Foreign Exchange System of Mercantile Bank Limited

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Foreign Exchange System of Mercantile Bank Limited

Introduction

Mercantile Bank Limited was incorporated in Bangladesh as a Public Limited Company with limited liability under the Bank Companies Act, 1991 on 20 May 1999 and commenced commercial operation on 02 June 1999. The Bank went for public issue of shares on in 2003 and its shares are listed with Dhaka Stock Exchange and Chittagong Stock Exchange. The Mercantile Bank Limited is a highly capitalized new generation Bank with an Authorized Capital and paid-up Capital of Tk. 3000.00 million and Tk. 1498.90 million respectively. The Bank provides a broad range of financial services to its customers and corporate clients. The Board of Directors consists of eminent personalities from the realm of commerce and industries of the country. The Main branch of Mercantile Bank Limited is located in the Dilkusha commercial area. The total manpower of this branch is 137.The total number of the senior vice president is 10.As it is the main branch of the bank, the customer appearance in the bank is very high.

In the Mercantile Bank Limited, Main Branch, the people are mostly courteous, friendly in nature and eager to help despite the tremendous workload. Manpower is sufficient in the branch but there is no information booth for customer information. So as a new private bank, Mercantile Bank Limited is running steadily. The Mercantile Bank Limited (MBL) undertakes all types of banking transactions to support the development of trade and commerce in the country. MBL’s services are also available for the entrepreneurs to set up new ventures and BMRE of industrial units. The bank gives special emphasis on Export, Import, Trade Finance, SME Finance, Retail Credit and Finance to women Entrepreneurs. To provide clientele services in respect of International Trade it has established wide correspondent banking relationship with local and foreign banks covering major trade and financial centers at home and abroad.

In 2007, Mercantile Bank Limited remained at forefront of the banking industry of the Bangladesh, in the face of challenges of intense competition, ongoing reforms in the banking industry and a more challenging business and economic environment confronting its customers. The bank continued to play an important role in the government’s drive to strengthening the rural economy as the driver of the future economic driver of the Bangladesh. Mercantile Bank Limited emerged as a new commercial bank to provide efficient banking services and to contribute socio-economic development of the country. With the passage of time it has expanded its number of branches and variety of services along with its core business of taking deposits and granting loans.

Now MBL has emerged as a new commercial bank to provide efficient banking services and to contribute socio-economic development of the country. Rising trend of the banks profitability over the last 8 years is also materialized. The MBL is committed to the delivery of the superior shareholders’ value. Foreign Exchange Department of the bank is one of the most important departments. Now it has become the backbone of the bank. With the aim to be the ‘bank of choice’, it is operating in the industry with a team of devoted personnel to excel both their own career and the bank’s future.

MBL at A Glance

Name	Mercantile Bank Limited
Date of incorporation	20th May, 1999
Date of inauguration of operation	2nd June, 1999
Registered Office	61, Dilkusha Commercial Area Dhaka –1000, Bangladesh Tel-02-9559333, 0171-1535960 Fax: 880-2-09561213 Telex: 642480 MBLMB BI
Logo	Mercantile Bank Limited efficiency Is our strength
Name of the Chairman of the Board	Md. Abdul Jalil(MP)
Name of the Managing Director	A.K.M. Shahidul Haque
Number of branches	65(at the end of 2010)
Services provided	Deposit scheme, credit facility and foreign exchange services
Diversification of Product And Services	Corporate banking, Retail banking
Publicly Traded Company	Shared quoted daily in DSE & CSE
Credit Card	Member of Master Card
Banking operation system	Both conventional and foreign exchange system
Technology used	Member of SWIFT, online banking, UNIX based computer system
Market value per share	BDT 412 (at the end of 2010)
Earning per share	BDT 41.04 (at the end of 2010)
E-mail	mbl@bol-online.com
Website	www.mblbd.com
SWIFT	MBLBBDDH

Mercantile Bank Limited (MBL) Timeline:

Figure: MBL Timeline

Management Hierarchy:

The Corporate Structure

Board of Directors

Board of Directors, the apex body of the Bank, formulates policy guidelines, provides strategic planning and supervises business and performance of management while the Board remains accountable to the company and its Shareholders.

Executive Vice President Company Secretary

Deputy Managing Director ID, IT, CREDIT, R&P

Deputy Managing Director GSD, CAD, A&I, GB, D&M

Senior Vice President

Senior Vice President

Senior Vice President

Vice President

Senior Executive Officer

Executive Officer

Officer

Asst. Officer

Managing director -HRD

Board of Directors

Chief Advisor

C H A I R M A N C H A I R M A N

Senior Asst. Vice President

F.A.V.P

Asst. Vice President

Principal Officer

Figure: Management Hierarchy of MBL

Features of Mercantile Bank Ltd:

There are so many reasons behind the better performance of Mercantile Bank Limited than any other newly established banks:

Highly qualified and efficient professionals manage the bank.

