Overall Performance of M B Knit Fashion

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Overall Performance of M B Knit Fashion

Chapter 1


1.1 Background of the Report

In general sense “MB Knit Fashion Limited” means a Multinational Manufacturer of all Kind of Knitted Garments Company that its use transfer pricing to maximize corporate profitability, by ensuring most profits are made where taxation is lowest. Transfer prices will differ from market prices to give the desired profit split between different parts of the multinational. Multinational Corporation, business enterprise with manufacturing, sales, or service subsidiaries in one or more foreign countries, also known as a transnational or international corporation. A multinational Buyer’s develops new products in its native country and manufactures them abroad, often in Third World nations, thus gaining trade advantages and economies of labor and materials. Almost all the largest Buyer’s are American, Spain, Japanese, or West European. Such corporations have had worldwide influence—over other business entities and even over governments, many of which have imposed controls on them. Many smaller corporations also became multinational, some of them in developing nations. Proponents of such enterprises maintain that they create employment, create wealth in countries that are in dire need of such development. Critics, however, point to their inordinate political influence, their exploitation of developing nations, and the loss of jobs that result in the corporations’ home countries.

1.2 Objectives of the Report

The following are the general & specific objectives of the report.

· General Objectives

The general Objectives of the report are as follows:

  • To acquire practical experience and analyze the overall performance of MB Knit fashion Limited in providing different corporate services.

· Specific Objectives

The specific objectives of the study are as follows:

  • To present an overview of MB Knit fashion Limited.
  • To find out the “Impact of Providing Satisfactory Customer Service on Business Growth of MB Knit fashion Limited.”
  • To gather comprehensive knowledge of the overall corporate functions and the expectations of the customers regarding the service level of the company.
  • To enrich idea about the products of the company.
  • To identify the factors contributing to the attractive and operative performance of the corporate office.
  • To make a study of the facts in order to arrive at certain conclusion about overall function of MB Knit fashion Limited.
  • To find out strength and weaknesses of the organization.
  • To learn how to use different ratios in practical fields.

1.3 Scope of the Study

While I have prepared this report, I have a great opportunity to have an in depth knowledge of all the divisional work practiced by MB Knit Fashion. It also helps me to acquire a firsthand perspective of a leading private organization in Bangladesh. The scope of this report is to analyze the operation of Import Department and to evaluate the performance of the different departments of MB Knit Fashion.

1.4 Methodology

While conducting smooth and accurate study everyone has to follow some rules and regulations. In this report have both primary and secondary data. Both the primary and secondary form of information is used to make the report more meaningful and presentable. The details of these sources are given below

· Primary Sources

  • Face to face conversation with the respective officers & staffs of the Company.
  • Informal conversation with the clients.
  • Personal observation.
  • Desks work in different sections/departments.

· Secondary Sources

  • Annual report of the Company.
  • Consultation of related books and publications.
  • Different statements of Company.

1.5 Limitations of the Study

It was difficult to communicate with the customer, as many of them were hesitant to respond. Therefore, the sample size was not big.

  • Another limitation of this report is Company’s policy of not disclosing some data and information for obvious reason, which could be very much useful.
  • Field practice varies with the standard practice that also created problem.
  • Large-scale research was not possible due to constraints and restrictions posed by the organization.
  • To protect the organizational loss in regard of maintaining confidentiality, some parts of the report are not in depth.

Chapter 2

2.1 Introduction
2.2 Historical background of MB Knit Fashion Ltd.
2.3 Business Philosophy of MB Knit Fashion Ltd:
2.3.1 Vision
2.3.2 Mission
2.3.3 Goals
2.3.4 Objectives
2.3.5 Management Strategies
2.4 Hierarchy of MB Knit Fashion Ltd.
2.5 Achievements of MB Knit Fashion
2.6 Product and Services information
2.7 Quality Control
2.8 Products of MB Knit Fashion
2.8.1 Production Guide Line
2.8.2 Products Gallery:
2.9 MB Knit Fashion Ltd at a Glance
2.10 Company Analysis
2.10.1 SWOT Analysis
2.10.2 Ratio Analysis
2.11 MB Knit Fashion Current Operations and Future Directions
2.11.1 A MB Knit Fashion for Tomorrow
2.11.2 Multiplier Effect of Innovations
2.11.3 Execute Management with CSR

