Performance Evaluation Of Mercantile Bank Ltd

View With Charts And Images

Performance Evaluation Of Mercantile Bank Ltd

1.1 Origin of the report

Mercantile Bank Ltd. is committed to provide high quality services to its constituents through different financial products and profitable utilization of fund and contribute to the growth of GDP of the country by financing trade and commerce, helping industrialization, boosting export, creating employment opportunities for the educated youth and encouraging micro-credit leading to poverty alleviation and improving the quality of life of the people and thereby contributing to the overall socio-economic development of the country.

1.2 Objective of the report

1.2.1 GENERAL OBJECTIVE:

The general objective of the study is to prepare and submit a report on the topic “Performance Evaluation Of Mercantile Bank Ltd; A special concentration on L/C operation”

1.2.2 SPECIFIC OBJECTIVES:

• To get a clear idea about the bank’s and how it runs and what function it does.
• To know the overall L/C operation
• To take idea on import and export activities.

1.3 Scope of the Report

The report covers the over view of the performance of Mercantile Bank Ltd. Its growth potential comparing to the previous year and the L/C operation.

1.4 Methodology:

1.4.5 Primary Sources:

Major sources of Primary information have been collected through discussing with senior colleagues, Manager Operation, Head of Branch and foreign exchange incharge.

1.4.6 Secondary Source:

Sources of secondary information are as follows:

· Bank’s Annual Report

· Internet

1.5 Limitation:

Although efforts will be made to make the report as comprehensive as possible , nevertheless the following limitations have been identified for the preparation of the report.

· Time limit

· Lack of sufficient secondary data

· All the concerned personnel of the department may not be interviewed

• In bank all employees are too busy. It is tough to have a break from their tight schedule
• There are a lot of secret matters in the organization. As an intern the researcher cannot reach to those secret topics.

2.1 Banking Sector Overview

The banking system, as a whole, remains healthy despite the economy going through a period of economic difficulty. The banking sector absorbed the build-up of non-performing loans in the system while maintaining profitability and robust balance sheets. Much of the credit for this must go to the SBP for the policies it has pursued over the last decade to ensure that banks are adequately capitalized and adhere to prudent risk management.

Banks act as payment agents by conducting checking or current accounts for customers, paying cheques drawn by customers on the bank, and collecting cheques deposited to customers’ current accounts. Banks also enable customer payments via other payment methods such as telegraphic transfer, EFT, POS, and ATM.

Banks provide almost all payment services, and a bank account is considered indispensable by most businesses, individuals and governments. Non-banks that provide payment services such as remittance companies are not normally considered an adequate substitute for having a bank account.

2.2 Risk and capital

Banks face a number of risks in order to conduct their business, and how well these risks are managed and understood is a key driver behind profitability, and how much capital a bank is required to hold. Some of the main risks faced by banks include:

• Credit risk: risk of lossarising from a borrower who does not make payments as promised.
• Liquidity risk: risk that a given security or asset cannot be traded quickly enough in the market to prevent a loss (or make the required profit).
• Market risk: risk that the value of a portfolio, either an investment portfolio or a trading portfolio, will decrease due to the change in value of the market risk factors.
• Operational risk: risk arising from execution of a company’s business functions.

2.3 Regulation

Banking law is based on a contractual analysis of the relationship between the bank (defined above) and the customer—defined as any entity for which the bank agrees to conduct an account. The law implies rights and obligations into this relationship as follows:

1. The bank account balance is the financial position between the bank and the customer: when the account is in credit, the bank owes the balance to the customer; when the account is overdrawn, the customer owes the balance to the bank.
2. The bank agrees to pay the customer’s cheques up to the amount standing to the credit of the customer’s account, plus any agreed overdraft limit.
3. The bank may not pay from the customer’s account without a mandate from the customer, e.g. a cheque drawn by the customer.
4. The bank agrees to promptly collect the cheques deposited to the customer’s account as the customer’s agent, and to credit the proceeds to the customer’s account.
5. The bank has a right to combine the customer’s accounts, since each account is just an aspect of the same credit relationship.
6. The bank has a lien on cheques deposited to the customer’s account, to the extent that the customer is indebted to the bank.
7. The bank must not disclose details of transactions through the customer’s account—unless the customer consents, there is a public duty to disclose, the bank’s interests require it, or the law demands it.
8. The bank must not close a customer’s account without reasonable notice, since cheques are outstanding in the ordinary course of business for several days.