• MBL has established a core Research &Planning Division with efficient persons.
• The bank has established correspondent relationship with 240 of foreign banks.
• The computerized operation systems in all branches of MBL have provided the frequent and prompt customer service.
• The strict leadership along with the supervision of efficient management directs all the branches.
• The inner environment and teamwork, of all branches in MBL motivated all experienced employees to achieve the ultimate object of MBL.
• MBL has become a member of the SWIFT system expedite foreign trade transaction.
• MBL has become introduced some scheme for the purpose of saving of low income people which are not available in other banks like “Family Maintenance Deposit (FMD)”, “Personal Loan Scheme”, “Car Loan Scheme” etc.
• The bank offers attractive saving rate than other financial institutes.
• MBL provides loan to the customers at lower interest with easy and flexible condition than the others do.
• Along with the profit generation Mercantile Bank Limited also maintain social responsibilities.
• Mercantile Bank Limited charges lower commission from their customer in comparison with other banks.
• The Bank is always guided their potential customers by giving valuable advises.

Mechanism:

Global network banking facilities

Commercial banking is the core activities of Mercantile Bank Limited. The bank serves all types of customer ranging from individual to corporate entities, both private and public. The standard service offered by mercantile bank Limited Include-

• One counter service for all banking needs of the customer.
• Customer counseling
• Personalized services and relationship banking
• Deposit banking
• Loan and advances
• Export and import financing
• Inland and foreign remittance facilities

Long Term target Services of Mercantile bank Limited include-

• Investment banking supported technology knows how transfer program.
• Leasing and lease financing.
• Capital market operation.

To reach the objectives, MBL has its basket of services among other-

• In house know how for feasibility study and strategic planning.

• Automated and computerized offices.

Mercantile Bank Foundation:

The Bank has set up Mercantile Bank Foundation for extending benevolent services to the society. The Bank contributes 1% of operating profit or Tk.4.00 million; whichever is higher, to Mercantile Bank Foundation every year. The Foundation has been established with following objectives:

Mercantile Bank Prize to 8(eight) eminent personalities of the country for the outstanding contribution in the fields of Economics and Economic Research, Bengali Language and Literature, Science and Technology, Education and Culture, Journalism, Sports, Research on Liberation War and Industry and Commerce.

• Interest free education loan for the meritorious but poor students
• To conduct research on Bengali language and literature.
• Book purchase and Distribution Policy to encourage writers and publishers of the country.
• Interest free Loan to the unemployed educated people.
• Donation for handicapped artists, literature and distressed people.
• Project for the development of shelter-less children

Services Offer by MBL:

The Bank launched several financial products and services since its inception. Among them are:

1. Deposit Schemes
2. Family Maintenance Deposit (FMD).
3. Monthly saving scheme (MMS).
4. Pension and Family Support Deposit (PFSD).
5. Monthly Benefit Scheme.
6. Quarterly Benefit Deposit Scheme.
7. 1.5 times Benefit Deposit Scheme.
8. Double Benefit Deposit Scheme (DBDS).
9. Special Saving Scheme (SSS).
10. Credit Schemes
11. Consumer Credit Scheme (CCS).
12. Car Loan Scheme.
13. Doctors Credit Scheme.
14. Rural Development Scheme.
15. Lease Financing.
16. Personal Loan.
17. Small Loan Scheme.

General Banking:

THE BANKER – CUSTOMER RELATIONSHIP

The Banker – Customer relationship is essentially a debtor-creditor contractual relationship. This relationship may be divided into two categories,

Legal relationship

Behavioral relationship

After the contractual relationship is established between the banker and customer, they have to avoid by some implied conditions of the contract as well as practices of the bank.

Some of the conditions and practices are as follows:

• Customer is to use cheque books while demanding payment from his account.
• Customer should keep cheque books in his safe custody.
• Customer must inform the bank on time for any loss of cheque leaf or cheque books.
• Customer while depositing money or presenting cheque, they must do that during business hour of the bank.
• Banker also should give necessary banking advice and help the customer in various banking activities.

SWOT Analysis of MBL:

In the competitive area of marketing are SWOT analysis is based on product, price, place and promotion of a financial institution like private Bank. By doing the SWOT analysis it is possible to find out the strengths, Weaknesses, opportunities, and threats of the MBL. From the SWOT analysis we can figure out on going scenario of the Bank.

SWOT Analysis

Strength

Threats

Internal Factors

External Factors

Weakness

Opportunity

Fig: SWOT Analysis

SWOT analysis two factors act as prime movers

Internal factors which are prevailing inside the concern which include Strength and Weakness.

On the other hand another factor is external factors which act as opportunity and threat.

