“Foreign Exchange Operation and risk management of Trust Bank Limited”
View With Charts And Images“Foreign Exchange Operation and risk management of Trust Bank Limited”
· Report Objectives:
Objective of the study acts as a bridge between the starting point and the goals of the study. To illustrate the objectives properly, presented into two parts:
To observe the Foreign Exchange operation of The Trust Bank Limited, their services and their general banking operation.
o To observe the major outline of foreign business.
o To observe credit line arrangement
o To observe the foreign correspondents of TBL.
o To observe the post import financing operations.
o To analysis the expansion of Foreign Trade business of the TBL.
o To identify the problems of it’s financing.
o To recommend solutions of or solving the problems faced by TBL in Foreign exchange Business.
· Scope of the Report:
The main objective of the study is to obtain a clear idea about the Foreign Exchange business of our banking operation i.e. how the L/C is opened and how the import & export is done.
· Type of study:
There are mainly three different types of researches. We should define my type from these three types of researches. The researches are:
Exploratory Research: The objective of exploratory research is to gather preliminary information that will help define the problem and suggest hypotheses.
Descriptive Research: In this type of research certain problem, operation and issue is analyzed in a descriptive manner and also fuscous on the finding and recommendations.
Causal Research: The objective of such type of research is to test hypotheses about cause and effect relationships.
After doing all the research work & analyze all those I can see that, I have done a descriptive type of research.
· Methodology for Data Collection:The Primary sources of Data:
W Face to face conversation with the respective officer of the branch.
W Face to face conversation with the clients.
W Relevant file study as provided by the officers concerned.
The Secondary sources of Data:
W Annual Reports of the Trust Bank Limited.
W Periodicals published by the Bangladesh Bank.
W Different books, articles etc. regarding Foreign Exchange operations.
· Report Design:Descriptive Research:
I will try to identify the real problems and product categories for accurate description. Any source of information can be used in its strategy. More survey research and secondary source are needed.
· Limitations of Report:
The study was not free of limitations. The limitations faced during the preparation of this report are given below:
Lack of adequate information:
There was lack of sufficient primary and secondary data.
Sometimes respondents are not capable of answering question because they cannot recollect or have never given attention to what they do and why. Respondents may have answered the question without knowing correct answer in order to appear smart, or they may have try to help us by giving pleasing answer.
Unwillingness to cooperate:
Some of the secondary sources i.e. the company personnel were uncooperative.
Secrecy of information:
Some of the information needed to explore the current market scenario of the company was not disclosed. Such as, information related to price, sales and advertisement.
Chapter One (2):
Overview of Bangladesh Economy and Financial Institutions.
· Introduction :
Bangladesh is a less developed country, whose economy is agro based. The Agricultural system is primitive and frequently affected by natural disaster. Poverty is the main problems of this country. About 47.6% of its population is living bellow the poverty line whoever as about 18% of the population is living blows the hard core poverty line (with less then 1800 calories per head per day).
After the devastating flood 1998-1999, the economic activities of the country resumed by taking various rehabilitation program and bumper production in the agriculture sector helps to recover that blow. Bangladesh economy has faced severe set back again after the terrorist attack on world trade center of USA on September 11,2001 and Afgan war. This even has changed the world economic scenarios and caused global economic recession. This global recession has severely affected export system & Bangladesh economy like ready made garments industry, Frozen food, Manpower export hotel and tourism sector etc. Due to global recession foreign financial assistance also severely affected.
To overcome this situation government has taken various sector based reform plan (closer of Adamjee Jute Mill is an example of it). Govt. also prepares the current fiscal year’s budget to decrease the foreign aid dependency. Although global recession has caused the ever lowest foreign currency reserve of US$1057n million in October,2001, which is increased to US$1478 million in April,2002 by various positive steps taken by the Government money laundering law, emphasis on remittance through proper banking channel.
According to Bangladesh economic analysis (2002) of ministry of finance, income is increased by 1.73% and population is increased 1.71%. per capita GDP, GNI and NNI is shown in the following table :
· Overview of Financial Institutions of Bangladesh:
Financial institutes play an important role for the economic development of any country. The objective of these institutions is to accumulate the scattered deposit and invest it in a productive manner for economic emancipation.
There are 51 schedule banks (January 2001) operate in Bangladesh. Of them 4 nationalized commercial banks, 5 specialized banks, 30 private commercial banks and 12 foreign banks. The number of branches of those banks is 6242. Of which 2511 (40.2% of total) are in urban areas and rest 3731 (59.8% of total) are in rural areas.