Basel II is the second of the Basel Accords, which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision. The purpose of Basel II, which was initially published in June 2004, is to create an international standard that banking regulators can use when creating regulations about how much capital banks need to put aside to guard against the types of financial and operational risks banks face. Advocates of Basel II believe that such an international standard can help protect the international financial system from the types of problems that might arise should a major bank or a series of banks collapse. In theory, Basel II attempted to accomplish this by setting up risk and capital management requirements designed to ensure that a bank holds capital reserves appropriate to the risk the bank exposes itself to through its lending and investment practices. Generally speaking, these rules mean that the greater risk to which the bank is exposed, the greater the amount of capital the bank needs to hold to safeguard its solvency and overall economic stability.

2.4 Role of Central bank:

Bangladesh Bank performs all the functions that a central bank of any country is expected to perform, and such functions include maintaining the price stability through economic and monetary policy measures, managing the country’s foreign exchange and the gold reserve and regulating the banking sector of the country. Like all other central banks across the globe, Bangladesh Bank is both the Government’s banker and the banker’s bank, a “Lender of the Last Resort”. Bangladesh Bank, like most of the central banks of different countries, exercises monopoly over the issue of currency and the banknotes. Except for the 1 and 2 taka notes, it issues all other denominations of Bangladeshi Taka

3.1 Historical Background:

Mercantile Bank Limited emerged as a new commercial bank to provide efficient banking services and to contribute socio-economic development of the country. The Bank commenced its operation on June 2, 1999. with an authorized capital of Tk 800 million divided into 8 million ordinary shares of Tk 100 each.

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.

3.2 Vision:

“Would make finest corporate citizen”

3.3 Mission:

“Will become most caring, focused for equitable growth based on diversified deployment of resources, and nevertheless would remain healthy and gainfully profitable Bank”

3.4 Objectives

3.4.1 Strategic objectives:

• To achieve positive Economic Value Added (EVA) each year.
• To be market leader in product innovation.
• To be one of the top three financial institutions in Bangladesh in terms of cost efficiency.
• To be one of the top five financial institutions in Bangladesh in terms of market share in all significant market segment they serve.

3.4.2 Financial objective:

• To achieve 20% return on shareholders’ equity or more, on average.

3.5 Core Values

· For the customer

Providing with caring services by being innovative in the development of new banking product and services

· For the shareholder

Maximizing wealth of the bank

· For the employer

Respecting worth and dignity of individual employees devoting their energies for the progress of the bank

· For the community

Strengthening the corporate values and taking environment and social risks and reward into account.

3.6 MBL Time Line

3.7 Operational network organ gram

3.8 Mercantile Bank’s Functional Departments

The Mercantile Bank Limited has the following departments, which includes the whole operations of the bank. The departments are listed below with their major section in the following table.

Departments in Mercantile Bank Limited

Table – 01: Departments in MBL

3.9 Financial product & Services

The Bank has launched a number of financial products and services since its inception.

3.9.1 Deposit Products

Monthly Saving Scheme : It is a significant product; introduced to attract small savers for building up their habit of savings and thereby build up a healthy capital base for the economy. The monthly installments are in various sizes and one can adopt the schemes for a period of 05 years, 08 years or 10 years. Investor gets a lump sum (principal plus interest) at the maturity of the scheme. Installment amount should be deposited within the first 10 days of each month. In case of failure, 5% of monthly installment will be charged as late payment fee which will be added with the installment amount. In case of premature encashment, interest will be paid at Savings rate. The incumbent depositor can get a loan facility of maximum 80% of his deposited amount.

Monthly Benefit Deposit Scheme Under this scheme, depositor will get a certain sum of money in each month proportion to his/her deposit during the entire tenure. Benefit starts right from the first month of opening an account under this scheme and continues upto five years. On maturity, the principal amount is paid back. Objectives of this scheme are: help the retired persons for investing their retirement benefits, create investment opportunities for Non-Resident Bangladeshi, etc. Minimum deposited amount is BDT 50,000 or its multiples and the tenure is Five (05) years. This scheme is also known as “Family Maintenance Deposit Scheme (FMD)”.

Double Benefit Deposit Scheme: Under this scheme, deposited amount will be double in a tenure of Seven and Half (7.5) years. Minimum deposited amount should be BDT 10,000 or its multiples. In case of premature encashment interest will be paid on Saving A/c Rate. Loan may be granted up to maximum 80% of the deposited amount, but minimum principle amount must be BDT 20,000.