Strength:

• The bank provides quality service to the clients compared to it other contemporary competitors.
• Experienced bankers and corporate personnel have formed the management.
• The bank recently introduce on line banking which enable it to automate all of its operations. At present, several banking functions are performed by computers. The bank is also a member of SWIFT (Society for Worldwide Inter bank Financial Telecommunication) alliance Access which enables the bank to exchange critical financial messages swiftly and cost effective.

Weaknesses:

• Delegation of authority is centralized which makes the employee to realize less responsibility. Thus, the employee morale is deteriorated.
• The credit proposal evaluation process is lengthy. Therefore, sometimes valuable clients are lost and the bank becomes unable to meet targets.
• No substantive use of Annual Confidential Report (performance evaluation form of the employee) to reward or to punish the employee. Hence the employee becomes ineffective.
• The bank lacks aggressive advertising and promotional activities to get a broad geographical coverage.
• Computer facility for all the officers is not available. Moreover, all the officers have no computer knowledge.
• The bank has no any research and development division.

Opportunities:

• The bank can introduce more innovative and modern products and services for then customers.
• It can diversity its portfolio by taking new sector.
• Many branches can be opened to reach the bank’s services to the remote areas.
• It can recruit more efficient and experienced persons to give fast and efficient service to the customers

Threats:

• The common attitude of Bangladeshi clients is default.
• Multinational as well as the fast growing local banks with modern products and services are capturing huge market within short period a resulting to switch over the existing customers of the bank.
• Bangladesh Bank Sometimes requires Private Commercial Banks to be abides by such rules and regulations which are not suitable for every commercial Bank

Branch Network of MBL:

MBL with 45 branches now in many corners of the country. The branch network of the country is shown in the map below:

Map Branch Network

In the above marked districts, MBL is in operation with its 45 Branches

2.11 OPERATIONS OF THE BANK:

Deposits

Figure Deposit

The Bank mobilized total deposits of BDT 39,348.00 million as of December 31, 2007 as compared to BDT 33,332.65 million in 2006. Competitive interest rates, attractive deposit products, deposit mobilization efforts of the Bank and confidence reposed by the customers in the Bank contributed to the notable growth in deposits. The Bank evolved a number of attractive deposit schemes to cater to the requirement of small and medium savers. This improved not only the quantum of deposits; it also brought about qualitative changes in the deposits structure.

Advances:

Figure Advances

The Bank has formulated its policy to give priority to small and medium businessmen while financing large-scale enterprises through consortium of banks. Total loans and advances of the Bank stood at BDT 31,877.86 million as of December 31, 2007 as compared to BDT 26,842.14 million in 2006. Trade and commerce, garments industry, large and medium scale industries and construction are major sectors in which the Bank extended credit.

Import Trade

Figure Import Trade

Mercantile Bank Limited opted quality financing while facilitating import trade in 2007 in a changed scenario. This year the Bank executed a total of 17,464 letters of credits amounting to BDT 40,380.10 million. The principal items were capital machineries, garments & accessories, rice, wheat, sugar, CDSO, vegetable oil, cement clinkers, hot roll steel, raw cotton, old ships etc.

Export Trade

Figure Export Trade

The Bank remained selective in export trade financing in 2007. A total of 13,078 businesses were handled worth BDT 32,670.10 million in 2007. The main focal point of the Bank in export financing was garments industry, the lone driving force of the economy of Bangladesh in single biggest source of foreign exchange and employment provider of the country. Other notable items were jute & jute goods, leather, handicrafts, tea, frozen food & fish products.

Foreign Remittances

Total foreign remittance in a single year, i.e., in 2007 made a record high to the tune of BDT 3,510.40 million. The Bank has deepened its step on the foreign soils further by establishing more and more remittance arrangements with overseas exchange companies where Bangladeshi expatriates are working. These include United Kingdom, U.A.E, Kuwait, Bahrain, Canada, Italy and France etc. Moreover, for prompt & safe delivery of this hard earned money to their near and dear ones in every corner of the country we have established agency arrangements with some big banks.

Operating Revenue

The operating revenue of the Bank stood at BDT 1,385.15 million in 2007 as against BDT 1,178.76 million in 2006. After necessary provision net profit after tax stood at BDT 540.50 million as of December 31, 2007 as against BDT 494.22 million in 2006. An amount of BDT 658.34 million has been set aside for income tax contribution to National Exchequer in 2007 as compared to BDT 475.90 million in 2006.

Total Income

Figure Total Income

Total income increased from BDT 4,631.41 million in 2006 to BDT 5,560.95 million in 2007. Interest income accounted for 80.04%, exchange gains 7.63%, commission 6.59% and other income 5.75% to total income in 2007 as against 75.54%, 8.96%, 8.18% and 7.32% respectively in 2006.