Up to February 2002, of fiscal 2001-2002, total deposit and loan of all banks is taka 85259.8 and Taka 69392.6 Cr. Respectively.
For proper monitoring the operations of banks, Bangladesh bank introduces “Problem Bank Monitoring Division” in addition to CAME RATING. To increase the economic activities Bangladesh bank reduces the bank rate to 6% from 7%.
To increase customer services banks are using various modern techniques like on line banking, ATM, Money Gram, Credit Card etc.
List of Banks operating in Bangladesh:
· Nationalized Commercial Banks (NCBS):
o Sonali Bank.
o Janata Bank.
· Private Commercial Bank (PCBS):
o Agrani Bank.
o Rupali Bank.
o Pubali Bank Ltd.
o Uttara Bank Ltd.
o Arab Bangladesh Bank Ltd.
o National Bank Ltd.
o The City Bank Ltd.
o International Finance Investment and Commerce Bank Ltd.
o United Commercial Bank Ltd.
o Eastern Bank Ltd.
o National Credit and Commerce Bank Ltd.
o Prime Bank Ltd.
o South East Bank Ltd.
o Dhaka Bank Ltd.
o Dutch-Bangla Bank Ltd.
o Mercantile Bank Ltd.
o Standard Bank Ltd.
o One Bank Ltd.
o Mutual Trust Bank Ltd.
o First Security Bank Ltd.
o The Trust Bank Ltd.
o Premier Bank Ltd.
o Bank Asia Ltd.
o Bangladesh Commerce Bank Ltd.
o Export and Import Bank Ltd. (EXIM).
o Shahajalal Bank Ltd.
o Jamuna Bank Ltd.
o Brac Bank Ltd.
o Islami Bank Bangladesh Ltd.
o The Oriental Bank Ltd.
o Al-Arafa Islami Bank Bangladesh Ltd.
o Social Investment Bank Ltd.
· Foreign Commercial Banks :
o American Express Bank.
o Standard Chartered Bank.
o Habib Bank Ltd.
o State Bank of India.
o Credit Agricole Indosuez.
o National Bank of Pakistan.
o Muslim commercial Bank.
o Citi Bank NA.
o Shamil Bank of Bahrain E.C.
o The Hongkong & Shanghai Banking Corporation (HSBC).
· Specialized Bank:
o Bank of Small Industries & Commercial Bangladesh Ltd.
o Bangladesh Shilpa Bank.
o Bangladesh Shilpa Rin Shonghstha.
o Bank of Small Industries & Cottage.
o Bangladesh Krishi Bank.
o Rajshahi Krishi Unnayan Bank (RAKUB).
· Role of Private Commercial Bank in Economic Development of Bangladesh
A bank is usually defined as a financial institution which deals in money. Today, however, the functions of a bank have increased so much that it is considered a very vital agent of development in country like ours. Because of their positive involvement in trade, industry, business finance and a host of other allied services, banks today form a very important part of an economy.
A bank like private commercial Bank helps to develop economy as follows:
Chart – 1
The nationalized banks, countries margin operational banking units, could not demonstrates and achieve optimistic results in terms of overall economic growth. The gloomy picture of nationalized banks is mainly due to –
o Lack of quality of services.
o Minimum of commitment toward institutions.
o Management inefficiency.
o Excessive intervention of collective bargaining agent (CBA).
o Lack of security.
o Documentation of loans and advances debarring legal action in case of default.
o Slow rate of recovery of loan.
o Lack of supervision and monitoring of loans and advances.
o Directive loans.
o Political instability.
o Transitional inconsistency while formulating policy issues on banking.
Due to inefficient and continuous loosing concern of public sector, the main objective of privatization policy was –
W To reduce deficit of the Govt. to meet continuous loss of public enterprises.
W To improve operative efficiency of enterprises.
W To introduce competitiveness in all spheres of economic activities except few areas where Govt. control of economic activities was unavoidable.
It was increasingly felt that a number of PCBs night have improved their position patting nationalized banks into competition. The launching of PCBs has finally created a significant impact in quality of services in banking. Banking being a service industry, it is not easy to quantity to performance of this sector like manufacturing. The performance of the banking sector in terms of generating of profit, expansion of bank branches, mobilization of deposits, deployment of advances, involvement in foreign trade and generating of employment.
