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Transcript of LC Operation
CHAPTER ONE: INTRODUCTION
BACKGROUND
The volume of trade transactions is gradually increasing in the
international arena. To secure the international trade payment is
particularly very crucial. There are so many factors that may affect
the matter of securing payment for an international transaction. Most
important among them are the potential risk and cost that the
exporters and the importers are willing to face or share between them.
There are four methods in international trade payment: Cash in Advance
or prepayment; Open Account; Documentary Collection; and Documentary
Credit. Under Cash in Advance or prepayment method payment is expected
by the exporter, in full, prior to goods being shipped. This is the
most secure method of payment for the exporters and consequently the
least attractive for importers. On the other hand, open account is the
least secure method of payment for the exporters. But it is the most
attractive method for the importers. Documentary collection is more
secure method for an exporter than open account trading, as the
exporter’s documents are sent from the exporter’s bank to the
importer’s bank. However, among all the mentioned methods, documentary
credit method distributes risks in most balanced way in which both
importers and exporters are almost equally protected.
Letter of Credit (L/C) or the Documentary Letter of Credit is the most
popular international trade payment method in Bangladesh, which covers
the issues like potential risk that the parties in international trade
namely the importers and exporters wish to face or share between them.
Choudhury and Habib (2006) noted that Documentary Credit method
distributes risks in most balanced way in which both exporters and
importers are almost equally protected. They indicated the Documentary
Credit process as “the life blood of international commerce” that is
governed by a widely recognized and popular guiding framework of ICC
known as ‘Uniform Customs and Practices for Documentary Credit’
publication number 600.
Although Documentary Credit method distributes risks in most balanced
way for exporters and importers; it is facing challenge since the
method requires huge documentation and cost. Furthermore, electronic
payment system is evolving which could be a major threat for the
Letter of Credit method. Notwithstanding, it is still highly reliable
method of payment.
Bangladesh is basically a seller’s market since it is an import-based
country. Therefore, on the basis of our traders’ credibility, relative
bargaining power, banks and regulatory requirements Documentary Letter
of Credit is deemed to be the best fitted as the international trade
payment method. The government of a developing country like Bangladesh
tends to retain stringent control on foreign trade operations and thus
Documentary Credit has a widespread use in our country as it provides
useful additional weapon in the government’s control and supervisory
mechanism. In more than 97% cases of import payment and in more than
65% cases of export payment, Letter of Credit method is used for the
settlement ( Choudhury and habib;2006 ).
The ongoing globalization process has bought considerable changes in
international trade transactions and practices. Greater involvement of
costs in documentary credit operations is one of the main reasons of
switching to other modes of payment. Declining reliance on documentary
may raise payment related risks. It is well known that in some cases,
disagreement relating to trade payment through Letter of Credit method
arises. So it is a timely issue to explore the reasons behind this.
Currently, the cost of issuing L/C is increasing. It is increasing the
expenses of the traders. Although operation of L/C is guided by UCPDC
600, Bangladesh government has its own domestic Foreign Exchange
Regulations, Import and Export Policy. So on the basis of the above
background, the questions that would be investigated include: How
cost-risk tradeoff could be balanced? What attributes make the L/C
method reliable and acceptable than other trade payment method? Are
there discrepancies between these two international and domestic
rules?
OBJECTIVES OF THE STUDY
Based on the above background, the specific objectives of the study
are:
1) To discuss the operational procedures of Letter of Credit
operation and a comparison of L/C with other methods.
2) To review the regulatory and legal aspects of Letter of Credit
as an international trade payment method.
3) To discuss the Letter of Credit operation in the context of
Bangladesh.
METHODOLOGY
For attaining the objectives, both primary and secondary data have
been collected. Secondary data sources are related to practices of
Letter of Credit operation, various documents of ICC and domestic laws
and provisions. A questionnaire survey has been conducted for
collecting primary data. The survey area is the AD branch of some
selected commercial banks. Furthermore, interview method has been used
to have a clear view about the bankers’ expertise and traders’
knowledge on Documentary Credit operations.
Dealing Officers of foreign trade divisions of the selected banks were
interviewed. Six major AD branches of three commercial banks were
selected on the basis of convenience. All the branches are located
within Dhaka city.
LIMITATION OF THE STUDY
Time limitation is a great factor for researching on such a vast
topic. As this study has been accomplished on the basis of the data
collected from only 3 commercial banks which may not reveal the real
scenario of the operations and practices of L/C in Bangladesh.
ORGANIZATION OF THE STUDY
This report has five chapters. First chapter includes background,
objectives of the study, methodology and limitation of the study.
Chapter two covers sales and purchase contracts in international
trade, international trade payment methods, benefits of the
documentary credit, types of documentary credit, parties to a letter
of credit, operations of letter of credit and common documents
required for documentary letter of credit. Under chapter three
Domestic Regulations/Guidelines/Policies, Uniform Customs and
Practices for Documentary Credit (UCP 600), Uniform Rules for Bank to
Bank Reimbursement (URR 525), Incoterms-2000 and ISBP (International
Standard Banking Practices) have been covered. Chapter four includes
import procedure, import financing, export procedure, export
financing, methods of payment used in making and getting payment,
formalities and margin requirement while opening letter of credit,
forms of letter of credit in use, documentary requirements,
examination of documents, availability of credit, charges and
commissions. Chapter five covers observation and conclusion.
