses his decision to open the L/C quoting the amount of margin in percentage. Usually the importer gives the following information –

Full name and address of the importer Full name and address of the beneficiary Draft amount Availability of the credit by sight

payment/acceptance/negotiation/deferred payment Time bar within which the documents should be presented Sales type (CIF/FOB/C&F) Brief specification of commodities, price, quantity, indent no.

etc. Country of origin Bangladesh Bank registration number Import License/LCAF number IRC number Account number Documents number Insurance Cover Note / Policy number, date, amount Name and address of Insurance Company Whether the partial shipment is allowed or not Whether the transshipment is allowed or not Last date of shipment Last date of negotiation Other terms and conditions (if any) Whether the confirmation of the credit is requested by the

beneficiary or not.

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The L/C application must be completed/filled in properly and signed by the authorized person of the importer before it is submitted to the issuing bank.

5.4.5.2 L/C AUTHORIZATION FORM (LCAF):

The Letter of Credit Authorization Form (LCAF) is the form prescribed for the authorization of opening letter of credit/payment against import and used in lieu of import license. The authorized dealers are empowered to issue LCA Forms to the importers as per basis of licensing of the Import Policy Order in force to allow import into Bangladesh. If foreign exchange is intended to be bought from the Bangladesh Bank against an LCAF, it has to be registered with Bangladesh Bank’s Registration Unit located in the concerned area office of the CCI&E. The LCA Forms available with authorized dealers are issued in set of five (05) copies each. First Copy is exchange control copy, which is used for opening of L/C and effecting remittance. Second Copy is the custom purpose copy, which is used for clearance of imported goods from custom authority. Triplicate and Quadruplicate Copy of LCAF are to be sent to concerned area of CCI&E office by authorized dealer/Registration Unit of Bangladesh Bank. Quadruplicate Copy is kept as office copy by authorized dealer/Registration Unit. The Letter of Credit Authorization Form (LCAF) contains the followings –

Name and address of the importer IRC number and year of renewal Amount of L/C applied for (both in figure and in word) Description of item(s) to be imported HS Code number Signature of the importer with seal List of goods to be imported

5.4.5.3 IMPORT PERMIT FORM (IMP):

L/C authorization form number Date Value in Taka Registration of LCAF Quantity of goods Invoice value Country of origin Port of shipment Name of the steamer

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Indentor’s address.

5.4.5.4 PREPARATION OF L/C BY BANKER:

Bank’s officer prepares L/C when above-mentioned forms are to be submitted by customer or importer. Before preparing L/C MBL officer scrutinizes the application in the following manner.

1. The terms and conditions of the L/C must be complied with UCPDC 500 and Exchange Control & Import Trade Regulation.

2. Eligibility of the goods to be imported.3. The L/C must not be opened in favor of the importer.4. Radioactivity report in case of food item.

Survey reports or certificate in case of old machinery is required. Bank of the importer is called ‘L/C Issuing Bank’. Then issuing bank inform its corresponding bank, called “Advising Bank’ or ‘Confirming Bank” located in exporter’s country to advise and credit forward to the exporter and simultaneously officer makes L/C opening vouchers.

One debit voucher to be passed. Corresponding credit vouchers to be passed. (margin, commission, postage, stamp, F.F.C. and others.) Liability voucher to be passed.

ACCOUNTING TREATMENT:

Particulars Dr./Cr.

L/C Applicant A/C or Customer’s A/C Dr.Margin A/C Commission A/C Postage A/C Stamp A/CF.F.C(foreign corresponding charge) A/CTelex charge A/COther A/C

Cr.Cr.Cr.Cr.Cr.Cr.Cr.

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5.5 DESK WORK:


Customer’s liability A/C Dr.

Banker’s liability A/C Cr.

THE L/C CONFIRMING PROCESS:

5.5.1FORWARDING DOCUMENTORY CREDIT BY ADVISING OR CONFIRMING BANK:

There are usually two banks involved in a documentary credit operation. The issuing bank and the advising bank which is usually a bank in the seller’s country. The issuing bank asks another bank to advise or confirm the credit.If the 2nd bank is simply “advising the credit”, it will mention that when it forwards the credit to seller, such a bank is under no commitment or obligation to pay the seller.