It is revealed from the loan operations of banks. The PCBs provide operation mainly for trading (Internal trading, export and import trade) and construction while the NCBs are providing Finance for priority areas like agriculture, industry, and export/import tasks.
PCBs have shown some efficiency in terms of branch expansion, employment generation, and mobilization of deposits and deployment of advances but their activities remained concentrated in city areas. They could not provide finance for priority sector like agriculture.
The key to success of private sector banks is identified as a professional efficiency in choosing various risk assets, personalized quality of services, result oriented business strategy and achievement against stipulated target. But by rapidly issuing fresh licenses to the promoters of private banks, the quality of entrepreneurs is not being ensured and developed. As a result too many banks are chasing same customers/entrepreneurs within limited deposit base.
Now a day, the banking business exclusively depends on quality of services in terms of new innovative strategies for boozing banking operations compatible to international standard. Modern technology, equipment and innovation like computerized money counting machine automatic teller machine (ATM) etc. are being utilized to a great extent for survival and to face competitors.
PCBs have already explored new financial products by introducing master card, credit card to attract customer/entrepreneurs. Many PCBs have implemented various attractive schemes acceptable to the existing and prospective customers such as the customer credit scheme, marriage and educational scheme, micro credit scheme and small loan scheme etc. In this respect PCBs are keen for development of human resources to train and equip their manpower with new ideas and products to enable them to contribute to the greater innovation. The PCBs are taking part in stimulating foreign exchange reserve by financing 100% export oriented RMG industries. Neutrally 65% of export earnings of Bangladesh is generated by this sector.
The PCBs are participating and financing in various types of medium and long-terms industries either wholly or partly through consortium arrangement among the member banks. The PCBs are also general investor and recently a package program has been devolved to stabilize the countries capital markets by launching merchant’s banks, which will extend loans to the brokers and general investors.
The nationalized banks are taking advantages of restrictions imposed on non-nationalized banks while mobilizing deposits from government, autonomous and semi-autonomous bodies. Out of total available funds of Govt. sector, the PCBs are restricted to the range of 25% to 40% of these funds only. Such dual practice is not desirable when we are hoping the theory of free market economy.
Above all, PCBs. Have been playing and indispensable role in the money market for the growth and development of our economy along with all nationalized specialized and foreign banks. The better performance of PCBs will finally be recognized still when they offer better quality of service based on new ideas/products. We foresee a good future for the PCBs. They are expected to develop their lending role in the near future in financial market. The importance of variant economic refers to the due attention to a sound financial system. The base of financial services in Bangladesh is quite narrow. By improving only the financial structure and financial super structure, our financial system can be made sound.
Chapter One (3):
the TRUST BANK LIMITEDCORPORATE REVIEW
· Historical Background:
The Trust Bank Ltd is schedule commercial bank, which conducts its operation as per the rules and regulations of Bangladesh Bank. The Army Welfare Trust (AWT) is the main sponsor of the bank, and it is expected that the bank would soon float public shares in the capital market for its conversion into a public limited company. The bank started its operations in November 29, 1999. At present the bank has 12 branches across the country. It renders all types of personal, commercial and corporate banking service to its customers within the purview of the Bank Companies Act, 1991 and in line with the directives and policy guidelines laid down by the Bangladesh Bank.
In addition to ensuring quality customer services related to general banking the bank also deals in Foreign Exchange transactions. In the mean time the bank has extended credit facilities to almost all the sector of the country’s economy. The bank has plans to invest extensively in the country’s industrial and agricultural sectors in the coming days.
It has also plans to promote the agro-based industries of the country. The bank has already participated in syndicated loan agreement with other banks to promote textile sectors of the country. Such participation would continue in the future for greater interest of the overall economy. Keeping in mind the client’s financial and banking needs the bank is engaged in constantly improving its services to the clients and launching new and innovative products to provide better services towards fulfillment of growing demands of its customers.
The Trust Bank Ltd is very recent bank in this time. In present time as per the Bangladesh Bank rule that a bank’s paid-up capital must have 100 crore when any one want to open a bank. So at the present the bank do not have 100 crore in their paid-up capital structure but they have a huge fund which is given by The Army Welfare Trust. In recent the bank increase their paid-up capital from 25 crore to 35 crore but it is not signed by the board of directors.