INTEREST INCOME:

TOTAL INCOME

(BDT in millions)

Components	Amount %	of Total
Interest income	4,450.90	80.04
Exchange gains	424.04	7.63
Commission	366.32	6.59
Other income	319.69	5.75
Total	5,560.95	100.00

Table Total Income

Interest Income

Interest income increased from BDT 3,498.67 million in 2006 to BDT 4,450.90 million in 2007. Interest on loans and advances accounted for 80.11%, Interest on Treasury and T & T Bond 7.71%, interest on deposits with other Banks 2.72%, Interest on Treasury Line 2.69%, Interest on Treasury Bills 1.97% and other interest income 4.82% of total interest income in 2007 as against 85.00%, 3.65%, 2.70%, 2.36%, 3.35% and 2.94% respectively in 2006.

Interest Income (BDT in millions)

Components	Amount %	of Total
Interest on loans and advances	3,565.41	80.11
Interest on Treasury and T&T Bonds	343.00	7.71
Interest on deposits with Banks	121.00	2.72
Interest on Treasury Line	119.58	2.69
Interest on Treasury Bills	87.55	1.97
Other Interest Income	214.36	4.82
Total	4,450.90	100.00

Table Interest Income

Interest Expenses

Interest expenses moved up from BDT 2,662.58 million in 2006 to BDT 3,159.30 million in 2007. Interest on deposits under schemes was the largest component of interest expenses and accounted for 46.87% of total interest expenses in 2007 as compared to 47.00% in 2006. Interest on FOR accounted for 46.85%, interest on savings deposits 3.84%, interest on short-term deposits 1.62%, interest on call deposits 0.68% and other interest expenses 0.14% of total interest expenses in 2007 as against 43.45%, 3.58%, 1.55%, 3.82% and 0.60% respectively in 2006.

Interest Expenses (BDT in millions)

Components	Amount	% of Total
Interest on deposit schemes	1,480.86	46.87
Interest on fixed deposits	1,480.09	46.85
Interest on savings deposits	121.41	3.84
interest on STD	51.26	1.62
Interest on call deposits	21.41	0.68
Other interest expenses	4.27	0.14
Total	3,159.30	100.00

Table Interest Expenses

Net Interest Income

Net interest income increased from BDT 836.09 million in 2006 to BDT 1,291.60 million in 2007. Gross interest income of the Bank amounted to BDT 4,450.90 million and interest expenses amounted to BDT 3,159.30 million in 2007.

Non-interest Income

Non-interest income decreased from BDT 1,132.74 million in 2006 to BDT 1,110.05 million in 2007. Non-interest income was 19.96% of the total income in 2007 as compared to 24.46% in 2006. Exchange gains 38.20%, commission accounted for 33.00% and other non-interest income 28.80% of non-interest income in 2007 as against 36.63%, 33.44% and 29.93% respectively in 2006.

Non-Interest Income (BDT in millions)

Components	Amount	% of Total
Exchange gains	424.04	38.20
Commission	366.32	33.00
Other non-interest income	319.69	28.80
Total	1,110.05	100.00

Table Non-Interest Income

Total Expenses

Figure Total Expenses

The total expenses of the Bank stood at BDT 4,175.81 million during 2007 as compared to BDT 3,452.65 million in 2006. Interest expenses accounted for 75.66%, salaries and allowances 11.78%, rent, rates, taxes etc. 2.98%, depreciation and repairs 1.44%, stationery, printing and advertisements 1.36%, postage, stamp and telecommunication 0.68% and other expenses 6.11% of total expenses in 2007 as against 77.12%, 13.11%, 2.49%, 1.20%, 1.29%, 0.67% and 4.12% respectively in 2006.

Total Expenses

(BDT in millions)

Components	Amount	% of Total
Interest expenses	3,159.30	75.66
Salaries and Allowances	492.02	11.78
Rent, Rate, Taxes etc	124.31	2.98
Depreciation and Repairs	60.17	1.44
Stationery, Printing & Advertising	56.74	1.36
Postage, Stamp and Telecom	28.29	0.68
Other Expenses	254.98	6.11
Total	4,175.81	100.00

Table Total Expenses

Non-interest Expenses

Non-interest expenses moved up from BDT 790.07 million in 2006 to BDT 1,016.51 million in 2007. Non-interest expenses was 24.34% of the total expenses in 2007 as compared to 22.88% in 2006. Salaries and allowances accounted for 48.40%, rent, rates, taxes etc. 12.23%, depreciation and repairs 5.92%, stationery, printing and advertisements 5.58%, postage, stamp and telecommunication 2.78% and other expenses 25.08% of total non-interest expenses in 2007 as against 57.32%, 10.89%, 5.24%, 5.65%, 2.93% and 17.97% respectively in 2006.

