Foreign Exchange Operation of Mercantile Bank Limited

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‘Foreign Exchange Operation of Mercantile Bank Limited’

1.2 Objective of the study:

This report on Mercantile Bank is prepared for some distinguished objective, which is as follows:

1 To fulfill academic requirement;

2 To gather knowledge about banking companies operations in practical field.

3 To gather practical knowledge and real life experience in official environment.

4 To apply theoretical knowledge in the practical field.

5 To help the students in taking up professional courses in the B.B.A program.

6 To have exposure to the functions of foreign exchange section.

7 To understand procedures of foreign exchange management of commercial banks in Bangladesh.

8 To observe the working environment in commercial banks.

9 To study existing banker customer relationship.

10 To identify a link between practical operational aspects of the Bank to complementary the theoretical lessons

11 To get an overview of the private Banking in our country.

1.4 Methodology of the study:

The study is performed based on the information extracted from different sources collected by using a specific methodology. This report is analytical in nature. The methodology is mentioned below:

1.4.1 Population: All the companies company located in everywhere in Bangladesh have been taken into consideration as population.

1.4.2 Sample: The Mercantile Bank Limited is considered as sample for preparing this report.

1.4.3 Data collection: Source of data of this report can be divided into two categories:

1.4.3.1 Primary Sources:

1 Three months practical participation in internee ship

2 Face-to-Face conversation with the respective officers and staffs.

3 Relevant file study provided by the officers concerned.

1.4.3.2 Secondary Sources:

1 Annual Report of Mercantile Bank Limited.

2 Relevant books, Research papers, Newspapers and Journals.

3 Internet and various study selected reports.

2.1 Mercantile Bank Limited-At a glance:

Mercantile Bank Limited is a scheduled private commercial Bank established on May 20, 1999 under the Bank Company Act, 1991 and incorporated as a Public Limited Company under Companies Act, 1994. The Bank started commercial Banking operations from June 02, 1999. From then with in a short time MBL established itself in a strong position in the economy of the country. It has earned significant reputation in the country’s Banking sector as Bank and created a wide image in the eye of the people. The dream of creating MBL, which is ‘A Bank of 21^st Century’, has become successful because of the initiative of some persons who are the sponsors of MBL. There are 30 sponsors in Mercantile Bank Limited and all of them are highly regarded for their entrepreneurial competence.

2.2 Approach of MBL:

The aim of Mercantile Bank Limited is to become a leading Bank of the 3^rd generation by providing better service to the clients along with other quality operations in Private Banking Sector. The bank has some mission to achieve the organizational goals. This are-

1 MBL intend to provide the better service for the customer.

2 MBL intend to provide the good return for their respectable shareholders.

3 MBL work as medium of exchange on behalf of their potential clients.

4 MBL is much responsive in case of provide the optimum benefit of the customers.

5 MBL is always concentrated to enhance the competitive advantages by upgrading banking technologies and information system.

6 MBL believes in discipline growth strategy.

7 MBL always encourages investors to boost up the share market.

8 MBL maintain high standard of corporate and business ethics.

9 MBL intends to play more important role in the economic development of Bangladesh and its financial relations with the rest of the world through international trade.

2.3 Objectives & Goals of Mercantile Bank Limited:

1 MBL is always ready to maintain the highest quality to services by upgrading banking technology prudence in management and by applying high standard of business ethics through its established commitment and heritage.

2 MBL is committed to ensure its contribution to national economy by increasing its profitability through professional and disciplined growth strategy for its customer and by creating corporate culture in international banking arena.

2 The objective MBL is not only to earn profit but also to keep the social commitment and to ensure its co-operation to the person of all level, to the businessman, industrialist-specially who are engaged in establishing large-scale industry by consortium and the agro-based export oriented medium & small-scale industries by self-inspiration.

3 MBL, one of the renowned private banks is committed to continue its endeavor by rapidly increasing the investment of honorable shareholders into assets.

4 MBL believes in building up strong-based capitalization of the country.

5 MBL is committed to continue its activities in the new horizon of business with a view to developing service oriented industry and culture of morality and its maintenance in banking.

6 MBL is always pre-occupied to encourage the inventors for purchasing its share by creating the opportunity of long-term investment and increasing the value of share through prosperity as developed day by day.

7 MBL is playing a vital role in Socio-economic development of Bangladesh by way of linkage with rest of the world by developing worldwide network in domestic and international operations.