The Trust Bank Ltd aims at optimizing profit with a view to allowing good returns on the investors’ money. Within two years of its operations bank has strengthened its capital base by increasing reserve and retained earnings. The Capital Adequacy Ratio as on December 31, 2001 was 17% against the standard of 8% and the crore capital ratios was 16% as against standard of 4%
The authorized capital of the bank is Taka 1000 million. Total shareholders equity at the end of the December 2001 stood at Taka 276.31 million. Out of Taka 276.31 million, paid-up capital is Taka 250 million, Statutory Reserve is Taka 10.97 million and Retained Earnings is Taka 15.34 million. The paid-up capital is indicative of the face value of 250000 ordinary shares of Taka 1000/= each fully subscribed by the shareholders. As at the close of business on December 2001 the capital adequacy ratio was 17% against the standard of 8%. The core capital ratio was 16% against the standard of 4%.
· Number of Branches:
In this time the bank has already 13 branches in many different places in Bangladesh. Most of the branches are inside the cantonment area, because when they start their operation there main purpose was to serve the army. But with the current demand they try to go for vast banking. So for meeting up the demand they try to increase the number of brunches all over the Bangladesh.
· Management Structure:
The management structure of the company has shown below through the organization structure diagram:
Organizational Management Structure
An institution cannot run without manpower. So it is not accepted for The Trust Bank. In current they have 169 officers’ level employee and 50 as a causal worker.
· Profit & Operating Result:
Total operating income of the bank in the year 2002 was Taka 190.34 million against a total operating expenditure of Taka 85.47 million. Total profit before provision stood at Taka 104.71 million during 2001. After keeping Taka 15.71 million as provision against classified loans & advances, Taka 2.52 million as provision against unclassified loans (1%) and Taka 34.00 million as provision for income tax, the net profit stood at Taka 52.48 million during the year 2001. Net profit after income tax in the year 2000 posted by the bank, was Taka 25.96 million. There is a significant increase in profit in 2002 over the preceding year 2001. The earning per share was Taka 199.45 in the year 2001. The retained earnings increased to Taka 50.53 million in 2002 from Taka 15.34 million in 2001.
· Expansion of Branches:
The TBL has taken up a programme to expand its branches. The bank has already 13 branches in many different places in Bangladesh; most of them are inside the different cantonments. The management is filling that they need more branches all over the Bangladesh. So very recent they will open a branch in Dhanmondi. As per Bangladesh Bank circular that if any bank opens a branch in Dhaka then they have to be open a branch in out side Dhaka.
· Information Technology & Automation:
All the branches of the TBL are fully computerized. New software is now in use to provide faster, accurate and efficient service to the clients. The bank is continuously striving for better services through extensive automation of its branches. We are soon going to launch “One Branch Banking” through on-line connectivity. The bank has set up a full-fledged IT division to keep abreast of the latest development of IT for better service in the days to come.
· Foreign Correspondents:
Foreign correspondent relationship facilities foreign trade operation of the bank, mainly in respect of export, import and foreign remittance. The number of foreign correspondents and agents of the bank in the year 2002 stood at 244, which covers important business and trade centers of the world. The bank maintains excellent relationship with the leading international banks, for handling all foreign correspondent and maintaining all foreign business there is an International Division, which is called ID.
· Human Resources Development:
The bank’s work force is composed of personnel having rich academic background with vast experience in banking. The human resources development means to create an environment by dynamic, enthusiastic and vigorous participation of all individuals. We would like to be consistent and transparent in their decisions and actions. The total number of executives and officers of the bank stood at 138 and others number of employees are 50 as on April 2003. To make their personnel knowledgeable and truly professional they arrange training for them at Head office of the bank, BIBM and other institutions. The management of the bank sits with the branch managers and departmental heads in regular meetings. The meetings provide scope for open discussion, which help in formulating new strategies for achieving “targets” of the bank.
· Social Commitment & Future Prospect:
It has been all most three years science the stepped in to the banking arena. They are not yet past of their formative stage. It would be only a matter of time for them to testify that they are equally committed to the social upliftment of the country. They would stand by the people through philanthropic activities whenever any crisis and disaster confront them. They will not keep their social welfare activities restricted to one area only. It will be diversified in the days ahead of us as they are planning to award students of exceptional academic performance with scholarship in different educational institutions. They expect to launch soon school banking by extending their services, which would encourage parsimony in the students. It would also help in the creation of savings, which could be utilized for pursuing higher studies in future. Keeping in mind their social commitment would soon launch “Educational” and “Hajj” loans. Agriculture, being the only means of subsistence for innumerable people in rural areas of the country, needs more attention. They have plans to manufacturing agricultural equipments in the Bangladesh Machine Tools Factory Ltd., which would be distributed among their farmers at an affordable price.