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

5.5.2 SUBMISSION OF NECESSARY DOCUMENTS BY EXPORTER TO THE NEGOTIATING BANK:

As soon as the seller/exporter receives the credit and is satisfied that he can meet its terms and conditions, he is in position to load the

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L/C Issuing Bank

L/C Confirming Bank

Exporter or L/C Beneficiary

Issue L/C & request to Add Confirm


goods and dispatch them. The seller then sends the documents evidencing the shipment to the bank. Exporter will submit those documents in accordance with the terms and conditions as mentioned in L/C. Generally the documents observed in the foreign exchange department are:

Bill of exchange Commercial invoice Bill of lading Certificate of origin Packing list Clean Report of Finding (CRF) Weight list Insurance cover note Pre-shipment certificate

Clean Report Of Findings (CRF):

This certificate is provided by the Pre Shipment Inspection (PSI) Concerns. The entire world has been brought under the three supervision of the three pre shipment inspection concerns based on different territory. These are as follows

Intertek Testing Service Inspectorate Griffith Ltd. Bureau Veritas

5.5.3 THE DOCUMENTS SENT TO THE ISSUING BANK THROUGH THE NEGOTIATING BANK:

The negotiating bank carefully checks the documents provided by the exporter against the credit, and if the documents meet all the requirement of the credit, the bank will pay, accept, or negotiate in accordance with the terms and conditions of the credit. Then the bank sends the documents to the L/C opening bank.

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Negotiating Bank

L/C Issuing Bank

Sending L/C Documents


MAKING THE PAYMENT OF FOREIGN BILL THROUGH THE REIMBURSING BANK:

The L/C issuing bank getting the documents checks immediately and if they are in order and meet the credit requirements, it will arrange to make payment against L/C through reimbursement bank and will send the importer the document arrival notice.

5.5.4 SCRUTINY OF THE DOCUMENTS:

First of all it must be ensured that full set of documents as mentioned in the L/C has been received. The bank official must make sure that the following documents are given and then he should scrutinize the documents.

Documents have been negotiated within the negotiation period. The Bill of Lading/Air-Way Bill/ Railway receipt is not dated later

than the last date of shipment mentioned in the L/C. The L/C has not been amended or subjected to any special

instructions, which might alter the value of L/C. Import bills include following documents, which are to be

scrutinized. Bill of Exchange Commercial Invoice Bill of Lading Certificate of Origin Others

5.5.4.1Bill of Exchange:

It has to be verified that the bill of exchange has been properly drawn and signed by the beneficiary according to the terms and conditions of L/C.

The amount in the bill is identical with that mentioned in the invoice.

The amount drawn does not exceed the amount mentioned in the L/C.

The amount in words and figures should be same. The bill of exchange should be properly endorsed.

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5.5.4.2 Commercial Invoice:

It has to be verified that the commercial invoice has been properly drawn and signed by the beneficiary according to the terms and conditions of L/C.

The beneficiary should properly invoice the merchandise. The merchandise is invoiced to the importer on whose account the

L/C is opened. The description of merchandise and the unit price correspond with

that given in the L/C. The import license or IRC number of the importer, indenter’s

registration number and number of Letter of Credit Authorization number are incorporated in the Invoice.

5.5.4.3 Bill of Lading: First of all it has to be cleared that the Bill of Lading is showing “Shipped on Board” and it has to be properly endorsed to the bank. The B/L should include the description of the merchandise

according to invoice. The port of shipment and destination, date of shipment and the

name of the consignee are in agreement with those mentioned in the L/C.

The shipping company or their authorized agents properly sign the B/L.

The date on the B/L is not ‘stale’ which means it is not dated in unreasonably long time prior to negotiation.

5.5.4.4 Certificate of Origin:The Merchandise described in the Certificate is in accordance with the L/C.

5.5.4.5 Others:There are some other documents, which are also attached, with the shipping documents like packing list, pre-shipment inspection certificate etc. These documents are also verified carefully before lodgment.