Quarterly Benefit Deposit Scheme: The ‘Quarterly Benefit Deposit Scheme’ will be maintained for a period of 3 (three) years and the minimum amount of deposit is BDT 50,000.00 (fifty thousand) or its multiples. Interest will be paid on quarterly basis. Benefit starts right from the first quarter of opening the account. On maturity, principal amount will be paid back. Savings account is needed to maintain this scheme. Loan may be granted up to maximum 80% of the forced encashment value on the date of loan processing

Times Benefit Deposit Scheme: Under the ‘1.5 Times Benefit Deposit Scheme’ a deposit of minimum BDT 50,000.00 (fifty thousand) or its multiples will be received for a period of 4.25 years. On maturity, 1.5 times of the deposited amount will be paid back to the account holder. In case of premature encashment interest will be paid on Saving A/c Rate. However, no interest shall be paid if premature encashment takes place before expiry of 1 (one) year. Loan may be granted up to maximum 80% of the deposited amount.

Advance Benefit Deposit Scheme: Under this Scheme, one can deposit a certain amount of money for two years. The depositor will receive the benefit on yearly basis. The benefit amount of first year will be received in advance at the time of deposit. On maturity, the depositor will get back the principal amount with the benefit amount of second year. That is Interest is paid in two phases, first phase paid initially BDT 9,500 and second phase paid BDT109,520 after maturity against BDT 1,00,000. Loan may be granted up to maximum 70% of the deposit. This is Also known as “Agrim Munafa Amanat Prokolpo (AMAP)”.

3.9.2 Loan Products

Consumer Credit Scheme: Consumer Credit Scheme is one of the popular areas of collateral-free finance of the Bank. People with limited income can avail of credit facility to buy household goods including computer and other consumer durables. Total exposure under this scheme was BDT 49.83 million at the end of 2009.

Small Loan Scheme: This scheme has been designed especially for the businessmen longing for credit facility for their business and can’t provide tangible securities.

SME Loan Scheme : Small and Medium Enterprise (SME) Loan Scheme has been introduced to provide financial assistance to new or experienced entrepreneurs to invest in small and medium scale industries with a comparatively low rate of interest as the same is assisted by the Bangladesh Bank with refinancing facilities.

Lease Finance: This scheme has been designed to assist and encourage the genuine and capable entrepreneurs and professionals for acquiring capital machinery, medical equipments, computers, vehicle and other items. Flexibility and term and conditions of this scheme have attracted the potential entrepreneurs to acquire equipments of production and services and repay gradually from earnings on the basis of “Pay as you earn.”

Doctors’ Credit Scheme: Doctors’ Credit Scheme is designed to facilitate financing to fresh medical graduates and established physicians to acquire medical equipments and set up clinics and hospitals and thereby make the medical facilities upgraded and available to the mass people.

Personal Loan Scheme: Personal Loan Scheme has been introduced to extend credit facilities to cater the needs of low and middle-income group for any purpose. Government and semi-government officials, employees of autonomous bodies, banks and other financial organizations, multinational companies, reputed private organizations and teachers of recognized public and private schools, colleges and universities are eligible for this loan.

Car Loan Scheme: Car Loan Scheme has been introduced to enable middle-income people to purchase Cars/SUVs/Jeeps. Government and semi-government officials, employees of autonomous bodies, banks and other financial organizations, multinational companies, reputed private organizations, teachers of recognized public and private universities and businessmen are eligible for this loan.

Home Loam scheme: To meet the growing need of housing for middle and lower-middle income people, MBL has introduced Home Loan Scheme. We also support the Bangladesh Bank’s Home Loan Refinance Scheme. The Scheme will also boost up the growth of housing sector. Such loan shall be available for purchase or construction of new apartments for self-residing purpose.

Overseas Employment Loan Scheme: Overseas Employment Loan Scheme is designed to facilitate the Bangladeshi youths seeking employment abroad but unable to meet the expenses to reach the workplace from their own sources. The ultimate objective of the scheme is to promote skilled -skilled manpower to different countries across the world as well as to provide support to Government Policy considering priority of this sector. By availing loan under this scheme, the active youths of middle and lower middle class can get overseas employment by avoiding borrowing from the illustrious class or village ‘mohajon’ at a very high cost or selling their paternal properties. The scheme will also help fetching foreign currency for the country as well as fulfill the Bank’s commitment to encourage Micro-lending for poverty alleviation, improve the quality of life and thereby contribute to socio economic development of the country.