The bank will soon itself as a member of SWIFT Alliance Access, a sophisticated, fraud proof secured financial messaging system provided by the Society for Worldwide Inter-bank Financial Telecommunication (SWIFT), Belgium. With the installation of the SWIFT system the bank would ensure and reliable transmission of L/C, funds transfers, outgoing and incoming massages and other financial services.
· Web Page:
The introduction of Internet has change the traditional concept of world trade and commerce. As the time is progressing its necessity is being felt more in the prevailing competitive since no organization can afford to remain in isolation with the rest of the world for its survival. In order to provide up-to-date information on the bank at fingertips to the trade and business communities of the world, their own IT team has developed a web page for the bank. It can be accessed to under the domain: www.trustbankbd.com.
Chapter One (4)
Foreign trade can be easily defined as a business activity, which transcends national boundaries. These may be between parties or government ones. Trades among nations are a common occurrence and normally benefit both the exporter and importer. In many countries, international trade accounts for more than 20% of their national incomes.
Foreign trade can usually be justified on the principle of comparative advantage. According to this economic principle, it is economical profitable for a country to specialize in the production of that commodity in which the producer country has the greater comparative advantage and to allow the other country to produce that commodity in which it has the lesser comparative advantage. It includes the spectrum of goods, services, investment, technology transfer etc.
This trade among various countries causes for close linkage between the parties dealing in trade. The bank which provides such transactions is referred to as rendering international banking operations. International trade demands a flow of goods from seller to buyer and of payment from buyer to seller. And this flow of goods and payment are done through letter of credit (L/C).
· Foreign Exchange:
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 Firstly it is a term used referring to the currencies of the other countries in terms of any single one currency. To a Bangladeshi, Dollar, Pound sterling etc. are foreign currencies and as such foreign exchange. Secondly, the term also commonly refer to some interments used in international trade, such as bill of exchange, Drafts, Travel cheque and other means of international remittance thirdly, the terms foreign exchange is also quite of ten referred to the balance in foreign currencies held by a country.
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 the deposits, credits and balances payable in any foreign currency and draft cheque, letter of credit and bill of exchange expressed or drawn in Bangladesh currency but payable in any foreign country.
In exercise of the power conferred by section 3 of the foreign exchange regulation, 1947, Bangladesh Bank issues license to schedule bank to deal with exchange. These banks are known a Authorized Dealers. Licensees 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.
· Functions of Foreign Exchange Department:Exports:
o Pre-shipment advances.
o Purchase of foreign bills.
o Negotiating of foreign bills.
o Export guarantees.
o Advising/Confirming letters – letter of credit.
o Advance for deferred payments exports.
o Advance against bills for collection.
o Opening of letter of credit (L/C)
o Advance bills.
o Bills for collection.
o Import loan and guarantees.
o Issue of DD, MT, TT etc.
o Payment of DD, MT, TT etc.
o Issue and enhancement of traveler’s cheque.
o Sale and enhancement of foreign currency notes.
o Non-resident accounts.
· The Most commonly used documents in Foreign Exchange:
o Documentary Letter of Credit.
o Bill of exchange.
o Bill of Lading.
o Commercial Invoice.
o Certificate of origin of goods.
o Inspection certificate.
o Packing List.
o Insurance Policy.
o Proforma Invoice / Indent.
o Master receipt.
o GSP Certificate.
In simple terms a documentary credit is a conditional bank undertaking a payment. Expressed more fully, it is a written undertaking by a bank (issuing bank) given to seller (beneficiary) at the request, and in accordance with the instructions of the buyer (applicant) to effect payment (that is, by making a payment, or accepting or negotiating bill of exchange) up to a stated sum of money, with in a prescribed time limit and against stipulated documents. The customary clauses contain in a L/C are the followings:
o A clause authorizing the beneficiary to draw bills of exchange up to certain on the opener.
o List of shipping documents, which are to accompany the bills.
o Description of the goods to be shipped.
o An undertaking by the opening bank that bills drawn in accordance with the conditions will be dully honored.
o Instructs to the negotiating banks for obtaining reimbursement of payments under the credit.