An overview of MB Knit Fashion

2.1. Introduction

M B Knit Fashion, a name for quality in the knit world, established in January, 1992, is still working for the buyers through out the world. Quality and in time shipment is our first concern and with our policy in every steps in production and exporting has satisfied the customers. To meet the commitment of quality and prompt delivery, M B Knit Fashion decided to integrate the manufacturing processes in a planned manner. Over the years the entire process has been integrated by importing sophisticated machinery from world-renowned manufacturers. Working on new concepts in styling and content of the knitwear is a continuous activity in M B Knit Fashion with an objective to up the quality and the value of the merchandise.

2.2. Historical Background of MB Knit Fashion

MB knit fashion has started its operation in the RMG sector in the year of 1992 with only 20 sewing machines. Under the immense talent of its managing director and Proprietor “Mohammad Hatem” along with some dedicated and skilled technocrats today, MB Knit fashion emerged as one of the recognized knit garments manufacturers in Bangladesh. Today MB Knit fashion own fully vertical set up which includes knitting, dyeing, a fabric finishing division with all of the latest machinery, a several stitching units highly experienced in production of Garments for all age ranges of both genders.

Since inception, the company has been exporting various types of world class T-shirts, Polo shirts, along with all kinds of knit items to the couple of countries like USA, UK, Denmark, Italy, Spain, German etc. and have built a good reputation as a reliable vendor for all of our customers and associates to whom we offer our assurance of confidentiality and discretion. In the era of globalization and the out coming of enormous challenge coming days will be more competitive. And MB knit fashion will surely win the race with its uncompromising motto……..Price, quality, reputation & service.

2.3. Company’s Mission, Vision, Objectives and Strategies

Future Plans:

* To be a world-class knit garments company — one that becomes a benchmark for other knit garments company, its source for new ideas, information, professional development and quality standards.

* One that impresses its customers the first time.

* To attain highest level of business efficiency with integrity and honesty.

2.3.1 Vision

To be the most admired and respected family company in the country. MB Knit fashion has been successful in realizing this vision by creating a lasting brand name in every household all over the world. It has continued to expand in the field of Hire Purchase durables by acquiring new companies producing related products. It also describes aspiration for the future, without specifying the means necessary to achieve those desire ends. MB has continued to expand in the field of Hire Purchase durable and also increasing social responsibility. It has created a lasting brand name in every household all over the world.

2.3.2 Mission Statement:

· The Company mission is to give their customers a competitive advantage through superior products and services at best prices.

· The Company will meet and exceed their customers’ expectations of service through timely communications and quality information.

· To achieve tangible benefits by promoting efficiencies, productivity and professionalism.

· Provide competitive prices and genuine products to our clients.

· Creating a climate for voluntary compliance by providing guidance and building mutual trust.

· To promote international textile trade.

2.3.3 Goals

To develop and consolidate a strong client base and ensure all kinds of modern Garments facilities by expanding business and service periphery to full fill the expectations of the customer .

2.3.4 Objective

Highly trained and skilled managerial group, creating a friendly atmosphere through continuous training is expecting to achieve the company objective. Apart from support the nation with fore earning & solving unemployment problem, the main objective of MB Knit Fashion Group is human resource development for efficient management of garment sector giving priority to primary requirement of quality & on time shipments. Political instability, power crisis & illiterate work force having low quality concept are major barrier for Bangladesh garment export; break through of which is a challenge for us.

2.3.5 Management Strategy

MB Knit Fashion consistently focuses on growth and risk minimization through best Quality of products and increasing the market Demand of existing products by responding to changing customer or Buyer needs.

2.4. MB Knit Fashion Limited Organ-gram


2.5 Achievements of MB Knit Fashion

MB Knit Fashion ISO 9001: 2000 Company: MB Knit Fashion has been awarded ISO 9001: 2000 in recognition of the organization’s Quality Management System. The area of this certification will cover manufacturing of all kinds of knitted products.

Mb Knit Fashion is committed to offer quality products and service by maintaining quality at each and every level of its operational process. Achieving ISO 9001: 2000 is a reflection of its continuous effort to improve quality and maintain high ethical standard in every sphere of activities.