CHAPTER TWO: SALES AND PURCHASE CONTRACT, TRADE PAYMENT METHODS AND
OTHER ASPECTS OF LETTER OF CREDIT
Sales And Purchase Contracts in International Trade
In the contract, there will be an offer from the seller and purchaser
will have to accept it. The contents of the contract will be
determined by both the buyer and seller. The influence in determining
the terms and conditions of the contract will be manipulated by
buyers/sellers bargaining power/strength. The developing countries
buyers/sellers strength is lesser than the strength of developed
countries. Quality of product is also important factor in
International Trade. The country, which has comparative advantage, has
more bargaining power. Or volume of products produced by the country
also important in International Trade.
Without documentary credit, the international trade is being done by
contracts. These contracts have the following features:
1) Offer and Acceptance: There must be direct or indirect offer
and acceptance. Buying house or Indenting firms act on behalf of the
Principal buyer and enter into indirect Offer & Acceptance.
2) Proforma Invoice and Indent.
3) General Terms and Conditions:
Contract terms and conditions may differ from one buying/selling
operation to another, depending on the nature of goods and services
relative bargaining strength of the buyer and seller and market
conditions at the time of buying/selling.
The following are most common clauses on a contract:
1) Which conditions to apply.
2) Definition of the terms- No ambiguous should be included in
the contract. But if used it should be clearly defined.
3) Conclusion of the contract- either agreed or disagreed.
4) Assignment- right given by the one party to another party to
the interest of concerns parties. Without the consent of the buyer
assignment is not be established.
5) Trade Terms- Incoterms is to be identified.
6) Quality and Quantity- vital terms in the contract. Because the
buyer has the right to refuse goods if it is not as per the specified
terms.
7) Pre-shipment Inspection (PSI).
8) Price and payment & expenditure: ICC- Institute of Cargo
Clause & Marine Insurance clause.
9) Third party claim- there should not be any third party claim.
10) Delivery and liquidity damages.
11) Warranty/ Guarantee
12) Force Majeure (Act of God) like political hazards, natural
calamity etc.
13) Transfer of risk- who will bear insurance expense.
14) Shipping documents- a copy of shipping documents must be sent to
the seller alongwith the transport documents before claiming any
payment.
15) Dispute settlement.
16) Acceptance (acceptance of goods).
17) Packing and Marking.
International Trade Payment Methods
In International Trade, there are a number of modes of payment which
are being used for receiving trade proceeds. They are:
1) Cash in Advance
2) Open Account
3) Documentary Collection; And
4) Documentary Credit ( L/C )
Among these, documentary credit has been observed to be used mostly in
our country. The procedures and pros and cons of each of the payment
methods have been discussed in this chapter.
Cash in Advance
In Cash in advance method, the buyer places the fund at the disposal
of seller (exporter) prior to shipment of goods in accordance with the
sales or purchase contract, which is certainly to be concluded between
an exporter and importer before the trade transactions. This method of
payment is expensive and contains a lot of risks on the part of buyer
(because they have no assurance that what they contracted for will be
supplied and received in appropriate manner), they may not be willing
to accept such terms of payments. Thus it is rarely used in
Bangladesh.
Cash in Advance
This method of payment is
used
When the buyer’s credit is doubtful.
When there is an unstable political or economic environment in the
buyer’s country.
If there is a potential delay in the receipt of funds from the buyer,
perhaps due to events beyond his control.
Advantage to the seller
Immediate use of funds.
Disadvantage to the Buyer
He pays in advance, tying up his capital prior to receipt of the
goods or services.
He has no assurance that what he contracted for will be:
▫ Supplied
▫ Received
▫ Received in timely fashion
▫ Received in the quality or quantity ordered
Open Account System
In this system, an arrangement takes place between the buyer and
seller (sales/ purchase contract) whereby the goods are manufactured
and delivered before payment is required. Open account provides for
payment at some stated specific future date and without requiring the
buyer to issue any negotiable instrument evidencing his legal
commitment. The seller must have absolute trust that he will be paid
at the agreed day. Though the seller can avoid a lot of banking
charges and other cost, but he has no security that he will be
receiving payment in due course. For this reason, the exporter may not
be willing to accept this sort of mode of payment. This system is also
uncommon Bangladesh.
Advantage to the Buyer
He pays for the goods or services only when they are received and/or
inspected.
Payment is conditioned on the basis of political, legal and economic
issues.
Disadvantages to the Seller
He releases the title to the goods without having assurance of
payment.
There is possibility that political events will impose regulations
which defer or block the movement of funds to him.