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After scrutinizing the import negotiating document, if no discrepancy are found then it is treated to be accepted after the end of seven banking days following the day of receipt of the document under “Article 1(b) of UCPDC –500”. If any discrepancy is found then the banker inform it to the importer that whether he accept the bills with discrepancies or not. If the importer does not accept, the banker (PBL) informs it to the negotiating bank within seven banking days from the date of receipt of the documents, otherwise it is treated to be accepted and the opening bank (MBL) must bound to pay against the bill and no complain against the bill will be accepted more than 4 banking days following the date of receipt of the documents under article number K1 (d) & article number 14 (c) of the UCPDC-500.

5.6.1 ACCOUNTING TREATMENT:

The office passes the following vouchers after negotiation.

PAD (Payment Against Document) Account Dr.

H.O. International Division Account Cr.

Reverse entry is given.

Banker’s liability Account Dr.Customer’s liability Account Cr.

The shipping documents then stamped with PAD number and entered in the PAD register. As soon as the above formalities are completed, the importer is served with PAD bill intimations for retirement of concerned import documents.

On intimation the importer calls on the bank’s counter requesting retirement of the shipping documents against payment to the debit of their account by the bill amount and other charges payable. Bank prepares cost memo in printed form on account of the concerned party giving detailed read of charges payable.

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5.6 LODGMENT & RETIREMENT OF SHIPPING DOCUMENTS:


Vouchers passed in retiring documents:

L/C margin Account Dr.Party Account Dr.PAD Account Cr.Income Account interest on PAD

Cr.

Commission on PAD Cr.Miscellaneous earning Cr.

After the vouchers are passed, endorsement is made on the back of the bill of exchange as ‘Received Payment’ & bill of leading is endorsed to the effect that ‘Please deliver to the order of M/S’ under two authorized signatures of the bank officials of MBL. Then the documents are delivered to the L/C applicant (importer).

But if there is any discrepancy in the documents, the L/C issuing bank send message to the negotiating bank to rectify it under its risks and responsibilities.

5.6.1 POST-IMPORT FINANCING:

If there is no available 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 form of post import finance available in MBL Main Branch.

LTR (Loan Against Trust Receipt).

5.6.1.1 LTR:

On the arrival of goods and lodgment of import documents, importer may request the bank for clearance of goods from the port (custom). Proper sanction from the competent authority is to be obtained before clearance of consignment.

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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.

It’s needless to say that bank only deals with the documents, not with goods & services in case of foreign exchange business.

Creation of wealth in any country depends on the expansion of production and increasing participation in international trade. By increasing production in the export sector we can improve the employment level of such a highly populated country like Bangladesh. Bangladesh exports a large quantity of goods and services to foreign households. Readymade textile garments (both knitted and woven), Jute, Jute-made products, frozen shrimps, tea are the main goods that Bangladeshi exporters export to foreign countries. Garments sector is the largest sector that exports the lion share of the country's export. Bangladesh exports most of its readymade garments products to U.S.A and European Community (EC) countries. Bangladesh exports about 40% of its readymade garments products to U.S.A. Most of the exporters who export through MBL are readymade garments exporters. They open export L/Cs here to export their goods, which they open against the import L/Cs opened by their foreign importers.

Export L/C operation is just reverse of the import L/C operation. For exporting goods by the local exporter, bank may act as advising banks and collecting bank (negotiable bank) for the exporter.

5.7.1 EXPORT POLICY:

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

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

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

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5.7 EXPORT:


5.7.2 EXPORT INCENTIVES:

Different incentives are:

5.7.2.1Financial Incentives: Restructuring of Export Credit Guarantee Scheme;

Convertibility of Taka in current account;

Exporters can deposit 40% of FOB value of their export earnings

in own accounts in dollar and pound sterling;

Export Development Fund;

Expansion of export credit period from 180 days to 270 days;

50% tax rebate on export earnings;

Duty draw back;

Bonded warehouse facilities to 100% export oriented firms;

Duty free import of capital equipment for 100% export oriented

firms;

5.7.2.2 GENERAL INCENTIVES: National Export Trophy to successful exporters;

Training course on external trade;

Arrangement of international trade fairs, commodity-based

exhibitions in the country and participation in foreign trade

fairs;

5.7.2.3 OTHER INCENTIVES: Assistance in improvement of quality and packaging of

exportable items;

Simplification of export procedures;

5.7.3 EXPORT PROCEDURES:

The import and export trade in our country are regulated by the

Import and Export (Control) Act, 1950.