Non-Interest Expenses (BDT in millions)

Components	Amount	% of Total
Salaries and allowances	492.02	48.40
Rent, Rate, Taxes etc	124.31	12.23
Depreciation and Repairs	60.17	5.92
Stationery, Printing & Advertising	56.74	5.58
Postage, Stamp and Telecom	28.29	2.78
Other Expenses	254.98	25.08
Total	1,016.51	100.00

Table Non Interest Expense

Asset Portfolio:

The Bank’s total assets outstanding as of December 31, 2007 amounted to BDT 44,940.54 million as compared to BDT 37,159.65 million in 2006. Of the total assets outstanding in 2007, loans and advances constituted 70.93%, investments 15.80%, cash 8.27%, money at call and short notice 1.16%, balances with other banks 0.47%, and other assets 3.37% as against 72.23%, 14.55%, 7.92%, 1.06%, 0.64% and 3.60% respectively in 2006.

Asset Portfolio (BDT in millions)

Components	Amount	% of Total
Loans and Advances	31,877.86	70.93
Investments	7,099.98	15.80
Cash	3,717.35	8.27
Money at call and Short Notice	520.00	1.16
Balance with other Banks	209.20	0.47
Other Assets	1,516.15	3.37
Total	1,016.51	100.00

Table; Asset Portfolio

Corporate and Financial Reporting:

The Board of Directors confirms compliance with the financial reporting framework for the followings:

the Financial Statements prepared by the Management of the Bank present fairly its state of affairs, the results of its operations, cash flows and changes in equity;

proper books and accounts of the Bank have been maintained;

appropriate accounting policies have been consistently applied in the preparation of Financial Statements and accounting estimates are based on reasonable and prudent judgment;

International Accounting Standards, as applicable in Bangladesh, have been followed in preparation of Financial Statements and any departure, therefore, has been adequately disclosed;

the system of Internal Control is sound in design and has been effectively implemented and monitored;

There are no significant doubts upon the Bank to continue as a going concern.

Financial Summary:

Figure Financial Summary

Financial Highlights

Highlights for the year 2008 and 2007 (BDT in million) SL NO. PARTICULARS 2008 2007 1 Paid-up Capital 1,798.68 1,498.90 2 Total Capital Fund 4,186.69 3,387.17 3 Capital Surplus/Deficit 120.41 483.51 4 Total Assets 55,928.72 44,940.54 5 Total Deposits 49,538.36 39,348.00 6 Total Loans and Advances 41,993.95 31,877.86 7 Total Contingent Liabilities and Commitments 19,917.86 18,904.10 8 Credit Deposit Ratio (in %) 84.77 81.02 9 Percentage of Classified Loans against Total Loans and Advances (in %) 2.96 2.80 10 Profit after Tax and Provision 615.88 540.50 11 Amount of Classified Loans during the year 348.47 410.98 12 Provision kept against Classified Loans 578.20 563.85 13 Provision Surplus – – 14 Cost of Fund (in %) 9.19 8.75 15 Interest Earning Assets 49,941.85 39,497.83 16 Non-interest Earning Assets 5,986.87 5,442.71 17 Return on Investments (ROI) (in %) 10.46 10.98 18 Return on Assets (ROA) (in %) 1.22 1.32 19 Income from Investments 751.10 764.48 20 Earning Per Share (BDT) 34.24 36.05 21 Net Income Per Share (BDT) 34.24 36.05 22 Price Earning Ratio (approximate) 10 Times 12 Times

Table Financial Highlights

Introduction to Foreign

Exchange

Foreign Exchange- its meaning and definition:

Foreign exchange refers to the process or mechanism by which the currency of one country is converted into the currency of another country. Foreign exchange is the means and methods by which rights to wealth in a country’s currency are converted into rights to wealth in another country’s currency. In banks when we talk of foreign exchange, we refer to the general mechanism by which a bank converts currency of one country into that of another. Foreign Trade gives rise to foreign exchange.

According to Foreign Exchange Regulation Act (FERA) 1947, “Any thing that conveys the right to wealth in another country is foreign exchange. Foreign exchange means and includes all deposits, credits and balances payable in foreign currency as well as foreign currency instruments such as drafts, TCs. Bill of Exchange, promissory Notes and Letters of Credit payable in any foreign currency. “.

Types of Foreign Trades:

There are mainly three types of transactions which lead to foreign exchange. These are:

a) Import

b) Export

c) Foreign Remittance

Regulations for Foreign Exchange:

Local regulations: our foreign exchange transactions are being controlled by the following local regulations:

Foreign Exchange Regulation Act: Foreign Exchange Regulation (FERA) Act. 1947 enacted on 11^th March 1947 in the then British India, provides the legal basis for regulation the foreign exchange. This act was adapted in Pakistan and lastly in Bangladesh.