2.4 Directors and Management of MBL:

The organizational structure and corporate governance of MBL strongly reflect its determination to establish, uphold and gain a stronger footing as an organization, which is customer oriented and transparent in its management.

The Board of Directors consists of eminent personalities from commerce and industry of the country. Mr. Md. Abul Jalil, Founder Chairman of the Board of Directors, is a businessman besides being an eminent personality of the country.

The Bank is manned and managed by highly qualified and efficient professionals.

2.6 Functions of Mercantile Bank Limited:

The functions of commercial Banks are now wide and varied. However, the functions of Commercial Banks may broadly be classified under the following two categories-

A. Primary Functions; and

B. Secondary Functions.

A. Primary Functions:

The primary functions of Mercantile Bank Limited are same as other Commercial Banks. These functions includes-

i. Accepts deposits;

ii. Lends money;

iii. Creates credit;

iv. Creates medium of exchange.

B. Secondary Functions:

Modern commercial Banks like MBL, besides performing the functions, cover a wide range of financial and on-financial services to meet the growing needs of the time. Some of these services are available only to the customers while others are available to the public in general.

The subsidiary services provided by a modern banker may be classified into following three groups-

i. Agency Services; and

ii. Generally Utility Services

iii. Foreign Exchange Business

2.7 Performance of MBL-At a Glance:

(BDT in million)

Source: Annual Report 2010 of MBL

2.8 MBL Gulshan Branch-At a glance:

2.8.1 Start Of Operation:

Gulshan Branch is on of the most profit-oriented branch of Mercantile Bank Limited which started its operation at Gulshan Avenue, Gulshan on January 31, 2000 with the 18 efficient & responsible officers. Now the number of employees of Gulshan Branch 32.

3.1 Foreign Exchange and Foreign Exchange Market:

The most important prerequisite of this market is that the buyers and sellers are systematically in contact with each other for the purpose of executing foreign exchange transactions. For establishing the contact, would be buyer need not personally meet the probable sellers. It is of course true that in the early phase of the evolution of foreign exchange business there emerged meeting places known as bourse to conduct dealings in foreign exchange.

To buy foreign goods or services, or to invest in other countries, companies and individuals may need to first buy the currency of the country with which they are doing business. Generally, exporters prefer to be paid in their country’s currency or in U.S. dollars, which are accepted all to the world.

The foreign exchange market, or the “FX” market, is where the buying and selling of different currencies takes place. The price of one currency in terms of another is called an exchange rate.

The market itself is actually a worldwide network of traders, connected by telephone lines and computer screens—there is no central headquarters. There are three main centers of trading, which handle the majority of all FX transactions—United Kingdom, United States, and Japan.

3.1.1 Foreign Exchange Market Participants:

There are four types of market participants—banks, brokers, customers, and central banks.

1 Banks and other financial institutions are the biggest participants. They earn profits by buying and selling currencies from and to each other. Roughly two-thirds of all FX transactions involve banks dealing directly with each other.

2 Brokers act as intermediaries between banks. Dealers call them to find out where they can get the best price for currencies. Such arrangements are beneficial since they afford anonymity to the buyer/seller. Brokers earn profit by charging a commission on the transactions they arrange.

3 Customers, mainly large companies, require foreign currency in the course of doing business or making investments. Some even have their own trading desks if their requirements are large. Other types of customers are individuals who buy foreign exchange to travel abroad or make purchases in foreign countries.

4 Central banks, which act on behalf of their governments, sometimes participate in the FX market to influence the value of their currencies.

3.2 Foreign Exchange Transactions:

Conversion of currencies or exchanges is known as foreign exchange transactions. The conversion may arise from a transaction between a bank and another bank at home or abroad. The transactions involve at least two currencies. For a bank in Bangladesh, the process of conversion frequently involves conversion of Bangladesh Taka into foreign currency and vice versa.

3.2.1 Types of FX Transactions: There are different types of FX transactions:

1. Spot transactions: Spot market – deals with currency for immediate delivery (within one or two business days). Two parties agree on an exchange rate and trade currencies at that rate. This expresses only a potential interest in a deal, without the caller saying whether he wants to buy or sell. Although spot transactions are popular, they leave the currency buyer exposed to some potentially dangerous financial risks.

2. Forward transaction: One way to deal with the FX risk is to engage in a forward transaction. In this transaction, money does not actually change hands until some agreed upon future date. A buyer and seller agree on an exchange rate for any date in the future and the transaction occurs on that date, regardless of what the market rates are then.