The services which we provide the best sourcing, Buying arrangement, meeting with manufacturers, and co-coordinating from sampling, production to dispatch, quality assurance in production, consolidating shipments etc.

Our service can help you find the best manufacturer for almost any type of readymade garments product. We will quote you on a one-cost basis, including all duties, freight, and delivery. If you would like to expand your line, find a lower-cost manufacturer with best quality, or get a quote on an existing item. The main objective of our Company is to reduce your risk by keeping the following issues on our agenda of work:

  • To introduce manufacturer who is capable of manufacturing as per buyer requirements.
  • To check production capacities and quality capabilities of Companies
  • To ensure that the quality is built into the product sample and manufacturing processes.
  • To check the correct material and component are used for production.
  • To check quality at start of production.
  • To check conformity as per samples and order during production.
  • To inspect quality, quantity, packing prior to shipment.
  • To witness loading of inspected consignment.
  • To carry out other special instruction of buyers.

Company also undertakes developments, products sourcing, as per buyer’s specification. In a nutshell we can assist you in outsourcing wide range of products from Bangladesh.

  • Company Activities
  • Sourcing
  • Supplier evaluation
  • Monitor compliance
  • Facilitate pricing and negotiation
  • Sampling
  • Quality control – inline and final inspections
  • Testing
  • Facilitate approvals
  • Monitor and facilitate export documentation
  • Updates on production

2.7 Quality Control

The Company offer quality products that are built to compete with the best in the world. All the company products are tested and verified for the best quality. The company has their own QC department & start checking quality from making yearn to shipment, in every stage company has their specialist quality controller to ensure the merchandise quality. The Company ensure the right yearn, right fabric weight, right pantone color, right pattern, right sewing, the right finishing and as well as right time shipment. This Company believe quality is the main key for clothing items.

2.8 Products of MB Knit Fashion

2.8.1 Production Guide Line

Monitoring progress and Quality of orders in production is a crucial and essential part of the Production function. Our Production & QC department takes charge of the process after all sampling and pre-production activity is completed. With a dedicated team of QC personnel, production is diligently checked daily at the manufacture’s premises to ensure complete conformance to standards and requirements. The company works with a number of qualified manufacturers whose processes meet the quality standards of Apparel Source.

Daily production figures are verified by our own staffs who visit the manufacturers daily. Our production department works with buyers in their needs to move in or move out deliveries based on their requirements for the retail industry.

  • Full time quality Control team.
  • Everyday Quality Inspection.
  • Collecting report From QC team.

2.8.2 Products Gallery:

Product Gallery :: Polo Shirt

Product Gallery:: T-Shirt

Product Gallary :: Ladies Tank Tops

Product Gallery: Ladies T-shirt

Product Gallary: Hooded Jacket

Product Gallery: Sweatshirt

2.9 Company Analysis

There are two types of Company Analysis.

  1. Qualitative (SWOT) Analysis
  2. Quantitative (Ratio) Analysis

2.9.1 SWOT Analysis

The SWOT analysis of Singer reveals that it can be considered as a feasible and profitable marketing plan. According to the analysis, the strengths, weaknesses, opportunities and threats are as follows:


  • The products of MB Knit Fashion have unique features compared to the other similar products.
  • The company has already acquired customer or Foreign Buyer trust in their better Quality and Service.
  • The company is providing better Quality and Service in their products.
  • The company has sufficient ability to research, develop and improve the product.
  • Mass marketing.
  • Convenient shape and usage features.
  • Existing production facility.


  • Existing competitors.
  • Product costs are higher than similar products in the market.
  • Absence of traceable market potential.


  • Fewer competitors.
  • Existing strong distribution channel.
  • Wide range of not yet reached target market.
  • Existing brand loyal customers.


  • Well organized competitors.
  • Absence of patent for the unique features.
  • Price competition.
  • Wide range of similar product with extra features is served by competitors.
  • Leakage of technology.
  • Piracy.

2.9.2 Quantitative analysis:

Ratio analysis:

2007 2008
Profitability Ratio:
  1. Return on equity capital = Net income after tax / Total equity
21.24% 22.45%
Profitability Ratio: Profitability ratio refers to the ability of firm to generate revenues in excess of expenses. In this section, I analysis the ratio of profitability in MB Knit Fashion at 2007 or 2008. And I told that, the banks profitability position 2008 is better than 2007.