Guidelines for Foreign Exchange Transaction: This publication issued by Bangladesh Bank in the year 1996 in two volumes. This is a compilation of the instructions to be followed by the Authorized Dealers in transactions relating to foreign exchange

F.E. Circular: Bangladesh Bank issues F.E. circular from time to time to control the export import business and remittance that is to control the foreign exchange.,

Export-Import Policy:Ministry of commerce issues Export Policy and Import Policy giving basic formalities for Import and Export Business.

Public Notice: Some times CCI &E issues public notice for any kind of change in Foreign Exchange Transaction.

Instructions from different ministry: Different ministries of the Govt. sometimes instruct the authorized dealer directly or through Bangladesh Bank to follow something required for the government.

International Regulations: There are also some international organizations influencing our Foreign Exchange transactions. Few of them are discussed bellow: ICC: International Chamber of Commerce is a worldwide Non-Governmental Organization of thousands of companies. It was founded in 1919. ICC National committees throughout the world present ICC views to their Governments and alert Paris Headquarters about national business concerns. ICC has issued some publications like Uniform Customs and Practice for Documentary Credits (UCPDC)-600, URC and URR, Incoterms-2000, etc., which are being followed by all the member countries. There is, also an International Court of Arbitration to solve the international business disputes.

W.T.O.: World Trade Organization is another International Trade Organization established on 1^st January 1995. GATT (General Agreement on Tariff & Trade) was established on 1^st January 1948. After completion of it’s 8^th round, the organization has been abolished and replaced by WTO. This organization has vital role in international trade through its 124 member countries.

Letter of Credit:

A Letter of credit is a letter issued by a bank (know as the opening or the issuing bank) at the instance of its customer (known as the opener) addressed to a person (known as beneficiary) undertaking that the bills drawn by the beneficiary will be duly honored by it (opening bank) provided certain conditions mentioned in the letter gave been complied with.

Classification of Letter of Credit:

In different considerations there are many kinds of L/Cs. Some of them are discussed bellow:

Irrevocable L/C: Irrevocable L/C cannot be amended or cancelled without the consent of the beneficiary or any other interested parties. Banks commonly open this type of L/C.

Revocable L/C: This kind of L/C can be amended or cancelled by the Issuing Bank, without the consent of the beneficiary or any other interested parties. If it is not indicated in the L/C, whether it is Revocable or Irrevocable, then the L/C to be treated as Irrevocable.

Add-confirmed L/C: When a third bank provide guarantee to the beneficiary to make payment, if Issuing Bank fail to make payment, the L/C is called Add-Confirmed L/C. In case of a confirmed L/C a third bank adds their confirmation to the beneficiary, to make payment, in addition to that of Issuing Bank. Confirmed L/C gives the beneficiary a double assurance of payment.

Clean Claused: It is a normal claused L/C without third bank’s confirmation.

Revolving L/C: It is an L/C where the original amount restores after it has been utilized. How many times and how long, the amount will restore must be specified in the L/C. For example, an L/C opened for USD 1000 and shipment effected for USD 500, now the L/C restored for full value i.e. There is scope to effect further shipment of USD 1000 revolving L/C may be opened to avoid difficulties of opening new L/C. This L/C is not allowed in our present import policy.

Transferable L/C: If the word “Transferable” incorporated in an L/C, then the L/C is transferable. The 1st beneficiary can transfer transferable L/C to the 2^nd beneficiary. But 2^nd beneficiary cannot transfer it further to another beneficiary. Transfer may be done to more than one beneficiary, partially, if not prohibited in the L/C.

Restricted L/C: If advising and/or negotiation of an L/C are restricted to a particular bank, the L/C is called a restricted L/C.

Red Clause L/C: A red clause L/C is an L/C, where a special clause is incorporated into it that authorizes the confirming or any other nominated bank to make advances to the beneficiary, before presentation of the documents. In other words this is an L/C, where the Issuing Bank authorizes the negotiating bank to provide pre-shipment finance to the beneficiary. The L/C is called red-clause because, the special clause was originally written in red-ink to draw attention to the unique nature of this documentary credit. Red clause L/C is not allowed in our present import policy.

Green Clause L/C: It is an L/C, where the Issuing Bank authorizes the Negotiating Bank to grant storage facilities to the beneficiary. The special clause was originally written in Green-ink, so the L/C is called Green Clause. In both the case of Red Clause and Green Clause L/C, if the exporter fails to ship the goods the financing bank has the right to demand repayment from the Issuing Bank and that bank would have a similar right of recourse against the applicant.

Clean Letter of Credit: This is a commercial letter of Credit, wherein the Issuing Bank does not ask any documents as evidence of execution of the deal under the L/C. Under the said L/C only bill of exchange may be negotiated or may be paid without any supporting documents. Clean Letter of //Credit is not permissible in our import policy.

Documentary Letter of Credit: All the commercial letter of credits, where export related documents such as invoice, B/L etc. are required to present with the bill of exchange, is called Documentary Credit. Under this L/C, bill of exchange will not be honored without other required documents.