Under the export policy of Bangladesh the exporter has to get valid Export registration Certificate (ERC) from Chief Controller of Import

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& Export (CCI&E). The ERC is required to renew every year. The ERC number is to incorporate on EXP forms and other papers connected with exports.

5.7.4 REGISTRATION OF EXPORTERS: For obtaining ERC, intending Bangladeshi exporters are required to apply to the controller/ Joint Controller/ Deputy Controller/ Assistant Controller of Imports and Exports, Dhaka/ Chittagong/ Rajshahi/ Mymensingh/ Sylhet/ Comilla/ Barishal/ Bogra/ Rangpur/ Dinajpur in the prescribed form along with the following documents:

Nationality and Assets Certificate; Memorandum and Article of Association and Certificate of

Incorporation in case of Limited Company; Bank Certificate; Income Tax Certificate; Trade License etc.

5.7.5 SECURING THE ORDER:

After getting ERC Certificate the exporter may proceed to secure the export order. He can do this by contacting the buyers directly or through agent.

In this purpose the exporter may get help from:

License Officer; Buyer’s Local Agent; Export Promoting Organization; Bangladesh Mission Abroad; Chamber of Commerce (local & foreign) Trade Fair etc.

5.7.6 SIGNING THE CONTRACT: After communicating buyer, exporter has to get contracted (writing or oral) for exporting exportable items from Bangladesh detailing commodity, quantity, price, shipment, insurance and marks, inspection and arbitration etc.

5.7.7 RECEIVING LETTER OF CREDIT:

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After getting contract for sale, exporter should ask the buyer for Letter of Credit (L/C) clearly stating terms and conditions of export and payment.The following are the main points to be looked into for receiving/ collecting export proceeds by means of Documentary Credit:

(1)The terms of the L/C are in conformity with those of the contract;

(2)The L/C is an irrevocable one, preferably confirmed by the advising bank;

(3)The L/C allows sufficient time for shipment and negotiation.(Here the regulatory framework is UCPDC-500, ICC publication)

Terms and conditions should be stated in the contract clearly in case of other mode of payment:

Cash in advance; Open account; Collection basis (Documentary/ Clean)

(Here the regulatory framework is URC-525, ICC publication)

5.7.8PROCURING 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.

5.7.9 SHIPMENT OF GOODS: Then the exporter should take the preparation for export arrangement for delivery of goods as per L/C and incoterms, prepare and submit shipping documents for Payment/ Acceptance/ Negotiation in due time.Documents for shipment:

EXP form,

ERC (valid),

L/C copy,

Customer Duty Certificate,

Shipping Instruction,

Transport Documents,

Insurance Documents,

Invoice,

Other Documents,

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Bills of Exchange (if required)

Certificate of Origin,

Inspection Certificate,

Quality Control Certificate,

G.S.P. Certificate,

Phyto-sanitary Certificate

5.7.10 FINAL STEP:

Submission of the documents to the Bank for negotiation.

Bangladesh is a developing country. After receiving order from the importer, very frequently exporters face problems of scarcity of raw material. Because some raw materials are not available in the country. These have to be collected from abroad. In that case, exporter gives lien of export L/C to bank as security and opens an L/C against it for importing raw materials. This L/C is called Back To Back L/C. In back to back L/C, PBL keeps no margin.

Sometimes there is provision in the export L/C that the importer can use the certain portion of the export L/C amount for importing accessories that are necessary for the making of the product. Only in that case, BTB is opened.

5.8.1 Payment of Back to Back L/C:

Client gives the payment of the BTB L/C after receiving the payment from the importers. But in some cases, client sells the bills to the PBL. But if there is discrepancy, the PBL sends it for collection. In case of BTB L/C, PBL gives the payment to the beneficiary after receiving the payment from the L/C of the finished product (i.e. exporter). Bank gives the payment from DFC Account (Deposit Foreign Currency Account) where Dollar is deposited in national rate.

For BTB L/C, opener has to pay interest at LIBOR rate (London Inter Bank Offering Rate). Generally LIBOR rate fluctuates from 5% to 7%.