1 Futures: Foreign currency futures are forward transactions with standard contract sizes and maturity dates — for example, 500,000 British pounds for next November at an agreed rate.

2 Swap: The most common type of forward transaction is the currency swap. In a swap, two parties exchange currencies for a certain length of time and agree to reverse the transaction at a later date.

3.3 Foreign Accounts of Banks:

There are generally three types of inter-bank foreign accounts, which are discussed briefly in below:

1) Nostro Account: Nostro account is a Latin word means ‘ours’. In order to follow the exact position of the foreign currency accounts maintained by the bank concerned in Bangladesh with bank abroad, banks maintained ‘Nostro Account’ their own bank. In the Nostro Account bank will show the foreign currency accounts of each transaction and alongside the respective items of domestic currency equivalents are indicated.

2) Vostro Account: The word Vostro means ‘yours’. It is also called a local currency account. Foreign banks maintained current accounts in domestic currency in local banks and such accounts are called Vostro Account. Generally the Vostro Account are maintained by the foreign banks on a reciprocal basis to effect payment of as well as to receive payment on behalf of their clients.

3) Loro Account: The word Loro means ‘their’. Foreign bank accounts of any third party, whether in foreign currency or in home currency is treated as Loro Account.

3.4 Payment mode of foreign trade:

An export contract can be deemed to be successfully completed when the exporter gets paid for the goods shipped by him, how he has to negotiations between which is to be decided during earlier negotiations between the exporter and the importer. There are five methods of payment which involve varying degrees of risk for the exporters are as follows:

1. Payment in advance

2. Open account

3. Documentary collections

4. Shipment on consignment basis

5. Documentary credit under letter of credit

3.4.1 Cash in Advance:

In this method of payment buyer pays seller before goods are shipped. Its generally used in case of new relationships and for smaller Transactions where buyer is unable to obtain an L/C. there is no advantage for buyer – Pays prior to receipt of goods and documents. Its adventurous for seller as eliminates risk of non-payment

3.4.2 Open Account:

In open account method Buyer pays seller subsequent to receipt of an invoice, normally after goods are shipped. Its used when there is high trusts relationships between buyer and seller and in inter-company transactions. It allows buyer to delay payment until goods have been examined, and/or goods have been sold. It doesn’t give any Advantage to seller – Risks non-payment.

3.4.3 Documentary Collections:

Documents (representing title to the goods) are exchanged through a bank for payment or acceptance (promise to pay). It is used for ongoing business relationships and transactions not requiring the protection and expense of L/C’s. Its adventurous for buyer as delays payment until receipt of documents and buyer can be financed directly by seller through use of time drafts. Its benefit able for seller as they can retains title to goods until payment or acceptance.

3.4.4 Shipment on Consignment Basis:

In this method the exporter makes shipment to the overseas consignee/ agent, but the title to the goods, as also the risk attendant thereto, even through the overseas consignee will have the physical possession of the goods. The payment is only made when the overseas consignee ultimately sells the goods to other parties; this producer is rather costly and risky to the exporter.

3.4.5 Documentary credit under Letter of Credit:

The most popular from in recent times, as the credit and payment risks of the exporter can be eliminated under appropriate forms of documentary credit. Documentary credit is any agreement, however named or described whereby a bank (the issuing bank) acting at the request and in accordance with the instructions of the customer (the applicant for the credit) (i) is to make payment to or to the order of a third party (the beneficiary) or is to pay, accept or negotiate bills of exchange (drafts) drawn by the beneficiary or (ii) authorizes such payment to be made or such drafts to be paid, accepted or negotiated by another bank against stipulated documents, provided that the terms and conditions of the credit are compiled with.

3.5 Letter of Credit:

A letter of credit is basically a document issued by a bank guaranteeing a client’s ability to pay for goods or services. A bank or finance company issues a letter of credit on behalf of an importer or buyer, authorizing the exporter or seller to obtain payment within a specified time frame once the terms and conditions outlined in the letter of credit are met. LC is a conditional commitment to pay certain amount after a certain period and some contains are fulfilled. It is useful when the importer or buyer is not well known and when exchange restrictions exist or are possible. Proper letters of credit have the following basic components:

1 Applicant:The party applying for the letter of credit, usually the importer in a grain transaction.

2 The Issuing Bank: The bank that issues the letter of credit and assumes the obligation to make payment to the beneficiary, usually the exporter.