3.10 Remittance Services

Mercantile Bank Limited maintains a strong network with the Overseas Exchange Companies & Banks in different parts of the world ensuring better remittance services for its customers. The following are the list of Overseas Exchange companies/Banks having arrangement with mercantile Bank Limited.

Table – 02: Name of the exchange co.

3.11 Cards

Dual Card (two in one): Single Card with double benefits. No hassle to carry two cards (local and international). A single credit card can be used both locally and internationally to withdraw cash from ATM for POS transaction. This is the special feature of MBL Visa card.

Debit Card: Visa debit card is mainly tagged with deposit account (CD/SB/STD) that is automatically debited from the A/C having available balance. Debit card can also be used for purchasing goods, services, payment of utility bills etc as well as withdrawal of cash from ATM.

Pre-Paid Card: Those who have no account with MBL may avail Pre-Paid card facilities. The Pre-Paid cardholders pay first buy later. Pre-Paid card offers the convenience and security of electronic payment in situations where one might otherwise use cash, such as birthday gift or a monthly allowance for a young adult. An example includes gift cards and salary payment etc.

Features:

* No Cash Withdrawal Fee

* Acceptability:

* Credit Facility

* Supplementary Card:

* Advance against Credit card:

* Overdraft Facilities:

* Payment of Utility Bill:

3.12 Swift

Transfer through SWIFT:

SWIFT is the Society for Worldwide Interbank Financial Telecommunication, a member-owned cooperative through which the financial world conducts its business operations with speed, certainty and confidence. Mercantile Bank enables to transfer funds to your beneficiaries through the most efficient channels, which are available from the bank. We facilitate quick and easy transfer of your funds by assuring complete security.

3.13 Online Banking

Online Banking have so far been activated with 42 Branches of the Bank from January 01,2006. Online service is now available for all customers –Both Cash deposit and withdrawals, Cheque Deposits and Transfer in CD, SB, STD, Loan accounts (Cheque Bearing within limit) and Monthly Savings Scheme (MSS) .

3.14 SMS Banking

Available Services :

1. To get Account Balance

2. To get last 3 Transactions

3. Information about Cheque leaf Status

3.15 Asset Portfolio:

The bank’s total asset as on December 31, 2009 amounted to BDT 66166.52 million as compared to BDT 55928.72 at the December.

(BDT in million)

Table – 03: Asset portfolio

Fig 01: Asset portfolio

3.16 Funding Structure:

The bank’s principal source of fund was deposit, which constituted 87.71% of total funds in 2009 as compared to 88.57% in 2008 and also other are compared with previous year 2008.

(BDT in million)

Table – 04 : Funding structure

Fig – 02: Funding structure

3.17 Corporate Social Responsibility

From the very beginning MBL is being awarded for its responsibilities to the society . Corporate social responsibilities are built in business activities. Corporate social responsibility (CSR) are the responsibility of an organization to proactively promote the public interest by encouraging community growth and development and voluntarily eliminating practices that harm the public interest. Broadly CSR activities of an organization should embrace to honoring the three P’s – people , planet and profit.

CSR commitment of the bank:

(BDT in million)

Table – 05: CSR activities

4.1 Letter of Credit

A Letter of Credit is a payment term generally used for international sales transactions. It is basically a mechanism, which allows importers/buyers to offer secure terms of payment to exporters/sellers in which a bank (or more than one bank) gets involved. The technical term for Letter of credit is ‘Documentary Credit’. At the very outset one must understand is that Letters of credit deal in documents, not goods. The idea in an international trade transaction is to shift the risk from the actual buyer to a bank. Thus a LC (as it is commonly referred to) is a payment undertaking given by a bank to the seller and is issued on behalf of the applicant i.e. the buyer. The Buyer is the Applicant and the Seller is the Beneficiary. The Bank that issues the LC is referred to as the Issuing Bank which is generally in the country of the Buyer. The Bank that Advises the LC to the Seller is called the Advising Bank which is generally in the country of the Seller.