His own capital is tied up until the goods are received and/ or
inspected by the buyer or until the services are found to be
acceptable and payment is made.
Documentary Collection
This is an arrangement (sales/ purchase contract) whereby the goods
are shipped and the relevant bill of exchange or draft is drawn by the
seller on the buyer and documents are sent to the seller’s bank with
clear instructions for collection through one of its correspondent
bank’s located in the buyer’s domicile. Normally, title to the goods
does not pass to the buyer (unless the buyer named consignee on the
transport document) until the Draft is paid or accepted by the buyer.
Collection provide the parties with an alternative arrangement other
than open account or cash in advance. Collections are usually
connected with the sale of goods rather than with the provision of
services.
Though documentary collection is inexpensive and simple to arrange,
exporter is required to ship the goods without an unconditional
guarantee or promise of payment by the buyer. However, as compared to
cash in advance and open account, documentary collection is a much
more common means of payment.
Documentary Collection
Advantage to the seller
Documentary Collections are uncomplicated and inexpensive
Documents of value, i.e. title documents, are not released to the
buyer until payment or acceptance has been affected. In the event of
non payment or non acceptance the collecting bank, if properly
authorized, may arrange for the goods released, and ware housing,
insurance or even reshipment to the seller.
Collections may facilitate pre-export or post export financing.
Disadvantage to the seller
He ships the goods without an unconditional promise of payment by the
buyer
There is no guarantee of payment or immediate payment by the buyer.
He ties up his capital until the funds are received.
Advantage for the buyer
Collections may favor the buyer since payment is deferred by him
until the goods arrive or even later if delayed payment arrangements
are agreed to.
Disadvantages to the buyer
By defaulting on a bill of exchange he may become legally liable.
His trade reputation may be damaged if the collection remains unpaid.
Documentary Credit
Documentary Credit or Letter of Credit can be defined as an
‘undertaking’ whereby the buyer’s bank is committed (on behalf of the
buyer) to place an agreed amount of money at the seller’s disposal
under some agreed conditions. Since the agreed conditions include,
amongst other things, the presentation of some specified documents,
the letter of credit is called Documentary Letter of Credit. The
Uniform Customs and Practices for Documentary Credit (UCPDC) published
by International Chamber of Commerce (2007) Revision; Publication No.
600 defines Documentary Credit.
“Credit means any arrangement, however named or described, that is
irrevocable and thereby constitute a definite undertaking of the
issuing bank to honor a complying presentation.”
Complying presentation means a presentation that is in accordance with
the terms and conditions of the credit ( ISBP-2007 ), the applicable
provisions of these rules ( UCP-600) and international standard
banking practice. According to the definition of ‘Credit’, when an
issuing bank determines that a presentation is complying, it must
honor.
Honor means,
to pay at sight, if the credit is available by sight payment,
to incur a deferred payment undertaking and pay at maturity if the
credit is available by deferred payment,
to accept a bill of exchange ( draft ) drawn by the beneficiary and
pay at maturity if the credit is available by acceptance.
Documentary Credit
This documentary credit arrangement usually satisfies the seller’s
desire for cash and the importer’s desire for credit. This financial
instrument serves the interest of both parties independently. The
documentary credit offers a unique and universally used method of
achieving a commercially acceptable undertaking by providing for
payment to be made against complying documents that represent the
goods and making possible the transfer of title to those goods.
Under a documentary credit operation, there exists a distinct
triangular contractual arrangement:
∆ First, the sales contract between seller and buyer.
∆ Second, the “Application and Security Agreement” or the “Reimbursing
Agreement” between the buyer ( the Applicant ) and the issuer ( the
issuing Bank ), and
∆ Third, the documentary credit between the issuing bank and the
beneficiary. If the documentary credit is confirmed by another bank,
then such bank undertakes it’s own contractual agreement, in addition
to that of the issuing bank, to the beneficiary.
Each contract is independent and controls the respective relationship
between the parties. The UCP 600 in Sub-Article 4 (a) recognizes that
relationship and states:
“A credit by its nature is a separate transaction from the sale or other contact on which it may
be based. Banks are in no way concerned with or bound by such contract, even if any reference
whatsoever to it is included in the credit. Consequently the undertaking of a bank to honour or
negotiate or to fulfill any other obligation under the credit is not subject to claims or defences
by the applicant resulting from his relationships with the issuing bank or the beneficiary.”
Benefits of the Documentary Credit
Facilitates Financing
The Documentary Credit
v provides a specific transaction with an independent credit backing
and a clear cut promise of payment
v satisfies the financing needs of the seller and the buyer by
placing the bank credit standing, distinguished from the bank’s funds,
at the disposal of the both the parties
v may allow the buyer to obtain a lower purchase price for the goods
as well as longer payment terms than would open account terms or a
collection
v reduces or eliminates the commercial credit risk single payment is
assured by the bank which issues an irrevocable letter of credit. The
seller no longer needs to rely on the willingness and capability of
the buyer to make payment
v reduces certain exchange and political risks while not necessarily
eliminating them
v may not require actual segregation of cash, since the buyer is not
always required to collateralized his credit obligation to the issuing
bank. And
v expands sources of supply for the buyers since certain sellers are
willing to sell only against cash in advance or documentary credit.