Straight Documentary Credit: Under the irrevocable straight documentary credit, the obligation of the Issuing Bank is extended only to the beneficiary, in honoring draft(s)/ documents and usually expires at the counter of the Issuing bank. This L/C. does not authorize any body to negotiate, purchase the documents. This L/C. is available for payment only at the Issuing Bank’s counter, not available for negotiation.

Irrevocable Negotiation Documentary Credit: This L/C. is available for negotiation by a nominated bank/any bank and expiring for presentation of document at the offices of negotiating bank. The Issuing Bank is bound to reimburse the Negotiating Bank, if it negotiates the documents complying with the credit terms.

With Recourse and Without Recourse to Drawers: These terms are related with bill of exchange. If the L/C allow a Bill of Exchange with recourse to the drawer, that means the Negotiating Bank has the right to claim the amount back, from the drawer, if the B/E is dishonored by, the drawee. And in case of without recourse, the Negotiating Bank has no right to claim the amount back. From the drawer, if the B/E is dishonored by the drawee. So in case of without recourse the negotiating Bank would be care-full to negotiate the document.

L/C can be classified according to source of fund:

Back-to-Back L/C: Back to Back import L/C is backed by another export L/C. where import of the goods to be made to execute the export L/C and payment of Back to Back bills to be made normally from related export process, the import L/C is called Back to Back L/C.

A Back-to-Back L/C is opened against an irrevocable L/C. The L/C is lien marked with the back-to-back L/C issuing branch. Back to Back L/C may be opened up to 75% of export L/C, (FOB value) and up to 80% where export price is more than USD 60/- per dozen in case of garments industries.

Cash L/C: Where payment of import bills under L/C is being made from (i) Foreign Currency reserve in Bangladesh Bank or (ii) F.C. account with authorized Dealer, the L/C is called Cash L/C.

Barter L/C: Where final settlements are being made through commodity exchange between the nations, the L/C is called Barter L/C.

According to Payment terms, there are mainly three types of L/Cs such as:

1. Sight Credit:
2. Accepted Credit:
3. Deferred Payment Credit:

Different parties involved Foreign exchange transaction:

Normally the following parties are involved to a documentary credit:

Importer:

The buyer or the importer is he who initiates the credit. He applies to bank for issue foreign a documentary credit. The obligations between the importer and the issuing bank are governed by the application-cum-agreement submitted by the importer to the bank. He is bound to reimburse the bank, which effects payment or incurred a deferred payment undertaking or has accepted or negotiated under the credit as per terms, and to take up the documents.

Opening Bank:

The issuing or opening bank is the importer’s bank and it issues a letter of credit normally pursuant to the terms of sales contract as set out in the application for the credit by the importer. The issuing bank should nominate the bank, which is authorized to pay or to accept drafts or to negotiate, unless the credit allows negotiation by any bank.

Exporter:

The seller or exporter is the beneficiary of the credit. The letter of credit is opened in his favor and addressed to him-. The beneficiary has the obligation to make export as per the contract and produce the documents as required by the credit.

The Advising Bank:

It is the bank in the exporter’s country (normally the exporter’s bank), which is usually the foreign correspondent of importer’s bank through which the L/C is advised to the supplier. If the intermediary bank simply advises/notifies the L/C to the exporter part, it is called “Advising Bank”.

The Confirming Bank:

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 conditions. The liability of the confirming bank is the primary liability and it is not contingent on the fulfillment of the obligation by the issuing bank.

The Accepting Bank:

Accepting bank is the bank nominated in the letter of credit to accept usance bills drawn under the credit. If the bank so nominated accepts the nomination, its responsibility to the beneficiary is not only to accept the drafts drawn but also to make payment on their due dates.

The Paying Bank:

Paying bank is a bank in the beneficiary’s country nominated in the letter of credit to make payment against documents to be tendered under the credit. Paying Bank must examine all documents with reasonable care to ascertain that these are drawn in accordance with the terms and conditions of the credit.

The Transferring Bank:

If the L/C is transferable, then the 1^st beneficiary of the L/C may transfer the L/C to the 2^nd beneficiary, through a bank nominated by the Issuing Bank. This bank is called the Transferring Bank.