The specified bank makes the payment upon the successful presentation of the required documents by the seller within the specified time frame. Note that the Bank scrutinizes the ‘documents’ and not the ‘goods’ for making payment. Thus the process works both in favor of both the buyer and the seller. The Seller gets assured that if documents are presented on time and in the way that they have been requested on the LC the payment will be made and Buyer on the other hand is assured that the bank will thoroughly examine these presented documents and ensure that they meet the terms and conditions stipulated in the LC.

4.2 Letter of Credit process

4.3 Types of letter of Credit

Revocable:

A revocable credit is a credit that can be amended or cancelled by the issuing bank at any time without notice to the seller.

Irrevocable:

A irrevocable letter of credit can not be cancelled. This guarantee that a buyer’s payment to a seller will be received on time and for the correct amount.

Add confirmed credit:

When a third party provides guarantees to the beneficiaries to make payment , if issuing bank fail to make payment , the L/C is called confirmed letter of credit.

Some other types of letter of credit are:

1. Clean clamed:

It is a normal L/C without third banks confirmation.

2. Revolving L/C:

It is an L/C where original amount restores after it has been utilized.

3. Transferrable L/C:

If the word transferable L/C incorporated in an L/C , then the L/C is transferable. The 1^st beneficiary can transfer to 2^nd beneficiary but the 2^nd beneficiary cant transfer to another beneficiary.

4. 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.

5. Red clause L/C:

A special clause is incorporated with it that authorizes the confirming or any other nominated bank to make advances to the beneficiary, before presentation of the documents.

6. Green clause L/C :

It is a letter of credit where the issuing bank authorizes the negotiating bank to grant storage facilities to the beneficiary.

7. Clean L/C :

This is a commercial letter of credit where only bill of exchange may be negotiating or may be paid without any supporting documents.

8. Documentary L/C :

All the commercial letter of credit where export related documents such as invoice, bill of lading etc are required to present with the bill of exchange is called Documentary credit.

9. Straight Documentary L/C :

Underthe irrevocable Straight Documentary L/C , the obligation of the issuing bank is extended only to the beneficiary, in honoring draft/documents and usually expires at the counter of the issuing bank.

10. Back to Back L/C :

It is essentially a secondary or ancillary credit opened by a bank on behalf of the beneficiary of the original credit, in favor of a supplier located inside the original beneficiary’s country.

11. Cash L/C:

Where payment of import L/C is being made from foreign currency reserve in Bangladesh bank or foreign country account with authorized dealer.

12. Barter L/C:

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

4.4 Parties related to a Letter of credit:

A letter of credit is issued by a bank at the request of an importer in favor of an exporter from whom the importer has contracted to purchases some commodity/commodities. The importer, the exporter and the issuing bank are the parties to the letter of credit. There are however one or more than one banks involved in various capacities and at various stages to play an important operation of the credit .

4.5 Documents required for submission to the bank for opening L/C:

• Valid Import registration certificate (IRC)
• L/C application form & LCA form dully filled in & signed
• Pro forma invoice or indent
• Insurance cover note with evidence of payment of insurance premium by pay order / demand draft.
• IMP form duly signed
• Any other document if required

4.6 Import

Import is the flow of goods and services purchased by economic agent staying in the country from economic agent staying abroad. Import can further be simplified as a means of purchasing goods and services from the foreign countries to Bangladesh. Normally consumers, firms and government import foreign goods to meet their various necessities.

4.6.1. Import procedure

Step 1 – Registration with CCI & E

For engaging in international trade, even trader must be first registered with chief controller import and export.

Step 2 – Determination terms of credit

It specifies the following:

• Amount of credit
• Name and address of the beneficiary and the opener
• Tenor of bill of exchange period
• Mode of shipment
• Nature of credit
• Expiry date , name , number and sets of shipping document

Step 3 – Proposal for opening of L/C

An importer submit proposal which contains the following particulars:

· Full particulars of the bank account

· Nature of business

· Required amount of limit

· Payment terms and condition

· Goods to be imported

· Offered security

· Repayment schedule

Step 4 – Submission of document by importer to the banker

The following documents should be filled :

• L/C application form
• LCA form
• Pay order for insurance
• Tax identification number
• Import registration certificate
• Beneficiaries credit report
• Amendment request form
• IMP form
• Insurance cover note and money receipt
• No objection certificate
• VAT certificate

Step 5 – Opening of L/C by the banker for the opener

Step 6 – Shipment of goods and lodgment of documents by exporter

· Bill of exchange

· Bill of lading

· Commercial invoice

· Certificate of origin

· Certificate of packet

· Packing list

· Advice details of shipment

· Pre shipment inspection certificate

· Vessel particular

· Shipment certificate

Step 7 –Lodgment of documents by opening from the negotiation bank

Step 8 – Retirement

4.6.2 Import Financing

Types of import:

A. Pre-import finance

B. Post- import finance

A. Pre-import finance

1. Opening of L/Cs under cash, loan/credit etc at below 100% margin

While importer open L/Cs at 10% margin with a commercial bank indicates that at the time of opening L/C the importer concerned deposits take equivalent to 10% of the L/C value and the rest 90% will have to deposit at the taking delivery of import delivery from the issuing bank .