Liquidity Ratio: Liquidity ratio refer to the ability of firm to meet its short term financial obligation when and as they fall due. In this section, I analysis the ratio of liquidity in MB Knit Fashion at 2007 or 2008. And I told that, the banks liquidity position 2008 is better than 2007.

  1. Return on assets (ROA) = Net income after tax / Total Assets
1.35% 1.47%
  1. Net operating Margin = (Total operating revenues – Total operating expanses) / Total Assets
3.90% 3.89%
  1. The company net profit margin (NPM) = Net income after tax / Total operating revenues
23.98% 25.68%
  1. Degree of asset utilization (AU) = Total operating revenues / Total Assets
5.62% 5.72%
  1. Equity multiplier (EM) = Total Assets/ Total equity capital
15.76 times 15.28 times
  1. Operating efficiency = Total operating expenses / Total operating revenues
30.64% 32.07%
Liquidity Ratio: I. Current Ratio = Current Assets / Current Liabilities 0.12 0.13
II. Quick Ratio = Cash + Short term marketable Security / Current Liability 0.023 0.056

2.9.3 Degree of Operating Leverage (DOL):

The degree of operating leverage (DOL) is defined as the percentage change in operating income- that is, earnings before interest and taxes, or EBIT-associated with a given percentage change in sales. Thus, the degree of operating leverage is computed as

% change in NOI

% change in sales

DOL = Degree of operating leverage =

Q (P-V)

Q( P-V)-F


S – VC

S – VC – F


Gross Profit





DOL 2004 =

DOL2004 = 1.28 times



DOL 2005 =

DOL2005 = 1.59 times

Thus, for every 1 percent change (increase or decrease) in sales there will be a 1.28 percents 2004 & 1.59 percents change (increase or decrease) in EBIT.

In this situation, we see that the company was more risky in 2005 than 2004.

2.9.4 The degree of Financial Leverage (DFL):

The degree of financial leverage (DFL) is defined as the percentage change in earnings per share (EPS) that results from a given percentage change in earnings before interest and taxes (EBIT), and it is calculated as follows:

% change in EPS

% change in EBIT

DFL = Degree of Financial leverage =






DFL2004 =

DFL2004 = 1.12 times



DFL2005 =

DFL2005 = 1.28 times

In this situation, we see that the company was more risky in 2005 than 2004.

2.9.5 The Degree of total Leverage (DTL):

The degree of total leverage (DTL),Which shows how a given change in sales will affect earnings per share. Here are equivalent equations for computing DTL.

% change in Sales

% change in EPS

DTL = Degree of Total leverage =


Gross Profit




1431m – 150

DTL2004 =

DTL2004 = 1.44 times


695m – 150m

DTL2005 =

DTL2005 = 2.03 times

In this situation, we see that the company was high risky in 2005 than 2004.

2.10. MB Knit Fashion Current Operations and Future Directions

MB Knit Fashion has emerged from a series of business and organizational restructurings as a stronger company. And the company is determined to build on this by achieving sustained growth with profit in all their business segments.

2.10.1 MB Knit Fashion for Tomorrow

MB Knit Fashion’s activities span the high growth domains of all kind of Manufacturing Knitted Products, the stable growth domain of Infrastructure Systems, and Home Appliances. They are promoting the strategies and capital investments required to achieve growth in all of these areas. This strategy can be seen in Singer’s capital investments in new semiconductor facilities, our commitment to building a global presence in the nuclear power business, and our drive for leadership in the Manufacturing Garments market through high Quality of products.

2.10.2 Multiplier Effect of Innovations

The growth the company is aiming for demands wide-ranging innovation in the way the company do business. They are promoting innovation in development, innovation in manufacturing and innovation in sales, along with the multiplier effect of applying these advances throughout their operations.

2.10.3 Execute Management with CSR

Another essential aspect of the way MB Knit Fashion do business is respect for their corporate social responsibilities (CSR). As a matter of course the company complies with laws and regulations. It cultivates robust corporate ethics and ensures honesty and transparency in their management practice. Looking to the future, MB Knit Fashion promotes strict environmental management and auditing, seek to reduce the environmental loads of its products, and promote measures to help protect the global environment. MB Knit Fashion also works closely with the communities in which the company operates through numerous outreach programs and voluntary activities.