International Trade Diagram:

The international trade can be illustrated by the following diagram:

Contract of sale (1)

Exporter London (Beneficiary)

Importer Dhaka (Applicant)

Ships Goods to (5)

Forwards L/C to (4)

Presents documents and obtains payment from (6)

Recovers Amount from (8)

Applies for opening of L/C (2)

Midland Bank London/ advising negotiating Bank

Obtains reimbursement from (7)

Mercantile Bank Ltd., Dhaka (Issuing Bank)

Opens L/C and send it to (3)

Figure Trade Diagram

List of Major Correspondents :

1. Citibank, N.A.

2. Wachovia Bank, N.A.

3. The Bank of Tokyo Mitsubishi Ltd.

4. The Hongkong and Shanghai Banking Corporation Limited.

5. Sumitomo Mitsui Banking Corporation

6. Commerzbank

7. Standard Chartered Bank

8. The bank of Nova Scotia

9. HypoVereinsbank

10. Commonwealth Bank of Australia

11. Toronto Dominion Bank

12. UniCredito Italiano

13. American Express Bank

14. MashreqBank

15. Hatton National Bank

16. Bank Austria Creditanstalt

17. Mizuho Corporate Bank Ltd.

18. Dresdner Bank AG

19. UTI Bank

20. UBAF

21. Danske Bank A/S

22. ING Bank

23. United Bank of India

24. ICICI Bank etc.

25. Woori Bank

26. Bank of America, N.A.

27. ABN AMRO Bank (Deutschland) AG

28. Korea Exchange Bank

29. Bank of Maldives Pl

c

30. Credit Lyonnais

31. Sevenska Handelsbanken

32. Nordea Bank Sweden AB (PUBL)

33. UBS AG

34. Habib Bank AG Zurich

35. Bank of Cyprus Ltd.

36. British Arab Commercial Bank Ltd.

37. Swed Bank

38. HBZ Finance

39. Habib American Bank

40. Nepal Bangladesh Bank Ltd.

41. China Merchants Bank

Import

IMPORT:

Import trade in Bangladesh is controlled under the Import and Export control Act 1950. Authorized Dealer Banks will import the goods into Bangladesh following the import policy, public notice, F.E. circular and other instructions from competent authorities from time to time. The import functions of the branch as far I have understood are discussed bellow.

Documentary Requirements for Opening L/C:

Importer shall submit following documents for opening L/C:

(a) Valid Import Registration Certificate (IRC) (commercial/industrial)

The following persons/purposes are exempted from Registration:

i) Govt. Departments

ii) Local Authorities & Statutory Bodies

iii) Recognized Educational Institutions

iv) Hospitals

v) Import of Capital Machinery for own use

(b) Tax Identification Number Certificate

(c) VAT Registration Certificate

(d) Membership Certificate of a recognized Trade Association as per IPO

(e) A declaration, in triplicate, that the importer has paid income-tax or submitted income lax return for the preceding year

(f) Pro forma Invoice or Indent duly accepted by the importer

(g) Insurance Cover Note with Money Paid Receipt covering value of goods to be imported plus 10 (Ten) percent above

h) L/C application Form (MF-fx l3) duly signed by the importer

i) Letter of Credit Authorization Form (LCAF), commercial or industrial as the case may be, duly signed ‘by the importer and incorporating New ITC number of at least 6(six) digits under the Harmonized System as given in the Import Trade Control Schedule 1988.

j) IMP Form duly signed by the importer

Precautionary Steps:

• The Branch must ensure that they deal only with known customers having a place of business in Bangladesh and can be traced easily, should any occasion arise for this purpose.
• The Branch shall all assess the financial standings & credibility of the customers with a view to ensure satisfactory arrangement for retirement of the documents.
• The Branch should also obtain confidential report on the exporter in all cases where the amount of the L/C exceeds Tk.2, 00,000.00 against P/invoice and Tk.5, 00,000.00 against indents.
• The Branch shall verify prices so as to ascertain competitiveness of the commodities to be imported.
• The Branch shall also see the marketability of the commodities to be imported.
• The Branch shall verify signature of the Importer on L/C Application Forms, LCAF & IMP Form.
• The Branch will not open L/Cs for import of goods through the customs stations/routes like Sonamasjid, hili, Burimary. Birol etc. unless the importers pay 100% margin or prior Head Office approval is obtained.

Sanctioning; Documentation & Legal Formalities :

Approval of Head Office and/or Branch Manger (where L/Cs are to be opened under his delegation) is to be obtained before opening L/C(s).

Security documentation is to be completed as per sanction/approval terms prior to opening of L.C. Charge Forms such as Demand Promissory Note, Letter of Undertaking, Letter of Debit Authority & Letter of Guarantee (where applicable) to be obtained with due stamps as per prevailing Stamp Act rate.

Opening L/C:

With the little understanding of L/Cs and after completing necessary formalities, the branch may now proceed for opening the credit on behalf of their own customers who maintain accounts with them, except government organizations. Necessary entries to be given in the L/C opening Register (MB/FX-03) by allocating an L/C number and following vouchers are to be passed for completion of opening transactions at Bill Clean (BC) Selling rate (Spot):

Dr. Customers Liability on L/C Cash

Cr. Bankers (Liability on L/C Cash

(Amount to be rounded off to the nearest thousand Taka)

(b)