2. Opening of back to back L/C

Generally the 100% export oriented garments industry with bonded warehouse facilities are importing their raw materials from abroad or from local market against export L/C at nil margin .

B. Post-import finance

1. PAD (Payment against document)

PAD is created in the name of the importer in order to reconcile the entries so debited by reimbursing bank.

2. LIM (Loan against Imported Merchandise)

LIM may be created at the request of the importer while he is not in a position to take delivery of import bills by making payment of entire bank dues.

3. LIR (Loan against Trust Receipt)

LIR may be sanctioned for 90/180/360 days depending on the merit of the case and the importer should adjust the LIR A/C within the sanctioned period.

4.7 Export

Like many other third-world countries, Bangladesh relies quite heavily on exports to provide for the needs of its densely populated nation. The same products sold locally will generally fetch a much lower price than they would on the international market. This means that it is far more profitable for the country to engage in exportation than it is to engage in local trade. While this may mean that a large percentage of the countries GDP is sent off abroad as Bangladesh exports instead of being enjoyed by the country’s own people, it also allows for a steady influx of foreign currency. The majority of the country’s trade is conducted with the USA but a small portion of exports also sees its way to Germany, the UK, France and Italy.

4.7.1 Formalities for export letter of credit:

Import and export trade in our country are regulated by the Import and Export (Control) Act, 1950.Under the export policy of Bangladesh the exporter has to get valid Export registration Certificate (ERC) from Chief Controller of Import & Export (CCI&E). The ERC is required to renew every year. The ERC number is to incorporate on EXP forms and other papers connected with exports.

Export procedure:

1. Obtaining Export Registration Certificate:

No exporter is allowed to export any commodity permissible for export unless he is registered with Chief Controller of Imports and Export and holds valid Export registration certificate(ERC)

For registration the following documents are required:

• Nationality and asset certificate
• Memorandum and Article of Association And Certificate of incorporation in case of limited company
• Bank certificate\
• Income tax certificate
• Trade license

2. Securing the certificate:

After getting ERC, the exporter may proceed to secure the export order. He can also do this by contracting the buyers directly through correspondence.

3. Obtaining EXP:

After having the registration, the exporter applies to MBL with the trade license, ERC and the Certificate from the concerned Government Organization to get EXP. If the bank is satisfied an EXP is issued to the exporter.

4. Signing of the contract:

After communicating with the buyer the exporter has to get contracted for exploiting exportable items from Bangladesh detailing commodity, quantity, price , shipment , insurance and mark, inspection , arbitration etc.

5. Receiving the letter of credit:

After getting contract for sale , exporter should ask the buyer for letter of credit clearly stating terms and conditions of export and payment.

6. Verification of genuineness of the letter of credit :

In case of L/C other than from the issuing bank , the advising bank must conform the genuineness of the letter of credit conforming directly with advising bank.

7. Advising L/C to the exporter:

Having confirmed about the genuineness of the letter of credit , the advising bank takes the following steps :

• The bank branches communicates with the beneficiary and advises him the letter of credit receipt favoring the beneficiary
• The branch enters full particulars of the L/C in the L/C advising register allotting separate serial number for each of letter of credit
• Particulars of all amendments ( if any ) are also to be recorded in the same
• Register before advising the same to the beneficiary
• If there any request by the opening bank to add any confirmation , the same will be done with the approval of head office under intimation to the beneficiary
• A suitable clause should be incorporated at the bottom of the LC stating the L/C is subject to the provision of UCPDC-ICC publication no. 5000.

8. Realization of Advising / confirmation charges :

For advising letter of credit to the beneficiary branch records letter of credit advising at the prescribed rate from the beneficiary.