· Parties to a Letter of credit (L/C):The parties to a Letter of Credit are:
o Importer / Buyer.
o Opening Bank/Issuing Bank.
o Advising Bank/Notifying Bank.
o Negotiating Bank.
o Confirming Bank.
o Paying / Reimbursing Bank.
Bill of Lading:
A bill of leading 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 constituted a document that is, or may be, needed to support an insurance claim.
The Details on the bill of Leading should include:
o A description of the goods in general terms not inconsistent with in the credit.
o Identify marks and numbers, if any.
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 the notifying party.
o Whether freight has been [paid or is payable at destination.
o The number of original bills of lading issued.
o The date of issuance.
A bill of lading specifically states that goods are loaded for ultimate destination specifically mentioned in the credit.
A Commercial Document is the accounting document by which the sellers change the goods to the buyer. A commercial invoice normally includes the following information:
W Name and address of the buyer and seller.
W Order of contract number, quantity and description of the goods, unit price and the total price.
W Weight of the goods, number of the package, shipping marks and numbers.
W Terms of delivery and payment.
W Shipment details.
Certificate of Origin:
A certificate of origin is a signed statement providing evidence of the origin of the goods.
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 the L/C. the inspection company is usually nominated by the buyer who also indicates the types of inspection he wishes the company to undertake.
The Insurance Certificate documents must –
o Be that specified in the credit.
o Cover the risks specified in the credit.
o Be consistent with the other documents in its identification of the voyage and description of the goods.
o Unless otherwise specified in the credit.
o Be a document issued and / or signed by an insurance company or its agent, or by underwriters.
o Be dated on or before the date of the date of shipment as evidenced by the shipping documents.
o Be for an amount at least equal to the CIF value of the goods and in the currency of credit.
Importation is foreign goods and services purchased by customer, firms and Governments in Bangladesh.
An importer must have import registration certificate (IRC) given by chief controller of import and exports (CCI & E) to import any thing from other country. To obtain import registration certificate (IRC) the following certificates are required:
o Trade License.
o Income Tax clearance certificate.
o Nationality certificate.
o Banks solvency certificate.
o Asset certificate.
o Registration partnership deed (if any).
o Memorandum and Article of association.
o Certificate of incorporation (if any)
o Rent receipt of the business premises.
· Import Procedure :
To import through The Trust Bank Limited a customer/client requires –
o Bank Account.
o Import registration certificate.
o Tax paying identification number.
o Proforma Invoice/Indent.
o Membership Certificate.
o L/C application form duly attested.
o One set of IMP Form.
o Insurance Cover Note with money receipt.
· Import Mechanism:
To import, a person should be competent to be an importer. According to import and Export control Act, 1950, the office of chief controller of Import and Export provides the registration certificate (IRC) to the importer. After obtaining this person has to secure a letter of credit authorization (LCA) from Bangladesh Bank and then a person becomes a qualified importer.
He is the person who requests or instructs the opening bank to open an L/C. He is also called opener or applicant or the credit.
Importer’s application for L/C limit / margin:
To have an import L/C limit, an importer submits an application to the department of (TBL) furnishing the following importation:
o Full particulars of bank account.
o Nature of business.
o Required amount of limit.
o Payment terms and conditions.
o Goods to be imported.
o Offered security.
o Repayment schedule.
A credit officer scrutinizes this application and accordingly prepares a proposal (CLP) and forwards it to the head office credit committee (HOCC). The committee, if satisfied, sanctions the limit and returns back to the branch. Thus the importer is entitled for the limit.
· Opening of Letter of Credit (L/C) by Bank:
Opening of L/C means, at the request of the applicant (importer) issuance of a L/C in favor of the beneficiary (Exporter) by a bank. the bank which open or issue L/C is called L/C opening bank or issuing bank.
On receipt of the importer’s L/C application supported by the firm contract (Indent / Proforma Invoice) and Insurance Cover Note the bank scrutinize the same thoroughly and fix up a margin on the basic of banker – customer relationship.