Chapter 3

Foreign Exchange & L/C Practices

Of Commercial Section in MB Knit Fashion

3.1 Introduction
3.2 Sources of foreign exchange and uses of foreign exchange
3.3 Role of Bank in Foreign Exchange
3.4 Exchange Rate
3.5 Exchange Rate System
3.6 Types of Foreign exchange Departments
3.7 Function of AD in Foreign Exchange
3.8 Import
3.8.1 Introduction
3.8.2 Types of Importer
3.8.3 Requirements of Import
3.8.4 Letter of L/C
3.8.5 Types of L/C
3.8.6 Features of Letter of Credit
3.8.7 Documentation of L/C opening
3.8.8 Payment System
3.8.9 Charges of L/C
3.8.10 Parties involved in a Letter of Credit
3.8.11 Import Financing
3.9 Export
3.9.1 Introduction
3.9.2 Exporter letter of Credit
3.9.3 Export Documentation
3.9.4 Back to Back letter of Credit
3.9.5 Export Financing

Foreign Exchange

3.1 Introduction:

Foreign Exchange is the mechanism by which the currency of one country gets converted in to currency of another country to effect ‘International Trade’ payment. This mechanism by which commercial investments and others transactions between countries are being settled. It involves with the purchase and sell of the money of foreign countries and transferring of exchange balance from bank to bank.

Bank largely depends in its Foreign Exchange Business to ensure profitability. To look after the Business and also to ensure prompt service to the Import & Export officers having exposure and expertise in Foreign Exchange Business have been posted both at Head Office & Authorized Dealer Branches. During 2006, the Bank handled Export & Import Business to the tune of Tk.8, 557.03 million & Tk.17, 646.84 million respectively.

Bank’s wide network of correspondence plays vital role in facilitating its International Trading. At present, total number of correspondents is 335.

With a view to facilitating housebound remittance, the Bank made arrangements with a number of exchange companies during the year. These arrangements brought significant development in remittance business. We are going to expand this network in near future.

3.2 Sources of foreign exchange and uses of foreign exchange:

Sources of foreign currency of a nation-

  • Proceeds from Export of commodities.
  • Proceeds from Export of service at abroad.
  • Foreign remittance. (inward by non-resident wage earner/ gifts grants form other country)
  • Foreign AID/Loan/Credit/Barters.
  • Foreign Direct Investment (FDI).
  • Income on investment receipt from abroad, foreign tourist/travelers.

Uses of foreign exchange-

  • Payment against imports of commodities from other nations.
  • Payment for services from abroad.
  • Providing gifts grants/donation to other nations.
  • Investment made to abroad.
  • Transfer of profit arising from foreign investment.
  • Residence travel to other nations (tourist/travelers)
  • Maintenance of am basis/consulate office at abroad.

3.3 Exchange Rate:

The rate at which one currency is converted in to another currency is the rate of exchange between the currencies concerned. The conversion of currency is done by bank who deals in foreign exchange. The rate of exchange is the price of one currency expressed in terms of another currency. (For Bangladesh, Exchange rate means the price of foreign exchange in terms of Bangladesh Taka)

3.4 Exchange Rate System:

Exchange Rate System can be classified as-

  • Fixed: Exchange rates are either held constant on are allowed to fluctuate only within narrow boundaries.
  • Freely Floating: Exchange rates would determine market forces without any intervention from government.
  • Managed Float: Exchange Rate System that lies some where between and freely floating system.
  • Pegged: Involves a policy of pegging a currency’s value to another currency on to same currency on to same other units of accounts.

3.5 Foreign exchange Departments:

Foreign exchange & foreign trade are being routed in NCC bank Ltd. through the following:

1) Import

2) Export

3) Remittance

1. Import:

Import of merchandise essentially involves two things, bring of goods physically into the country & remittance of foreign exchange toward the cost of the merchandise and services connected with dispatch of the merchandise. The physical import is regulated by the ministry of commerce through the chef controller of imports & export while Bangladesh Bank regulates the payments of these imports through its exchange control department.

2. Export:

Export is vise-a-visa of import. The import and export normally made against latter of credit through dependent upon the buyer & seller relationship. Detail procedure of import & export to be discussed in ahead.