9. Endorsement on EXP:

Before the export forms are lodged by the exporter with the customs or postal party / authorities, they should get all the copies endorsed by MBL. Before shipment , exporter submits exp. Form with commercial invoice. Then Mercantile Bank officer checks it properly , if satisfied , certifies the exp. Without it he cannot make shipment.

Disposal of Export forms:

a. Original: Customs authority reports first copy of exp to Bangladesh Bank after shipment of goods

b. Duplicate: Negotiating bank reports the duplicate to Bangladesh in or after negotiation date but not later than 14 days from the date of shipment .

c. Triplicate: On realization of exports proceeds Triplicate is reported by the same bank to the same authority

d. Quadruplicate: Finally, the negotiating bank as their office copy retains Quadruplicate.

10. Shipment of goods:

After certification of exp. Forms issued by the AD, the next step for the exporter to make necessary arrangements for shipment of goods.

Presentation of Export documents for negotiation :

• Beneficiary’s declaration about the shipment of goods as per letter of credit / Contarct terms
• Bill of exchange or draft
• Bill of lading
• Certificate of origin
• Consular invoice
• Freight certificate in case of FOB contract
• GSP certificate
• Inspection Certificate
• Insurance Policy
• Invoice
• Packing list
• Photo – sanitary certificate
• Quality certificate
• Shipping Advice

11. Examination of documents:

Banks deal with documents only not with commodity. As the negotiating bank is giving the value before repatriation of the export proceeds it is advisable to scrutinize and examine each and every document with great care whether any discrepancies is observed in the documents .

12. Negotiation of Export documents:

Negotiation stands for payment of value to the exporter against the document stipulated in the L/C .

4.7.2 Common Discrepancies Check list

· Unclean bill of lading

· Charter party Bill of lading

· Full set of bill of lading not presented

· Certificate of country of origin not provided

· Certificate notifying insurance company of shipment not presented

· Documents inconsistent with each other

· Description of goods on invoice differs from that in the credit

· Weights differ between documents

· The amount shows in Bill of exchange and invoice differ

· Shipping marks and numbers differ between documents

· Credit ( L/C) amount exceeded

· Credit (L/C) expired

· Late shipment

· Short shipment

· Bill of exchange drown on a wrong party

· Bill of exchange payable on an indeterminable date

· Packing list not submitted

· Inspection certificate not submitted

· Unit price not mentioned in invoice

· Absence of signatures, where required

· Description of documents on collection schedule differs with documents presented .

4.7.3 Export financing

An exporter requires finance In two stages namely-

1. Pre-shipment stage

2. Post-shipment stage

We may classify export finance in categories-

• Pre-shipment credit
• Post-shipment credit

Pre-shipment credit

Pre-shipment credit is given for the following purposes-

Ø Cash for local procurement and meeting related expenses

Ø Procuring and processing of goods for export

Ø .Packing and transporting of goods for export

Ø Payment of insurance premium

Ø Inspection fees

Ø Freight charges etc

An exporter can obtain credit facilities against lien on the irrevocable ,confirmed ,unrestricted export letter of credit. pre-shipment credit takes the following forms:

1. Export cash credit(hypothecation)

2. Export cash credit(pledge)

3. export cash credit against trust receipt

4. Packing credit

5. Back to back letters of credit

6. credit against anticipatory letter of credit

1. Export Cash Credit (hypothecation):

Under these arrangements a credit is sanctioned against hypothecation of the raw materials opr finished goods remain in the custody of the export. such facility is allowed to the first class exporters. As the bank has got no security in this case, expect charge documents and lien of export L\C contract and back normally insists on the exporter in furnishing collateral security. The letter of hypothecation creates a charge against the merchandise in favor of the back neither the ownership not the possession is passed to it.

2. Export cash credit (pledge):

Such credit facility is allowed against pledge of exportable goods or raw materials . In this case credit facilities are extended against pledge of goods to be stored in go down under bank’s control by signing letter of pledge and other pledge documents.

3. export cash credit against trust receipt:

In this case , credit limit is sanctioned against Trust receipt. In this case also like pledge the exportable goods remain in the custody of the exporter. He is required to execute a stamped export trust receipt in favor of the bank, where is a declaration is made that goods purchased with financial assistance of bank are held by him in trust for the bank.

4. Packing credit:

This type of credit is sanctioned for the transitional period from dispatch of the goods till negotiation of the export documents. The drawing under export cash credit limit are generally adjusted by drawing in packing credit limit which is in turn liquidated by negotiation of export documents.