Before opening a L/C, the issuing bank must check the following:
o L/C application properly stamped, signature verified and margin approved and properly retained.
o Indent / Proforma Invoice signed by the importer and Indenter / supplier.
o Ensure that the relevant particulars of L/C application correspond with those stipulated in Indenter / Proforma Invoice.
o Validity of LCA entitlement of goods, amount etc. conforms to the L/C application.
o Conversion and rate of exchange correctly applied.
o Charges like commission, FCC, Postage, Telex charge, SWIFT charge, if any recovered.
o Insurance Cover Note – in the name of issuing bank – A/c importer covering required risks and voyage route.
o Incorporation of instruction for Negotiating Bank as per banks existing arrangement.
o Reimbursement instructions for reimbursing bank.
o If foreign bank confirmation is required, necessary permission should be obtained and accordingly advising bank is advised as per banks existing arrangement.
o If add confirmation is required on account of the applicant charges should be recovered from the applicant.
o In case of usance L/C, mention rate of interest clearly in the letter of credit.
Liability of Issuing Bank:
As per Article 9(a) of UCPDC 500, An Irrevocable Credit constitute a definite undertaking of the issuing Bank, provided that the stipulated documents ——— comply with the terms and conditions of the credit.
Advising of Letter of Credit:
Advising means forwarding of a Documentary Letter of Credit received from the issuing bank to the beneficiary (Exporter).
Before advising a L/C the advising Bank must see the following:
o Signature of Issuing Bank officials on the L/C verified with the specimen signatures book of the said bank when L/C received.
o If the export L/C is intended to be an operative cable L/C Test Code on the L/C invariably be agreed and authenticated by two authorised officers.
o L/C scrutinized thoroughly complying with the requisites of concerned UCPDC provisions.
o Entry made in the L/C Advising Register.
o L/C advised to the Beneficiary (Exporter) promptly and advising charges recovered.
· Advising Bank’s Liability:
Advising bank’s liability is fixed up in uniform customs and practice for documentary credits, publication 500.
Article 7(a): A credit may be advised to a beneficiary through another bank (the “Advising Bank”) without engagement on the part of the advising bank, but that bank, if it elects to advise the credit shall take reasonable care to check the apparent authenticity of the credit which it advises. If the bank elects not to advise the credit, it must inform the issuing bank without delay.
Article 7(b): If the advising bank cannot establish such apparent authenticity it must inform, without delay, the bank from which the instructions appear to have been received that it has been unable to establish the authenticity of the credit and if it elects nonetheless to advise the credit it must inform the beneficiary that it has not been able to establish the authenticity of the credit.
Adding Confirmation is done by the confirming bank confirming bank is a bank which adds its confirmation to the credit and it is done at the request of the issuing bank the advising usually does not do it if there is not a prior arrangement with the issuing bank. By being involved as a confirming agent the advising bank undertakes to negotiate beneficiary’s bill without recourse to him.
o Issue L/C and request to add confirmation.
o Review the L/C terms.
o Provide reimbursement.
o Drafts to be drawn on L/C opening bank.
o Availability of credit facilities.
o Line allocation from the business and ownership units in the importer’s country.
o Confirm and advise L/C.
· Amendments to Letter of Credit:
After issuance and advising of a L/C, it may be felt necessary to delete, add or alter some of the clauses of the credit. All these modifications are communicated to the beneficiary through the same advising bank of the credit. Such modifications to a credit are termed as amendment to a letter of credit.
There may be some of the conditions in a credit are not acceptable by the beneficiary. In that cases beneficiary contact applicant and request for amendment of the clauses. On receipt of such request applicant approaches his bank that is issuing bank with a written request for amendment to the credit. The issuing bank scrutinizes the proposal for the amendment and if the same is not in contravention with the exchange control regulation and bank’s interest, the bank may then process for amendment there can be more than one amendment to a credit. All the amendment forms an integral part of the original credit.
L/C amendments are to be communicated by SWIFT or mail. If there are more than one amendment to a credit, all the amendment must bear the consecutive serial number so that the missing the any amendment can be identified by the advising bank or by the beneficiary.
· What is to be done by the issuing bank before advising amendments?
The issuing bank has to –
o Obtain written application from the applicant of the credit duly signed and verified by the bank.
o In case of increase of value, applications for amendment are to be supported by revised Indent/Proforma Invoice evidencing consent of the beneficiary.
o In case of extension of shipment period, it should be ensured that relative LCA is valid/revalidated/increased up to the period of proposed extension.
o Amendments an increase of credit amount and extension of shipment period both the cases amendment of Insurance Cover Note also be submitted.
o Proper recording and filing of amendment is to be maintained.
o Amendment charges (if an account of applicant) will be recovered and necessary voucher is to be passed.