3. Remittance:

Remittance means transfer of fund. Latin the word “Remittance” we understand transfer of fund from one place to another place with may be within the country or between two countries. Remittance and which in effected between two countries is called foreign remittance.

3.6 Function of AD in Foreign Exchange:

The Authorized Dealer Bank has vital role in the foreign trade of a country. They provide the finance needed to execute the transaction. They from the conduit pipe through which the documents and money are exchange between the exporter and importer. They act as the extended arm of the reserve bank of Bangladesh in a provision of the foreign exchange regulation act 1947. For the banks foreign exchange dealing is a specialized activity with good potential for profits.


Foreign Guarantee/Bond

Dealing Room


-FC Fund Mgt.Dealing

-Cross Fcry





Exchange position

Exchange House
Exchange Rate

3.7 Import Section

3.7.1 Introduction:

Import is the process of purchasing goods from overseas. Import of goods into Bangladesh is regulated by the ministry of commerce in terms of the import and export (control) act 1950, with import policy orders issued periodically and public notices issued from time to time by the chief controller of import and Export (CC in terms of importers, exporters and indentures (Registration) order 1981. No person can import goods into Bangladesh unless he/she is registered with the CCI&E. On the next step, the importer applies to Bangladesh Bank through authorized dealer for import goods.

3.7.2 Types of Importer:

Import is the flow of goods and services purchased by economic agent located in one country from economic agents located in another. Hence, import of merchandise essentially involves two things: bringing of goods physically into the country and remittance of foreign exchange towards the cost of the merchandise and service connected with its dispatch to the importer. In case of import, the importers are asked by their exporters to open letter of credit so that payment against goods is ensured.

Fig: Types of Importers


The Mechanics of Import and Export:


· A bill of loading, or, B/L, is issued to the exporter by a common carrier transporting the merchandise. It will be described more fully later in this chapter.

· A signed commercial invoice is issued by the exporter and contains a precise description of the merchandise. Unit prices, financial terms of sale, and amount due from the importer are indicated, as are shipping conditions related to charges, such as “FOB” (free on board), “FAS” (free alongside), “CFR” (cost and freight), or “CIF” (cost, insurance, freight).

· Insurance documents must be as specified in the contract of sale and must be issued by insurance companies or their agents. The insurance may be issued to the exporter, who must then endorse the policy to the importer, or it may be issued in the name of the importer. Insurance must be of types and for risks specified in the letter of credit.

· Packing lists may be required so that the contents of containers can be identified, either for customs purposes or for importer identification of the contents of separate containers. In addition, an export declaration prepared by the exporter to assist the government in the preparation of export statistics may be required.

Shipping deadline:

Most importers insist on a specified deadline or time interval by which the shipment will be made. If the goods in question are particularly time-sensitive (such as products for seasonal sale), Remedies will be included in the sales contract for failure to meet time commitments.

Payment instructions:

Which of the parties—the exporter or the importer—is to pay such charges as freight, insurance, import duties, handling fees, taxes, etc., must be specified carefully in the sales contract. The currency in which all payments are to be made benzene importer and exporter must also b specified dearly. The payment terms state whether cash is to be paid in advance, whether letters of credit are required, and what documents need to be presented against payment, consignments, or payment on open account. These terms must be detailed, in the sales-contract. The following section on key documents will elaborate on these payments term concepts.

Packaging and marking:

Depending on the nature of the goods, proper packaging may be critical to preserving and protecting items being shipped. Proper markings on the inner and outer boxes and containers are needed to conform to customs regulations in countries. These markings typically include clear and conforming invoices of the value of all items for import duty calculation and payment purposes.

Warranties, guarantees, and inspections:

Assurances regarding the performance or qualities demonstrated by the goods from the exporter ma also are included in the sales contract. This may include not only protection against product defects and proper performance, but protection against any consequential damages from defective parts or performance. In some cases, the Importer may wish to have the right to inspect the goods before paying (and even the right to inspect the goods while being manufactured before shipping). These stipulations should of course be delineated in the sales contract.