3 Beneficiary:The party in whose favor the letter of credit is issued, usually the exporter in a grain transaction.

4 Amount:The sum of money, usually expressed as a maximum amount, of the credit defined in a specific currency.

5 Terms:The requirements, including documents that must be met for the collection of the credit.

6 Expiry:The final date for the beneficiary to present against the credit.

3.5.1 Letters of Credit Parties Involved:

We’ve provided you with a comprehensive list of the parties involved in a letter of credit transaction. This page helps you understand the possible players in your scenario.

1 Advising Bank: Denotes the bank giving notification of the terms and conditions of a letter of credit to the beneficiary (seller). The advising bank also takes reasonable care to check the apparent authenticity of the letter of credit, which it advises.

2 Applicant: The party who applies to the opening (issuing) bank for the issuance of a letter of credit.

3 Beneficiary: The party in whose favor the letter of credit has been established. The beneficiary is the party who demands payment under the letter of credit.

4 Confirming Bank: A bank, that at the request of the issuing bank, assures that drawings under the credit will be honored (provided the terms and conditions of the credit have been met).

5 Drawee Bank: The bank on which the drafts specified in the credit are drawn and from which payment is expected.

6 Issuing Bank (Opening Bank): The bank, which issues the letter of credit on behalf of the applicant.

7 Negotiating Bank: Bank, other than the issuing bank, which elects to “negotiate” (advance funds or give value to the beneficiary) against presentation of complying documents.

8 Paying Bank: The bank authorized in the letter of credit by the issuing bank to honor sight or deferred payments under the terms specified in the credit. (If this bank is the advising bank, it has no obligation to honor documents; however, if this is a confirming bank, it is obligated to pay against complying documents.)

1 Presenting Bank: The bank that forwards the documents directly to the issuing bank to obtain settlement.

2 Reimbursing Bank: The bank authorized by the issuing bank to reimburse the drawee bank or other banks submitting claims under the terms of the credit.

3 Transferring Bank: A bank authorized by the issuing bank as specified in the credit that can transfer the issuing bank’s documentary credit from one beneficiary to another at the request of the first beneficiary.

3.6 Operations of Documentary Letters of Credit:

The following five major steps are involved in the operation of a documentary letter of credit:

? Opening.

? Advising.

? Amendment.

? Presentation.

? Settlement.

3.6.1 Opening of Letter of Credit:

Opening of letter of credit means, at the request of the applicant (importer) issuance of a L/C in favour of the beneficiary (exporter) by a Bank. The Bank, which open or issue L/C opening Bank or issuing Bank.

3.2 L/C Advising:

Advising through a Bank is a proof of evident authenticity of the credit to the seller. The process of advising a credit consists of forwarding the original credit to the beneficiary to whom it is addressed. Before forwarding the advising Bank verify the signature (s) of the officer (s) of the issuing Bank & ensure that the terms & condition are not in violation of existing exchange control regulation & the other regulation relating to export. If credit is transmitted via telex, advising Bank will match the test used in the telex.

3.6.3 Amendment of Credit:

Parties involved in a L/C, particularly the seller and the buyer cannot always satisfy the terms and conditions in full as expected due to some obvious and genuine reasons. In such a situation, the credit should be amended.

3.6.4 Presentation of Document:

The seller being satisfied with the terms and conditions of the credit proceeds to dispatch the required goods the buyer and after that, has to present the documents evidencing dispatching of goods to the negotiating bank on or before the stipulated expiry date of the credit. After receiving the entire document, the negotiating bank then checks the documents against the credit. If the documents are found in order, the bank will pay, accept or negotiate to the issuing bank. The issuing bank also checks the documents and if they are found as per credit requirements, either effects payment, or reimburse in the pre-agreed manner.

3.6.5 Settlement:

Settlement means fulfilling the commitment of issuing Bank in regard to effecting payment subject to satisfying the credit terms fully. This settlement may be done three separate arrangements as stipulated in the credit

3.7 Main Types of Money Transfers through banks:

1 SWIFT Inter-Bank Transfer: Now firmly established as standard practice in the major trading nations. The buyer will instruct their bank to make payment to any bank account specified by the exporter. It is good practice, therefore, for the exporter to include their account details on their invoice heads.