Provides Legal Protection
Documentary Credits are supported by a wide variety of laws and
regulations, such as:
legislative and semi-legislative law
codified law- in most countries the law for the Documentary Credit has
been codified, e.g. in
civil law code countries , and in
common law code countries
decisional law- statutory laws governing Documentary Credits are found
in various jurisdictions. There are extensive legal cases that have
interpreted this provisions and are well known in judicial circles
contractual law/ customary law- in addition to codified and case law,
documentary credits are governed by the ICC’s UCPDC-600. These rules ,
which are periodically revised, have been in effect since 1933 and are
the set of universally recognized rules governing documentary credit
operations.
Assures expert examination of documents
Through The Documentary Credit:
The buyer is assured that the documents required by the documentary
credit ( if issued subject to the UCP ) must be presented in
compliance with the terms and conditions of the documentary credit
and UCP rules.
The buyer is assured that the documents presented will be examined by
banking personnel knowledgeable in documentary credit operations, and
The buyer is confident that the payment will only be made to the
seller after the terms and conditions of documentary credit and UCP
rules are complied with.
Parties to a Letter of Credit
The parties are:
The issuing bank
The confirming bank, if any, and
The beneficiary
Other parties which facilitate the Documentary Credit are:
ü The applicant
ü The advising bank
ü The nominated bank
ü The reimbursing bank
ü The claiming bank
ü The presenter
ü The transferring bank
ISSUING BANK: It is the bank that issues a credit at the request of an
applicant or on its own behalf.
CONFIRMING BANK: Confirming Bank means the bank that adds it’s
confirmation to a credit upon the issuing bank’s authorization or
request. Confirmation means a definite undertaking of a confirming
bank in addition to that of the issuing bank to honor or negotiate a
complying presentation.
BENEFICIARY: It is the party in whose favor a credit is issued.
APPLICANT: Applicant means the party in whose request the credit is
issued.
ADVISING BANK: Advising Bank means the bank that advises the credit at
the request of the issuing bank. However, an advising bank may utilize
the services of another bank (2nd Advising Bank) to advise the credit
and any amendment to the beneficiary.
NOMINATED BANK: It means the bank with which the credit is available
or any bank in the case of a credit available with any bank.
REIMBURSING BANK: It means the bank , appointed by the issuing bank,
to reimburse the claims of payment of the claiming bank.
CLAIMING BANK: It means the nominated bank which claims the payment
from the reimbursing bank.
PRESENTER: It means a beneficiary, a bank or other party that makes a
presentation.
TRANSFERRING BANK: Transferring Bank is a nominated bank that
transfers the credit. In case of credit available with any bank,
transferring bank is specially authorized by issuing bank. An issuing
bank may also be a transferring bank.
Types of Documentary Credit
Article 3 of UCP 600 says that a credit is irrevocable even if there
is no indication to that effect. It therefore, indicates that (under
UCP 600) there is only one type of credit, named irrevocable letter of
credit.
Other Documentary Credits:
Confirmed Documentary Credit: A confirmation of a documentary credit
by a bank (confirming bank) upon the authorization or request of the
issuing bank constitutes a definite undertaking of the confirming
bank, in addition to that of the issuing bank, provided that the
stipulated documents are presented to the confirming bank or to any
other nominated bank on before the expiry date and the terms and
conditions of the documentary credit are compiled with either to
negotiate or to honour.
Revolving Credit: A revolving documentary credit is one by which,
under the terms and conditions thereof, the amount is renewed or
reinstated without specific amendments to the documentary credit being
required. The revolving documentary credit may revolve in relation to
time or value. A documentary credit of this nature may be cumulative
or non-cumulative.
Transferable Credit and Transferred Credit: Transferable credit means
a credit that specifically states it is “transferable”. It may be made
available in whole or in part to another beneficiary (second
beneficiary) at the request of the first beneficiary.Transferred
Credit means a credit that has been available by the transferring bank
to the second beneficiary.
Back to Back Credit: The Back to Back credit is a new credit opened on
the basis of the original credit in favour of another beneficiary.
Under back to back concept, the seller as the beneficiary of the first
credit offers it as security to his bank for the issuance of the
second credit. The beneficiary of the back to back credit may be
located inside or outside the original beneficiary’s country.
Red Clause Credit : A red clause credit is a credit with a special
condition incorporated into it that authorizes the confirming bank or
any other nominated bank to make advance to the beneficiary before
presentation of the documents. Under the above credit, the issuing is
liable for pre-shipment advances made by the nominated bank, in case
the beneficiary fails to repay or present the documents for
settlement.
Standby Credits: The Standby Credit is a documentary credit or similar
arrangement, however named or described, which represents an
obligation to the beneficiary on the part of the issuing bank to
a) Repay money borrowed by the applicant, or advanced to or for
the account of the applicant;
b) Make payment on account of any indebtedness undertaken by the
applicant; or
c) Make payment on account of any default by the applicant in the
performance of an obligation.