3.7.3 Requirements of Import

In order to import a product from aboard, the importer is obliged to open L/C with a bank. To process the import business, photocopies of following paper need to be attached with the application form:

· An up-to-date Trade License

· Import Registration Certificate

· Membership Certificate of the Chamber of Commerce or the Related Business Community

· Tax identification Number (TIN)

· Pro-forma Invoice or Indent


The Bank as the Import/Export Intermediary:

3.7.4 Letter of Credit (L/C)

Letter of Credit (L/C) is an agreement between an importer and a bank (Issuing bank). The bank to the importer provides letter of credit in order to purchase goods from the exporter. The bank acts on behalf of the clients to deal with the exporter and the clients make the payment after receiving the goods accordingly. It is one of modern credit facility that provides assurance, that exporter of goods will receive his payment from importer. Subject to the condition that the beneficiary exporter submits documents conforming to the term of L/C. It contains a brief description shipping date and the expiration date after which the payment will no longer be made. This type of letter is issued by commercial bank.

3.7.5 Types of Documentary Letter of Credit

Documentary Credits are basically two types. It may be either

· Revocable

· Irrevocable

Revocable Credit

This type of credit can be revoked or cancel at any time without consent of, or notice of the beneficiary. As per Article 8 (a) of UCPDC 5000 “A revocable Credit may be amended or cancelled by the issuing Bank at any moment and without prior notice to the Beneficiary”. In case of seller (Beneficiary), Revocable Credit involves risk, as the Credit may be amended or cancelled while the goods are in transit and before the documents are presented, or although presented, before payment has been made. The seller would then face the problem of obtaining payment. On the other hand, Revocable Credit gives the buyer maximum flexibility, as it can be amended or cancelled without prior notice to the seller up to the moment of payment by the issuing bank at which the issuing bank has made the Credit available. In modem banking, the use of revocable credit is not widely spread.

Irrevocable Credit:

The Irrevocable Credit is a commonly used type of documentary credit. The Credit which cannot be revoked varied or changed/amended without the consent of a parties-buyer (Applicant), seller (Beneficiary), Issuing Bank and Confirming l3ank (in case of confirmed LC). As per Article 9 (a) of UPCDC 500, an irrevocable Credit constitutes a definite undertaking of the issuing Bank, provided that the stipulated documents are presented to the Nominated Bank or to the issuing Bank and that the terms and conditions of the Credit are complied with. Irrevocable Credit gives the/seller greater assurance of payments, but he remains dependent on an undertaking of a foreign bank, Irrevocable Credit may be unconfirmed.

Special types of Letter of Credit (L/C)

  • Sight Payment Letter of credit.
  • Deferred Payment letter of Credit.
  • Acceptance letter of Credit.
  • Negotiating Letter of Credit.
  • Red Close letter of Credit.
  • Revolving credit.
  • Stand by Credit.
  • Confirmed Letter of Credit.
  • Confirmed and Irrevocable letter of credit.
  • Transferable letter of credit (L/C).
  • Back-to-Back letter of credit (L/C).
  • Green clause letter of credit (L/C).

Sight Payment Letter of Credit:

The most commonly used credits are sight payment credits. These provide for payment to be made to the beneficiary immodestly after presentation of the stipulated documents on the condition that the terms of the credit have been complied with. The banks are allowed reasonable time to examine the documents.

Deferred payment Letter of credit:

Under a deferred payment credit the beneficiary does not receive payment when his presents the documents but at a later date specified in the credit. On presenting the requited documents, he received the authorized banks written undertaking to make payment of maturity. In this way the importer gains possession of the documents before being debited for the amount involved.

In terms of its economic effect a deterred payment credit is equivalent to an acceptance credit, except that there is no bill of exchange and therefore no possibility of obtaining money immediately through a descant transaction. In certain circumstances, how ever, the banks payment undertaking can be used as collateral for an advance, though such as advance will normally only be available form the issuing or confirming bank. A discountable bill offers wider scope.

Acceptance Letter of Credit:

With an acceptance credit payment is made in the form of a tern bill of exchange drawn on the buyer, the issuing bank.

The word bank comes from Latin words Banco, Bancus, Banke, Bangk and Banca. Bank is a financial institution act as an intermediary that receives deposits for savers at a lower interested rate and lends money to investors at a higher interest rate. ; return false href=” javaScript: void (O) ’’ Bank or the pendent bank. Once he has fulfilled the credit requirements, the beneficiary can demand that the bill of exchange be accepted and returned to him. Thus the accepted bill takes the place of a cash payment.