2 Buyer’s Cheque: An unsatisfactory method of settlement for the exporter as it carries the risk of dishonor upon presentation as well as the added inconvenience of being slow to clear. There is also the very real danger of the cheque being lost in transit as well. A cheque is also unsatisfactory if it is in the currency of the buyer, as this will take longer to clear and will involve additional bank charges. Exporters should only use this method if they have an established trading history with their customer or in cases where the profit margin has been increased to offset cash flow problems anticipated by the delay in receiving payment.

1 Banker’s Draft: The buyer who asks their bank to raise a draft on its corresponding bank in the exporter’s country arranges this. Provides additional security to a buyer’s cheque, but they can be costly to arrange and they do run the risk of getting lost in transit.

2 International Money Orders: These are similar in nature to postal orders. They are pre-printed therefore cheaper to obtain than a Banker’s Draft, although again there is the risk of loss in transit.

4.1 Foreign Exchange Regulations:

Foreign Exchange Regulation (FER) Act, 1947 (Act No. VII of 1947) enacted on 11th March, 1947 in the then British India provides the legal basis for regulating certain payments, dealings in foreign exchange and securities and the import and export of currency and bullion. This Act was first adapted in Pakistan and then, in Bangladesh. Bangladesh Bank is responsible for administration of regulations under the Act. The acts and regulations that provide guideline to control Foreign exchange transactions are the following:

1 Foreign Exchange regulation act 1947.

2 Bangladesh Bank issues foreign exchange circular from time to time to control the export, import & remittance business.

3 Ministries of commerce issues export & import policy giving basic formalities for import & export business.

4 Sometime CCI&E issues public notice for any kind of change in foreign exchange transaction.

5 Bangladesh bank published two volumes in 1996. This is compilation of the instructions to be followed by the authorized dealers in transitions related to foreign exchange.

6 Uniform Customs & Practices for Documentary Credit (UCPDC) published by international Chamber of Commerce (1993) Revision.

5.1 Foreign Exchange Department of MBL:

International trade shapes our everyday lives and the world we live in. Nearly every time we make a purchase we are participating in the global economy. International trade is the system by which countries exchange goods and services. Countries trade with each other to obtain things that are better quality, less expensive or simply different from what is produced at home.

To buy foreign goods or services, or to invest in other countries, companies and individuals may need to first buy the currency of the country with which they are doing business. Generally, exporters prefer to be paid in their country’s currency or in U.S. dollars, which are accepted all to the world.

The procedures used to exchange currency in international trade are called foreign exchange system, banks plays vital roles in this procedures world widely. The Bangladeshi banks provide foreign exchange services under, Foreign Exchange Act, 1947 is for dealing in foreign exchange business, and Import and Export Control Act, and 1950 is for Documentary Credits. MBL has also become a member of SWIFT (Society For Worldwide Inter Bank Financial Telecommunication) in 2000, which provides a fast, secured & accurate communication network for financial transactions such as letter of credit, fund transfer etc. As an authorized dealer under regulations of BB, MBL Gulshan Branch provides the followings three type services under their foreign exchange department.

1 Import Services

2 Export Services

3 Remittance Services

5.2 Foreign Currency Accounts offered by MBL:

Following the liberalization of exchange controls Bangladesh Bank has authorized the banks to maintain different types of foreign currency accounts and convertible Taka accounts. The following are the regulations laid down by Bangladesh in respect of these accounts.

5.2.1 Who can open the accounts?

Branches of Mercantile Bank Limited may open Foreign Currency Accounts in the names of:

A. Bangladesh nationals residing abroad

B. Foreign nationals residing abroad or Bangladesh and foreign firms operating in Bangladesh or abroad,

C. Foreign missions and their expatriate employees.

5.2.1.1 Resident Foreign Currency Deposit (RFCD):

This is a foreign currency denominated account. Those who residence in Bangladesh but has to remit money to abroad because of various reasons.

5.2.1.2 Non Resident Foreign Currency Deposit (NFCD):

This is a foreign currency denominated account. Those who doesn’t domicile in Bangladesh but have to remit money to Bangladesh because of various reasons.

5.2.1.2.1 Requirements for opening RFCD Account:

1 Two copies of recent passport size photograph

2 Photocopy of passport

3 Photocopy of work permit

4 Salary certificate or employers certificate

For the Officers of Different Embassy they need not to submit all these documents but the Employers certificate is must.