Operations of Documentary Letter of Credit
The following five major steps are involved in the operation of
Documentary letter of Credit.
ü Issuing
ü Advising
ü Confirmation and Amendment ( if necessary )
ü Presentation, And
ü Settlement
Issuing a Letter of credit: Before issuing L/C, the buyer and seller
located in different countries conclude a ‘sales contract’ providing
for payment by documentary credit. As per requirement of the seller,
the buyer then instructs he bank-the issuing bank-to issue a credit in
favor of the seller or beneficiary. Instruction/Application for
issuing a credit should be made by the buyer (importer) in the issuing
bank’s standard form. The credit application which contains the full
details of the proposed credit, also serve as an agreement between the
bank and the buyer. After being convinced about the conditions
contained in the application form the issuing then proceeds for
opening the credit to be addressed to the beneficiary.
Advising a Letter of Credit: Advising through a bank is proof of
apparent authenticity of the credit to the seller. The process of
advising the credit consists of forwarding the original credit to the
beneficiary to whom it is addressed. Before forwarding, the advising
bank has to verify the signatures of the officers of the issuing bank
and ensures that the terms and conditions of the credit are not in
violation of the existing exchange control regulations and other
regulations relating to export. In such act of advising, the advising
bank does not undertake any liability. However, the advising bank may
utilize the services of another bank ( second advising bank ) to
advise the credit and any amendment to the beneficiary.
Confirmation and Amendment of Credit: The beneficiaries are not always
willing to rely on the credit standing of the issuing bank-
particularly when the bank is unknown to the beneficiary.
Consequently, the beneficiary ma y request that the applicant instruct
the issuing bank to have it’s credit confirmed by a confirming bank,
usually in the beneficiaries country. Moreover parties involved in L/C
particularly the seller and the buyer can not always satisfy the terms
and conditions full as expected due to some genuine and obvious
reasons. In such a situation, the credit should be amended. However, a
credit can neither be amended nor cancelled without the agreement of
the issuing bank, the confirming bank ( if any ) and the beneficiary.
Presentation of Documents: The seller being satisfied with the terms
and conditions of the credit proceeds to dispatch the required goods
to the buyer and after that, has to present the documents evidencing
dispatch of goods and fulfilling other terms and conditions of L/C to
the issuing or nominated bank on or before the stipulated expire date
of the credit. After receiving all the documents, the issuing or
nominated bank examines the documents against the credit. If the
documents are found complying, the bank will honor or negotiate.
Settlement: Settlement means fulfilling the commitments of the issuing
bank in regard to effecting payment subject to satisfying the credit
terms fully. This settlement may be done under three separate
arrangements as stipulated in the credit. These are:
Settlement by payment: Here the presenter/beneficiary presents the
documents to the nominated or issuing bank and the bank then
scrutinizes the documents. If satisfied, the nominated or issuing bank
makes payment to the beneficiary and in case this bank is other than
the issuing bank, then sends the documents to the issuing bank. If the
issuing bank is satisfied with the requirements, payment is obtained
by the nominated bank from the issuing bank.
Settlements by Acceptance: Under this arrangement, the beneficiary/
presenter submits the documents to the nominated/issuing bank
accompanied by a draft drawn on the bank ( where the credit is
available ) at the specified tenor. After being satisfied with the
documents, the bank accepts the documents and the draft and if the
bank is other than the issuing bank, then sends the documents to the
issuing bank stating that it has accepted the draft and at maturity
the reimbursement will be obtained in the pre-agreed manner.
Settlement by Negotiation: This settlement procedure starts with the
submission of the documents by the beneficiary/presenter to the
nominated bank accompanied by a draft drawn on the issuing bank or any
other drawee, at sight or at the tenor, as specified in the credit.
After scrutinizing that the documents meet the credit requirements,
the bank will purchase the drafts and/or documents, advance or agree
to advance funds on or before reimbursement is due. This bank then
sends the documents and the drafts to the issuing bank. As usual
reimbursement will be obtained in the pre-agreed manner.
Common Documents under Documentary Letter of Credit
Bill of exchange/Draft:
The draft must bear the correct Documentary reference number.
The draft must be date before expiry of the L/C and within the
stipulated period for negotiation.
It must be dawn or endorsed to the order of the bank.
It is drawn by the party indicated as the beneficiary of the credit.
It is drawn on the party indicated as the draw of the credit.
It is market as drawn under the proper L/C of the bank quoting the
L/C number.
The tenor is in conformity with that stipulated in the L/C.
The amount is identical with the amount mentioned in terms of the
credit.
Bill of Lading (B/L)
The full set of B/L is submitted including original copy.
It is marked “Shipped on Board”
It is drawn in favor of the bank endorsed to the order off the bank
and dated after issuance of the L/C
The B/L is clean
If the terms of sale is C& F, B/L is to be marked “Freight Prepaid”.