The beneficiary can present the accented bill to his own bank for payment at maturity or for discounting, depending on whether or not he wants cash immediately. For simplicities sake the beneficiary usually gives on instruction that the accepted bill should be let in the safe keeping of one of the banks involved until it matures. Bill of exchange drawn under acceptances credit usually has a term of 60-180 days.

The purpose of an acceptance is to give the importer time to make payment. It he sells the goods before payments fall due, he can use the proceeds to meet the bill of exchange in this way, he does not have to borrow money to finance the transaction.

Negotiation Letter of Credit:

Negotiation means the purchase and sale of bill of exchange or other marketable instruments. A negotiation credit is a commercial letter of credit opened by the issuing bank in the currency of its own country and addressed directly to the beneficiary. The letter is usually delivered to the addressee by a correspondent bank. This credit is sometimes also as Hand on credit.

The letter of credit empowers the beneficiary to draw a bill of exchange on the using bank, on any other named drawer or on the applicant for the credit. The beneficiary can present this bill to a bank for negotiation, together with the original letter of credit and the documents stipulated therein.

Payment of the bill of exchange is guaranteed by the issuing bank on the condition that the documents presented by the beneficiary are in order. The most common form of negotiation credit permits negotiation by any bank. In rare case the choice is limited to specified banks.

Red clause Letter of Credit:

In the case of a red clauses credit, the seller can obtain an advance for an agreed amount from the correspondent bank, goods that are going to be delivered under the documentary credit. On receiving the advances, the beneficiary must give a receipt and provide a written undertaking to present the required documents before the credit expires.

The advance is paid by the correspondent bank, but it is the using bank that assumes liability. If the seller’s dies not present the required documents in time and fails to refund the advance, the correspondent bank debits the issuing bank with the amount of the advance plus interest. The issuing bank, in turn, has reveres to the applicant, who therefore beats the risk for the advance and the interest accursed.

The clause permitting the correspondent bank to make an advance used to be written in red in home the name red clause credit.

Revolving Letter of Credit:

Revolving credit can be used when goods are to be delivered in installment at specified intervals. The amount available at any one time is equivalent to the value of one partial delivery.

A revolving credit can be cumulative or non-cumulative means that amount from unused or incompletely used portions can be carried forward to subsequent period. If a credit is non-cumulative, portions not used in the prescribing period case to be available.

Stand by Letter of Credit:

Stand by credit is encountered principally in the US. Under the laws of most US states, banks are prohibited from issuing regular quarantines, so credits are used instead. In Europe, too the use of this type of credit is increasing by virtue of their documentary credit, stand-by credit are governed by the UCP. However, their function is that of a grantee.

The types of payment and performance that can be guaranteed by stand-by credits include the following:

-Payment of thorium bill of exchange

-Repayment of bank advance

-Payment of goods delivered.

-Delivery of goods in accordance wets contract and

-Execution of construction contracts, supply and install contracts.

In order to enforce payment by the bank, the beneficiary merely presents a declaration stating that the applicant for the credit has tailed to meet his contractual obligation. This declaration may have to be accompanied by other documents.

Transferable Letter of Credit:

Transferable credits are particularly well adapted to the requirements of international trade. A trader who receives payment from a buyer in the form of a transferable documentary credit can use that credit to pay his own supplier. This enables him to carry out the transaction with only a limited and lay of his own funds.

The buyer supplies for an irrecoverable credit issued in the traders favor. The issuing bank must expressly designate the credit as transferable.

As soon as the trader receives the confirmation of credit he can request the bank to transfer the credit to his supplier. The bank is under no obligation to affect the transfer except in so far as it has expressly consented to do so.

The costs of the transfer are usually charged to the trader and the transferring bank is entitled to delete them in advance.

3.7.6 Features of Letter of Credit

· It is a documentary credit.

· It contains a directive for honoring a bill, a check of specific amount.

· Banks work as representative of the importer.

· It contains as representative of the importer.

· It contains a definite time period.

· It works as a contract among different parties to it. It bears a specific date

· A bank issues it.

Advantages of Letter of Credit

To the exporter

· A let