5.2.1.2.2 Requirements for opening NFCD Account:

1 Photocopy of passport

2 Citizenship certificate if available

3 Certificate or approval from our authority for exporting manpower

4 A nominee or authorized person will be selected by the account holder for transactions.

5 Under this account the nominee will receive local currency TK against any Foreign Currency.

5.3 Import Section of MBL:

As a authorized dealer the major import items financed by MBL, Gulshan branch are capital machinery, Hot Roll Steel, electronic equipment, rice, wheat, seeds, polyolefin, cement clinkers, dyes, chemicals, raw cotton, garments accessories, fabrics, cotton etc. To import, a person should be competent to be an ‘importer’. According to Import and Export (Control) Act, 1950, the officer of Chief Controller of Import and Export provides the registration (IRC) to the importer. After obtaining this, the person has to secure a letter of credit authorization (LCA) from Bangladesh Bank. And then a person becomes a qualified importer. He requests or instructs the opening bank to open an L/C.

5.3.1 Import procedures:

1. Registration with CCI&E

For engaging in international trade, every trader must be first registered with the Chief Controller or Import and Export.

2. Purchase Contract between importers and exporter:

a. Now the importer has to contact with the seller outside the country to obtain the Performa invoice/indent, which describes goods or Indent is got through indenters a local agent of the sellers.

3. Collection of LCA form:

Then the importer collects and Letter of Credit Authorization (LCA) from MBL Gulshan Branch.

4. Opening a Letter of Credit (L/C)

Bank provides guarantee to importer and exporter through Letter of Credit. Thus the contract between importer and exporter is given a legal shape by the banker by its ‘Letter of Credit’. The process of opening L/C regarding to import through MBL, Gulshan branch are as following:

A . Interview of probable L/C opener:

At first in case of import L/C opening opener must give an oral interview to the responsible officers of MBL. If the officers are satisfied with opener’s motive of import, type of import goods, quality of imported goods and marketability of goods than they will give approval to opener to further steps.

B . Application For L/C limit:

Before opening L/C, importer applies for L/C limit. To have an import L/C limit, an importer submits an application to the Department of MBL furnishing the following information,-

I. Nature of business.

II. Required amount of limit.

III. Payment terms and conditions.

IV. Goods to be imported.

V. Offered security.

VI. Repayment schedule.

VII.Full particulars of bank account maintained with MBL Gulshan Branch.

C. The L/C Application:

After getting the importer applies to the bank to open a letter of credit on behalf of him with required papers. Documentary Credit Application Form:

I. Tax Identification Number Certificate.

II. VAT Registration Certificate.

III. Membership Certificate of recognized Trade Association as per IPO.

IV. Proforma Invoice: It states description of the goods including quantity, unit price etc.

V. L/C Form: MBL provides a printed form for opening of L/C (MF-fx 13) to the importer. This form is known as Credit Application form. A special adhesive stamp is affixed on the form. While opening, the stamp is cancelled. Usually the importer expresses his desire to open the L/C quoting the amount of margin in percentage.

VI. L/C authorization form (LCAF) duly signed by the importer.

VII.The insurance cover note: The name of issuing company and the insurance number are to be mentioned on it.

VIII.IMP form duly signed by the importer.

IX. Forwarding for Pre-Shipment Inspection (PSI): Importer sends forwarding letter to exporter for Pre-Shipment Inspection. But all types of goods do not require PSI.

5. Time limit for opening L/C:

L/C (s) shall be open within 180 days from the date of issuance of LCAF or from the date of registration of LCAF with Bangladesh Bank.

6. Terms of L/C:

Full description of the goods along with quantity and unit price to be incorporated in the L/C and shall take all precautions to quote the correct H.S. Codes of the goods. Prices to be quoted on CER or FOB basis according to the P/Invoice or Indent. No import shall be made on CIF basis without prior approval from the Ministry of Commerce.

All L/Cs should provide for payment to be made against full sets of on board (shipped) transport documents drawn and/or endorsed to cover by the credit to a destination in Bangladesh.

7. Shipment Validity & Expiry:

All L/Cs must specify shipment validity as per terms of the P/Invoice or indent or L/C application. However, shipment validity under any circumstances shall not exceed 9 (nine) months from the date of issuance of LCAF or registration LCAF with Bangladesh Bank excepting capital machinery and spare parts shipments of which shall be made within 17 (seventeen) months. All L/Cs must stipulate an expiry date and a place for presentation of documents for payment/acceptance.

8. Amendments:

The MBL, Gulshan Branch may allow amendments to the L/Cs only upon requests of the L/C applicants that do not violate foreign exchange regulations and import control regulations. Necessary charges and/or margin (where L/C value is increased by subsequent amendments) also to be realized/recovered from the customer before amending the L/Cs.