Short from B/L is not acceptable
Charter party B/L is not allowed unless specified in the L/C
B/L is not stale
Other (if any) as per L/C terms.
Commercial invoice
The invoice is signed by the exporter / beneficiary
The required numbers of copies of the invoice are placed as per L/C
terms.
Description of the goods with measurement / weight is mentioned in
full.
The value and price of the goods to be tallied with L/C terms
The L/C number, name of the ship with shipping mark, shipments date
L.C.A.F/ license numbers of the importer, indent number etc. are to
be quoted in the invoice properly.
The quality and quantity of the goods as mentioned in the invoice
must agree with that of L/C terms.
The name of the importer and the L/C issuing bank is mentioned in the
invoice.
Certificate of origin
The certificate of origin may be issued by the chamber of commerce &
Industry of exporter’s locality or by the supplier as stipulated in
the L/C.
The goods must be originated from the country as per indication given
in the L/C.
Inspection Certificate
The certificate must comply with the inspection requirements of the
Documentary Credit.
It contains no detrimental statement as to the goods, specifications,
quality, packing etc. unless authorized by the documentary credit.
Packing List
A detailed packing list requires a listing of the contents of each
package, carton, etc. and other relevant information. It corresponds
with the requirements of the Documentary Credit.
Insurance Document
It is the policy/ certificate/declaration under cover note, as
required by the Documentary Credit.
It covers the specified risks as stated in the Documentary Credit and
that the risks are clearly defined.
CHAPTER THREE: LEGAL AND REGULATORY FRAMEWORK OF LETTER OF CREDIT
Domestic Regulations/ Guidelines/ Policies
ICC guidelines are not complete set of rules in regulating and guiding
international trade payment transactions. Since the payment guidelines
do not provide for comprehensive and complete rules for international
trade payment transactions, national laws play an important role. This
is particularly true for the issues that are not addressed by the UCP
intentionally. For example the legal nature of the credit itself and
legal nature of the relationship between different parties have not be
addressed in the UCP. For effective international trade payment
operation, it is required that national laws be capable of providing
solutions to any issues of international trade payment procedure open
to interpretation.
In Bangladesh, Foreign Exchange Regulation Act, 1947 [FERA, 1947] is
the most important domestic regulation in the area if international
banking. FERA, 1947 has empowered Bangladesh Bank to regulate all
kinds of foreign exchange dealings in Bangladesh. Empowered by the
act, Bangladesh Bank issues Authorized Dealers licenses to the
selected bank branches for conducting trade payments and other
international banking operation. Following the provisions of the act,
Bangladesh Bank issues circulars/ guidelines time to time to regulate
trade payment and international banking activities to be followed by
the banks.
While dealing in international trade payment, other than FERA, 1947
and Bangladesh Bank circulars/ Guidelines, bank are required to follow
trade policies issued form the Ministry of Commerce of the country
empowered by Import and Exports { Control } Act, 1950. The export and
import policies specifically prescribe the policies/ rules of the
government in regard to the export and import transactions and
procedure and operation of making and receiving trade payment.
Importer, exporters and indenters are required to be registered in
Bangladesh under Importers, Exporters and Indenters Registration Order
1981. Moreover, Customs Act 1969 is also applicable to trade
transactions that deal with levy and collection of customs duties and
other allied matters.
The prime objective of the trade policy of Bangladesh is to maintain a
favorable balance of trade through adopting an export led development
strategy, focusing on expansion and diversification export, ensuring
availability of imported raw materials for expanding export oriented
industries and increasing share of the country in global trade.
Bangladesh has been able to open up its economy substantially through
undertaking trade liberalization measures since 1980s. However, GOB
has taken into consideration the sensitive areas like public health,
security and religious bindings, while pursuing trade liberalization
measures. Simultaneously, more liberal import and export policies and
programs have been adopted including reduction of tariff slabs.
Bangladesh pursued one year export and import policies in the first
half of eighties and two year policies in the first half of eighties
and first half of the nineties. Five year export-import policies
(1997-2002) were formulated and implemented during 1997-2002. After
that, GOB pursued three year export-import policies during 2003-2006.
The current import and export policies (2006-2009) have been made
effective from May 14 and 31, 2007 respectively.
The new Import Policy Order, 2006-2009, has been formulated, keeping
in mind the market economy ideology, to make available the commodities
to the consumers at fair prices through removing the barriers to
movement of goods inter nationally, to ensure availability of quality
and health compliant goods, to create a congenial environment for
Foreign Direct Investment through expansion and growth of export
oriented industries, expansion and consolidation of domestic
industrial base so as to make Bangladesh economy active and vibrant.
At this moment the number of commodities kept under restricted list is
only 25. The new import policy has allowed opening of LC for importing
capital machinery even without IRC. The limit of import without LC has
raised from $5000 to $ 35000. For enhancing easy availability of
industrial raw materials and consumer goods at fair prices, some
commodities have been declared importable as raw materials.