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5.8 BACK TO BACK LETTER OF CREDIT

(BTB):


A schedule named Payment Order; Forwarding Schedule is prepared while making the payment. This schedule is prepared when the payment of L/C is made. This schedule contains the followings:

i. Reference number of the beneficiary’s bank and date.ii. Beneficiary’s name.iii. Bill value.iv. Payment order number and date.v. Equivalent amount in Taka.

5.8.2POST 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;

5.8.2.1 NEGOTIATION OF DOCUMENTS UNDER L/C:

The exporter presents the relative documents to the negotiating bank after the shipment of the goods. A slight deviation of the documents from those specified in the L/C may rise an excuse to the issuing bank to refuse the reimbursement of the payment already made by the negotiating bank. So the negotiating bank must be careful, prompt, systematic and indifferent while scrutinizing the documents relating to the export.

5.8.2.1 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

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collects the money from the exporter. PBL 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. For this purpose, PBL maintains a separate register named FDBP Register. This register contains the following information:

Date Reference number (FDBP) Name of the drawee Name of the collecting bank Conversion rate Bill amount both in figure & in Taka. Export form number Export L/C number

5.8.2.3ADVANCES 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. Bills drawn under L/C,

without any discrepancy in the documents, are generally negotiated

by the bank and the exporter gets the money from the bank

immediately. However, if the bill is not eligible for negotiation, 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.

5.8.3EXPORT DOCUMENTS CHECKING:

1. General verification: -a) L/C restricted or not.b) Exporter submitted documents before expiry date of the

credit.c) Shortage of documents etc.

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2. Particular verification:a) Each and every document should be verified with the L/C.

3. Cross verificationa) Verified one documents to another.

Foreign remittance section of MBL, Main Branch is an integral part of

Foreign Exchange Department. And this section of Foreign Exchange

Department deals with incoming and outgoing foreign currencies.

Therefore on the basis of its function, foreign remittance is divided

into two types. These are:

1. Outward Foreign Remittance and

2. Inward Foreign Remittance

5.9.1 OUTWARD FOREIGN REMITTANCES:

Remittances issued by MBL, Main Branch to foreign correspondents

to fulfill its customers’ needs are considered to be the Outward

Foreign Remittances. It comprises the followings:

FDD Issued

FTT Issued

TC Issued

Endorsement of foreign currencies in the passport.

Sale of foreign currencies.

5.9.2 FOREIGN DEMAND DRAFT (FDD) ISSUED:

People have to send money to abroad for various purposes. MBL

issues most of the FDD for the purpose of payment of the application

fees to the foreign universities. For the issuance of FDD, FORM T/M

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5.9 FOREIGN REMITTANCE:


has to be filled-in duly. This form is filled up under the Foreign

Exchange Regulation Act, 1947. This form contains:

The purpose of travel,

Name of the country where the applicant will go,

Name of the air or shipping company,

Passport number,

Date and place of issue of the passport are given.

This form has to be duly signed by the applicant. In case of

application fee, the applicant has to mention the name of the

university in whose favor the FDD is issued. MBL charges TK. 400 for

each FDD.

Accounting Treatment:MBL gives the following entries while issuing FDD:

Client’s Account/ Cash Dr.

Commission Cr.

IDT Cr.

5.9.3TRAVELER’S CHEQUE (TC) ISSUED:

MBL issues only American Express Traveler’s Cheque (TC). For TC,

customer has to fill up T/M form. He has to fill up the purchase form

also. Purchase form has four copies. One copy for American Express

Bank, one copy for PBL, and two copy for the customer. For TC MBL

charges 1% as commission.

Requirements for purchasing TC:

There are some requirements that are to be fulfilled by the Traveler’s

Cheque purchaser. The requirements are ---

i) Passport holder himself has to be present while

issuing Traveler’s Cheque.

ii) The passport must be a valid one.

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iii) Air ticket has to be confirmed.

Steps involved in issue of Traveler’s Cheque:

1. After verifying all these documents the customer is asked

to fill up prescribed application form.

2. In the application the customer states the amount he is

willing to endorse and it is being verified that his

required amount is within the stipulated.

3. Then the customer pays cash or by debiting his account

the Traveler’s Cheque is issued.

4. Endorsement is given on the passport and on the ticket.

Customer fills up the T/M Form.

5. Purchased application form has to be filled up by the

purchaser.