9. Transmission of L/C to Beneficiary through Advising Bank:

In this step the transmission of L/C is done through tested telex or fax to advise the L/C by MBL to the advising bank. The advising bank verifies the authenticity of the L/C. MBL has corresponding relationship or arrangement throughout the world by which the L/C is advised. Actually the advising bank does not take and liability if otherwise not requested.

10. Presentation of the Documents:

a. The seller being satisfied with the terms and the conditions of the credit makes shipment o the goods as per L/C terms.

b. After making the shipment of the goods in favor of the importer the exporter submits the documents to the negotiating bank.

c. After receiving all the documents, the negotiating bank then checks the documents against the credit. If the documents are found in order, the bank will pay, accept or negotiate to MBL.

d. MBL, Gulshan Branch & bank received seal to be affixed on the forwarding schedule.

e. MBL, Gulshan Branch crossed the bill of exchange & transport documents immediately to protects loss or fraudulent.

MBL checks the documents. The usual documents are,

I. Bill of exchange.

II. Invoice.

III. Bill of lading or Airway bills

IV. Certificate of origin.

V. Packing list.

VI. Weight list.

VII.Shipping advice.

VIII.Non-negotiable copy of bill of lading.

IX. Pre-shipment inspection report.

X. Shipment certificate.

11. Lodgment of Documents:

If the documents are found in order or the discrepancies in the document if any, are subsequently accepted by the applicant, the branch will record the particulars of the documents in the PAD Register (MB fx-05) .

12. Retirement of Documents:

MBL advise Importer about the date of lodgment of documents with full particulars of shipment to retire the documents against payment or to dispose the import documents as per prearrangement, if any. Subsequent reminders (MF fx-05) are also to be issued every week till retirement of the bill. Such bills will be considered and be reported as overdue if the importer fails to retire the documents within 21 days of arrival of the relative import consignments at the port of destination.

13. Endorsement of Non-Negotiable Copy Documents:

For clearance of cargo:

In the event of non-receipt of import documents relating to goods, which have already reached the port, the customer may ask the bank to provide a Shipping Guarantee/NOC to enable them to clear the goods, form the customers. The Shipping Guarantee may be given on the basis of a written undertaking from the clients by MBL. The S/G should state, inter alias, that he will in due course accept the original documents in spite of discrepancies, if any and bear the exchange loss on account of fluctuation of exchange rates between the dates of guarantee to actual date of lodgment of original documents, when received.

1 MBL, Gulshan Branch will check the non-negotiable copy documents with the L/C terms and make entries of particulars of copy documents in the Shipping Guarantee Issue Register (MB fx-06)

2 MBL, Gulshan Branch will recover Taka equivalent of F.C value of N/N copy documents and charges from the customer.

3 MBL, Gulshan Branch will ensure return back of the shipping indemnity/guarantee from the shipping company by delivering original shipping documents to the importer after receipt of original documents form the payee bank.

4 MBL, Gulshan Branch will mark cancellation on the shipping indemnity/guarantee returned by the shipping company through the importer and file it in the respective L/C file.

For customer Assessment Purpose:

At the request of the importer, MBL, Gulshan branch may endorse Non-negotiable copy documents for custom assessment purpose. The branch will certify the value of F.C on the copy invoice and also certify the copy transport documents under single authorized signature. Endorsement charge is to be realized as per schedule of charges of the bank.

14. Cancellation of L/Cs:

An irrevocable L/C cannot be cancelled without the agreement of the beneficiary and the confirming bank, if any.

The MBL, Gulshan branch at the request of the importer may approach the L/C advising bank for cancellation of the L/C and such cancellation will only be effective upon consent of the beneficiary advised to the branch through the L/C advising bank. However, the MBL, Gulshan branch may cancel the L/C without the consent of the beneficiary. Advising bank and confirming bank, if any, if the L/C expires and the MBL, Gulshan branch receives no shipping documents within 15 days of expiry of the L/C. The branch should send a massage to the concerned bank advising such cancellation and closure of L/C file due to expiry of the same. The MBL then cancels the Reimbursement Authorization, which has been provided to the Reimbursement Bank while opening the L/C. The branch will reverse L/C contra liabilities, refund margin and recover charges from the L/C applicant as per schedule of charges.