In order to sustain the level of exports of Bangladesh, productive
capacity of domestic export oriented industries should be increased
along with ensuring quality of exportable products and its market
diversification. For this reason, all efforts should be taken for
converting our comparative advantage of human resources to competitive
advantage. The Export Policy of 2006-2009 has considered agro-
products, light engineering products, leathers goods, pharmaceuticals
commodities, ICT products and home textiles as the thrust sectors of
our export development. In addition, finished leather, frozen fish
foods, cottage industry products, electronic products, fresh flower
etc. have been considered as special development sectors in the
current export policy. The current export policy has accommodated
fiscal, financial and general policies/incentives in line with
requirements of globalization, with a view to facing the challenges of
post-MFA and increasing the competitive capacities of all domestic
stakeholders. Bangladesh has adopted a number of projects under
technical assistance of donors for enhancing the quality of exportable
products, new market exploration, offering new products to world
markets according to market demand. GOB has also taken a lot of
measures such as simplification of disposal of goods, waiver of
utility bills, loan rescheduling, cash incentives, tariff-free import
etc. for development of Ready Made Garments and Textile sector. One of
the important aspects of export strategy of Bangladesh is to put equal
emphasis on both bilateral and regional trade. Bangladesh is playing
an active role in a number of regional trading blocs including SAFTA.
Foreign Exchange Regulation Act, 1947 was adapted in Bangladesh
immediately after the independence. However a few provisions have been
added under the foreign exchange regulation (Amendment) ordinance,
1976. Actually this Act empowered Bangladesh Bank to regulate certain
payments, dealings in foreign exchange and securities and the import
and export of currency. Foreign Exchange Regulation Act 1947 was
basically passed on 11th March in the year 1947. After 1947, the act
was adopted by Pakistan. And after 1971, Bangladesh adopted the same
act. The act has 27 sections and a number of sub sections. The major
section related with the international trade payment and foreign
exchange are depicted below :
Authorized dealers in foreign exchange
(1) The Bangladesh Bank may, on application made to it in this behalf,
authorize any person to deal in foreign exchange.
(2) An authorization under this section
(i) May authorize dealings in all foreign currencies or may be
restricted to authorizing dealings in specified foreign currencies
only;
(ii) May authorize transactions of all descriptions in foreign
currencies or may be restricted to authorizing specified transactions
only;
(iii) May be granted to be effective for a specified period, or
within specified amounts, and may in all cases be revoked for reasons
appearing to it sufficient by the Bangladesh Bank.
(3) An authorized dealer shall in all his dealings, in foreign
exchange comply with such general or special directions or
instructions as the Bangladesh Bank may from time to time think fit to
give, and, except with the previous permission of the Bangladesh Bank
an authorized dealer shall not engage in any transaction involving any
foreign exchange which is not in conformity with the terms of his
authorization under this section.
(4) An authorized dealer shall, before undertaking any transaction in
foreign exchange on behalf of any person, require that person to make
such declarations and to give such information as will reasonably
satisfy him that the transaction will not involve, and is not designed
for the purpose of, any contravention or evasion of the provisions of
this Act or of any rules, directions or orders made there under and
where the said person refuses to comply with any such requirement or
makes only unsatisfactory compliance therewith, the authorized dealer
shall refuse to undertake the transaction and shall, if he has reason
to believe that any such contravention or evasion as aforesaid is
contemplated by the person, report the matter to the Bangladesh Bank.
Restrictions on dealing in foreign exchange:
(1) Except with the previous general or special permission of the
Bangladesh Bank, no person other than an authorized dealer shall in
Bangladesh and no person resident in Bangladesh other than an
authorized dealer shall outside Bangladesh, buy or borrow from, or
sell or lend to, or exchange with, any person not being an authorized
dealer, any foreign exchange.
(2) Except with the previous general or special permission of the
Bangladesh Bank, no person whether an authorized dealer or otherwise,
shall enter into any transaction which provides for the conversion of
Bangladesh currency into foreign currency or foreign currency into
Bangladesh currency at rates of exchange other than the rates for the
time being authorized by the Bangladesh Bank.
(3) Where any foreign exchange is acquired by any person other than an
authorised dealer for any particular purpose, or where any person has
been permitted conditionally to acquire foreign exchange, the said
person shall not use the foreign exchange so acquired otherwise than
for that purpose or, as the case may be, fail to comply with any
condition to which the permission granted to him is subject, and where
any foreign exchange so acquired cannot be so used or, as the case may
be, the conditions cannot be complied with, the said person shall
without delay sell the foreign exchange to an authorised dealer.
(4) Nothing in this section shall be deemed to prevent a person from
buying from any post office, in accordance with any law or rules made
there under for the time being in force, any foreign exchange in the
form of postal orders or money orders.