6. Entry has to be given in the Foreign Currency Register

and in the Traveler’s Cheque Register.

5.9.4 ENDORSEMENT OF CASH:

Cash foreign currency can also be remitted through the cash

endorsement in the passport. In case of endorsing cash in the

passport, the requirements are similar to those of Traveler’s Cheque.

But according to the foreign exchange Regulation Act,1947 an

individual cannot take more than $1000.00 in cash in a year. That’s

why, the concerned officer checks the last voyage of the purchaser. If

he/she made any voyage and if he/she purchase dollar at that time,

then the officer will deduct the amount and will give the rest to the

purchaser.

PBL cannot endorse more than $600.00 as cash at a time. For more

than $600.00, the customer has to purchase TC. For cash

endorsement PBL maintains a separate register. For giving cash

foreign currency, PBL charges Tk. 100.00 as service charge.

5.9.4.1 Opening Of Foreign Account:

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MBL opens foreign currency account. Foreign currency account is

used for receiving foreign currency from abroad or for sending the

currency to abroad. It can be used in favor of a person or in favor of

exporters.

Following papers are required to open a foreign currency account:

i) Exporters’ foreign currency account opening form

(application form, two signature cards duly filled-in and

signed by the potential account-holder with authenticated

seal and introduction bya valued customer the bank).

ii) Two copies of passport size photographs of each operator

attested by Chairman of the company.

iii) Export registration certificate.

iv) Attested photocopy of the membership certificate of the

concerned association (BGMEA/ Others).

v) Export proceeds realization certificate--- declaration /

undertaking regarding the utilization of foreign currency.

vi) Incase of Limited Company:

a) Memorandum & Articles of Association of the

Company.

b) Power of Attorney.

c) Resolution of the Board of Directors.

d) Certificate of Incorporation.

e) Certificate of Commencement of Business.

f) List of Directors.

g) Trade License.

5.9.4.2 Student File Opening:

Student can endorse $200.00 at a time in his own name. But if the

amount exceeds $200.00, then the student has to open a student file.

For opening a student file, the following documents are required:

i) Preliminary application and information for admission.

ii) Letter of approval by the university of the student.

iii) A filled-in application form for foreign currency in abroad.

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iv) “Transcript of Records” given for the last degree by the

university.

v) Certificate given by the Board for S.S.C. / H.S.C. or

equivalent examination.

In case of tuition fees, applicant must send the currency in favor of

the institute. He cannot take the fees of the institute with him

personally. Usually a student has to endorse at least one third of the

fees of a year.

5.9.4.3 INWARD FOREIGN REMITTANCE:

Normally, Inward Foreign Remittance comprises of all incoming

foreign currencies. Remittances issued by the correspondent banks

situated in the foreign countries and thereby drawn on MBL, Main

branch are considered to be its Inward Foreign Remittances.

Followings are the Inward Foreign Remittances of MBL, Main branch.

a. FDD Payable

b. FTT Payable

c. TC Payable

d. Encashment of foreign currencies endorsed in the

passport.

e. Purchase of foreign currencies.

5.9.4.4FOREIGN TT PAYABLE:

Foreign remittance section also pays the claim of the foreign TT. After

receiving TT payable, MBL performs the following functions:--

1) Customer has to fill up a “C Form” if the amount exceeds

$2000.00. “C Form” describes the purpose of sending the TT.

2) The dollar amount comes to the Head office of PBL through

American Express, New York.

3) PBL, Motijheel branch sells the dollar to Head Office @ Tk.

56.50 (this rate was applicable when I was in Foreign

Remittance Section) and collects the money in local currency.

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5.9.5 ACCOUNTING TREATMENT:

Each day, the foreign remittance department gives the following

vouchers:

1.One debit voucher for cash USD sold.

2.One debit voucher for TC sold.

3.One debit voucher for IDT (For total amount)

4.One credit voucher for foreign currency USD (cash sold)

5.One credit voucher for account payable TC sold.

6.One credit voucher for commission on TC.

7.One credit voucher for other fees & commission.

8.One credit voucher for photocopy.

9.One debit voucher for account payable TC sold.

10.One debit voucher for Prime General Account (For TC sold).

11.One debit voucher for FDD.

12.One debit voucher for Prime General Account (For FDD).

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