5.3.2 Import Financing by MBL:

5.3.2.1 Payment Against Document (PAD):

The MBL, Gulshan branch starts PAD procedure after getting all documents from the exporter of importer as evidence of exporting goods. Documents required for PAD is mentioned below:

1 Original (Non-negotiable) bill of Leading.

2 Commercial Invoice.

3 Certificate of Insurance.

4 Certificate of Origin.

5 Bill of Exchange.

6 Pre-shipment Inspection Certificate.

7 Packing List.

8 Clean Report of Findings (CRF).

5.3.2.1.1 Examination of PAD Documents:

Scrutinizing documents is very important for the MBL, Gulshan branch. As after examining all the documents the MBL will make payment to the negotiating bank. So any mistake in the examination process may cost MBL, Gulshan branch.

5.3.2.2 Loan against Trust Receipt (LTR):

Under this LTR, Loan is allowed by MBL only to first class importers. Here only on the basis of trust without paying MBL anything or a partial amount, the importer takes the documents. Then importer is allowed 60-90 days time to make payment.

5.4 Accounting Treatment For Opening Import L/C:

When the officer thinks fit the application to open a L/C, giving the following entries- creates the following charges-Table-Showing accounting treatment at the time of L/C opening:

Source: Gulshan branch, MBL

The following accountings treatments are given by MBL in different stages of import L/C are as following:

1 When import L/C is opened:

When L/C against import is opened then bank as gives guarantee on behalf on customers so customer’s liability is transferred to bankers liability.

1 When charges are taken by MBL:

When different charges and margin is charged by bank for import L/C then party a/c or current deposit account of L/C opening party is charged against different charges and margin on L/C.

1 When documents are received:

When documents is received than the amount provided to importer is debited under PAD account and head office and other charges as income is credited and at the same time as documents is received so MBL liability against that documentary credit is decreased and importers liability is increased.

1 When payment is made:

When payment is made by bank then importer account i.e. party a/c and margin on L/C account is debited PAD account is credited.

5.5 Export section of MBL:

5.5.1 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 & 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. MBL mainly handles export of readymade garments, jute goods, leather, plastic scrap, handicrafts etc. The followings process must be passed by a exporter to open a documentary credit in MBL, Gulshan branch:

(a) 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:

1 Nationality and Assets Certificate;

2 Memorandum and Article of Association and Certificate of Incorporation in case of Limited Company;

3 Bank Certificate;

4 Income Tax Certificate;

5 Trade License etc.

(b) 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:

1 License Officer;

2 Buyer’s Local Agent;

3 Export Promoting Organization;

4 Bangladesh Mission Abroad;

5 Chamber of Commerce (local & foreign)

6 Trade Fair etc.

(c) 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.

(d) Receiving Letter of Credit: 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:

1 Cash in advance;

2 Open account;

3 Collection basis (Documentary/ Clean)

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

(e) Procuring the materials: After making the deal and on having the L/C opened in his favor, the next step for the exporter is to set about the task of procuring or manufacturing the contracted merchandise.

(f) Shipment of goods: Then the exporter should take the preparation for export arrangement for delivery of goods as per L/C and incomer’s, prepare and submit shipping documents for Payment/ Acceptance/ Negotiation in due time.

Documents for shipment:

1 EXP form,

2 ERC (valid),

3 L/C copy,

4 Customer Duty Certificate,

5 Shipping Instruction,

6 Transport Documents,

7 Insurance Documents,

8 Invoice,

9 Other Documents,

10 Bills of Exchange (if required)

11 Certificate of Origin,

12 Inspection Certificate,

13 Quality Control Certificate,

14 G.S.P. Certificate,

(g) Documents submission: In this step exporter who confined with MBL will prepare export related documents and submit those documents to MBL, Gulshan branch for negotiation. According to those documents MBL collects proceeds from the former issuing banks.

1 Pre-shipment credit

2 Post-shipment credit

(e) Back to Back Letter of Credit (BTB):

When exporter falls short of raw materials 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, MBL gives facility to open BTB L/C upto highest 80% of lined export L/C.

Documents Required for Opening a Back-to-back L/C:

In MBL, Gulshan Branch, following papers/ documents are required for opening a back-to-back L/C-

? Master L/C

? Valid Import Registration Certificate (IRC) and Export Registration Certificate (ERC)

? L/C Application and LCAF duly filled in and signed

? Proforma Invoice or Indent

? Insurance Cover Note with money receipt

? IMP Form duly signed

In addition to the above documents, the followings are also required to export oriented garment industries w