The following clauses of L/C are generally amended:
o Increase/decrease value of L/C and increase/decrease of quality of goods.
o Extension of shipment/negotiated period.
o Terms of delivery i.e. FOB, CFR, CIF etc.
o Mode of shipment.
o Inspection clause.
o Name and address of the supplier.
o Name of the reimbursing bank.
o Name of the shipping line etc.
· Settlement of Letter of Credit :
Settlement means fulfillment of issuing bank in regard to affecting payment subject to satisfying the credit terms. Settlement to may be done under three separate arrangements as stipulated in the credit.
o Settlement by Payment :
Here the seller presents the documents to the nominated bank and the bank scrutinizes the documents. If satisfied, the nominated bank makes payment to the beneficiary and in case this bank is other than the issuing bank, then sends the documents to the issuing bank and claim reimbursement as per arrangement.
o Settlement by Acceptance :
Under this arrangement, the seller submits the documents evidencing the shipment to the accepting bank (nominated by the issuing bank for acceptance) accompanied by draft down on the bank at the specified tenor. After being satisfied with the documents, the bank accepts the documents and the draft and if it is a bank other than issuing bank, then sends the documents to the issuing bank stating that it has accepted the draft and at maturity the reimbursement will be obtained in the pre-agreed manner.
o Settlement by Negotiation :
This settlement procedure starts with the submission of documents by the seller to the negotiating bank. in a freely negotiate documents and if negotiation restricted by the issuing bank, only nominated bank can negotiate the documents. After scrutinizing that the documents meet the credit requirement, the bank may negotiate the documents and give value to the beneficiary. The negotiating bank then sends the documents to the issuing bank as usual; reimbursement will be obtained in the pre-agreed manner.
· Accounting Treatment:
Sundry Deposit L/C Margin A/C Dr.
PAD A/C Cr.
(Margin amount transferred to PAD A/C)
Customer A/C Dr.
PAD A/C Cr.
(Customer A/c debited for the remaining Amount)
PAD A/C Dr.
Head Office A/C + Exchange Trading A/C Cr.
Income A/c interests on PAD Cr.
(Amount given to Head Office ID and interest credit)
Banker’s Liability Dr.
Customer’s Liability Cr.
(When lodgment is given)
After realizing the telex charge, service charge, interest (if any), and the shipping documents is then stamped with PAD number & entered in the PAD Register. Intimation is given to the customer calling on the bank’s counter requesting retirement of the shipping documents. After passing the necessary vouchers, endorsements is made on the back of the bill of Exchange as “Receipt Payment” and the Bill of Lading is endorsed to the effect “Please deliver to the order of M/s………………………. under two authorized signatures bank’s officer’s (P.A. holder). Then the documents are delivered to importer.
· Payment procedure of the Import Documents:
This is the most sensitive task of the import department. The officials have to be very much careful while making payment.
Date of Payment: Usually payment is made within 7 days after the documents have been received. If the payment is become deferred, the negotiating bank may claim interest for making delay.
Preparing Sale Memo: A sale memo is made at BC rate to the customer. As the TT & DD rate is paid to the ID, the difference between these two rates is exchange trading. Finally, an Inter Branch Exchange Trading Credit Advice is sent to ID.
Requisition for the foreign Currency: For arranging necessary fund for payment, a requisition is sent to the International Department.
Transmission of Telex: A telex is transmitted to the correspondent bank ensuring that payment is being made.
Practically by the term Export we mean out carrying of anything from one country to another. As banker we define export as sending of visible things outside the country for sale. Export Trade plays a vital note in the development process of an economy. With the caring we meet out import bills.
Although export trade is always encouraged, any body cannot export anything to any place. Like importer the exporters are also required to get them registered before entering into export trade. Export registration certificate (ERC) given by CCI & E is required for this purpose. The required documents to obtain ERC are also same as IRC.
When a bank (Authorized dealer) receives a L/C (cable or original) it ascertains the correctness of the test number and the authorized signature. Then the bank sends the original copy of the L/C to the beneficiary.
The exporter presents the relative documents to the negotiating bank after the shipment of the goods. The L/C issuing bank undertakes to honor is obligation only if the beneficiary fulfills the conditions stipulated in the L/C, may namely, the submission of stipulated documents with in the stipulated time. Even a slide deviation of the documents from these specified in the L/C may give an excuse to the negating
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