5. Back to back letters of credit:

Under this arrangement the bank finances export business by opening a letter of credit on behalf of the exporter who has received a letter of credit from the overseas buyer but is not the actual manufacturer or producer of the exportable goods. The letter of credit is opened in favor of the actual producer or supplier within or outside the country .Since the second letter of credit is opened on the strength of and backed by another letter of credit it is called back to back letter of credit.

6. credit against anticipatory letter of credit:

Under red clause letter of credit, the opening bank authorizes the advising bank/negotiating bank to make advance to the beneficiary prior to shipment to enable him to procure the exportable goods in anticipation of his effecting the shipment and submitting a bill under the L/C .

The following documents are usually called for depending on the nature of the export credit facility to be provided at the shipment stage:

• Lien on confirmed / irrevocable and unrestricted letter of credit from a first class bank .
• Letter of hypothecation duly stamped
• Letter of pledge duly stamped
• Documents of title of goods
• Trust receipt
• Export credit guarantee scheme
• Export form duly signed by the exporter

Post-shipment credit

This type of credit refers to the credit facilities extended to the exporter by commercial banks after shipment of the goods export documents. Necessity for such credit arise as the exporter can not afford to wait for a long time for payment to local manufacturers / suppliers. Before extending such credit , it is necessary to obtain report on creditworthiness the exporters and financial soundness of the buyer as well as others relevant documents connected with the export in accordance with the rules and regulations in force. Bank in our country extend post shipment credit to the exporter through –

1. Negotiation of document under L/C

2. Purchase of DP & DA bills

3. Advance against export bills surrendered for collection .

1. Negotiation of document under L/C

Under this arrangement, after the goods are shipped , the exporter submits the concerned documents to the negotiating bank for negotiation . The documents should be negotiated strictly in accordance with the terms and conditions and within the period mentioned in the letter of credit.

2. Purchase of DP & DA bills

In such a case, the banks purchase/ discount the DP ( Document against payment ) and DA ( Documents against acceptance ) bill at rate published by the exchange rate committee of authorized dealers .

3. Advance against export bills surrendered for collection

Banks generally accept export bills for collection of proceeds when they are not drown under a L/C or when the documents, even though dawn against an L/C contains some discrepancies . Bills drawn under L/C, without any discrepancies in the documents are negotiated by the bank and the exporters get the money from the bank immediately. However if the bill is not eligible for negotiation , he may obtain advance from the banks against the security of the export bills. Banks may give advance ranging from 50 to 80percent of the documents value. In addition to the export bills , banks may ask for collateral security like a guarantee by a third party and excitable / registered mortgage of property.

4.8 Foreign Exchange Risk Management

Risk arising from potential change in earning resulted from exchange rate fluctuate, adverse exchange positioning or change in the market prices are managed by the treasury division. This risk usually affects import, export, remittance business but it can also affect investors making international investment. Foreign exchange policy of the bank has been formulated with a view to reducing the foreign exchange risk where Treasury Division has given authority to conduct the FX transactions.

Continuous monitoring of foreign exchange risk

Bank’s treasury division manages and controls day to day trade activities under the supervision of ALCO that ensures continuous monitoring of the level of assumed risks . While Treasury division monitors the foreign exchange price movement in the market and takes position in making deals . Mid and back office verify the deals and pass the entire in the book of accounts.

Back office placed in separate location & rates from independent source

Treasury Back office is conducting its operation in separate location apart from the treasury front office. Treasury back office is responsible for currency transactions, deal verification, limit monitoring & settlement of transactions independently.

Revaluation of foreign exchange transactions at mark- to- market method

All foreign exchange transactions are revalued at mark- to – market method according to Bangladesh Bank’s guidelines. The position maintained by the bank at the end of day is kept within stipulated limit prescribed by the Central Bank.

Nostro Accounts Management

The bank has to maintain nostro accounts in various currencies with different countries. These accounts are operated by the international division of the bank. All nostro accounts are reconciled on a monthly basis. The management reviews outstanding entries beyond 30 days regularly to keep the reconciliation status updated. Nostro accounts are verified by the external auditors and reports are submitted to Bangladesh Bank.

4.9 Performance review:

4.9.1 International Business Service:

Following table illustrates the number of L/ C issued and total value of L/C issued as at the end of 2008 and 2009.

Table – 06 : International Business services

4.9.2 L/C Cash :