Restrictions on payments:
(1) Save as may be provided in and in accordance with any general or
special exemption from the provisions of this sub-section which may be
granted conditionally or unconditionally by the Bangladesh Bank, no
person in or resident in Bangladesh shall-
(a) make any payment to or for the credit of any person resident
outside Bangladesh;
(b) Draw, issue or negotiate any bill or exchange or promissory note
or acknowledge any debt, so that a right (whether actual or
contingent) to receive a payment is created or transferred in favour
of any person resident outside Bangladesh;
(c) make any payment to or for the credit of any person by order or
on behalf of any person resident outside Bangladesh;
(d) place any sum to the credit of any person resident outside
Bangladesh;
(e) make any payment to or for the credit of any person as
consideration for or in association with¾
(i) the receipt by any person of a payment or the acquisition by any
person of property outside Bangladesh;
(ii) the creation or transfer in favour of any person of a right
whether actual or contingent to receive a payment or acquire property
outside Bangladesh;
(f) draw, issue or negotiate any bill of exchange or promissory note
transfer any security or acknowledge any debt, so that a right
(whether actual or contingent) to receive a payment is created or
transferred in favour of any person as consideration for or in
association with any matter referred to in clause (e).
(2) Nothing in sub-section (1) shall render unlawful¾
(a) the making of any payment already authorised either with foreign
exchange obtained from an authorised dealer under section 4 or with
foreign exchange retained by a person in pursuance of an authorisation
granted by the Bangladesh Bank;
(b) the making of any payment with foreign exchange received by way of
salary or payment for services not arising from business in, or
anything done while in Bangladesh.
(3) Nothing in this section shall restrict the doing by any person of
anything within the scope of any authorisation or exemption granted
under this Act.
(4) For the purposes of this section “security” also includes coupons
or warrants representing dividends or interest and life or endowment
insurance policies.
(1) Where an exemption from the provisions of section 5 is granted by
the Bangladesh Bank in respect of payment of any sum to any person
resident outside Bangladesh and the exemption is made subject to the
condition that the payment is made to a blockedaccount
(a) the payment shall be made to a blocked account in tile name of
that person in such manner as the Bangladesh Bank may by general or
special order direct, and
(b) the crediting of that sum to that account shall, to the extent of
the sum credited, be a good discharge to the person making tile
payment.
(2) No sum standing at the credit of a blocked account shall be drawn
on except in accordance with any general or special permission which
may be granted conditionally or otherwise by the Bangladesh Bank.
Restrictions on import and export of certain currency and bullion.
(1) The Government may, by notification in the official Gazette, order
that subject to such exemptions, if any, as may be contained in the
notification, no person shall, except with the general or special
permission of the Bangladesh Bank and on payment of the fee, if any,
prescribed bring or send into Bangladesh any gold or silver or any
currency notes or bank notes or coins whether Bangladesh or foreign.
Explanation: The bringing or sending into any part or place in the
territories of Bangladesh of any such article as aforesaid, intended
to be taken out of the territories of Bangladesh without being removed
from the ship or conveyance in which it is being carried. Shall
nonetheless be deemed to be bringing or as the case may be, sending,
into the territories of Bangladesh of that article for the purposes of
this section.
(2) No person shall, except with the general or special permission of
the Bangladesh Bank or the written permission of a person authorised
in this behalf by the Bangladesh Bank, take or send out of Bangladesh
any gold, jewellery or precious stones, or Bangladesh currency notes,
bank notes or coins or foreign exchange.
Guidelines for Foreign Exchange Transactions
Authorized Dealers (ADs) must deal only with known customers having a
place of business in Bangladesh and can be traced easily should any
occasion arise for this purpose.
ADs may issue ‘Letter of Credit Authorization Form’ in conformity
with the current IPO allowing imports into Bangladesh.
ADs must not issue blank LCAF to the clients.
LCAF remain valid for shipment of goods nine months subsequent to the
month of issue. Therefore ADs should not make remittance against any
LCAF after the expiry of the prescribed validity period without first
obtaining revalidation of the LCAF.
ADs must take all precautions to quote the correct ITC number (HS
CODE) of the goods to be imported, in the LCAF and the LC. Because,
failure to do so may lead to imposition of penalties by the Customs
Authorities.
When LCs are opened, full particulars thereof must be endorsed on the
back of the exchange control copy of the LCAF under our stamp and
signature. The Taka equivalent of the LC opened must be endorsed on
the LCAF at the ruling BC selling rate.
Before delivering the import documents to the importers, ADs must
invariably endorse on the invoices accompanying the bill amount both
in figures and words which have been remitted from Bangladesh. The
endorsement should be under our stamp and signature.
On expiry of an LC unutilized partly or wholly, or on cancellation or
reversal of a sale of foreign exchange, the endorsements made on the
back of the LCAF may be cancelled with appropriate remarks under our
seal and signature.
In case an endorsement is made mistakenly on a wrong LCAF, ADs may
cancel the endorsement provided the endorsement is transferred
simultaneously to the appropriate valid LCAF
The aggregate amount of foreign exchange sold against an LCAF whether
under LC or otherwise, should not exceed the value mentioned in the
LCAF.
ADs may report to the Bangladesh Bank the remittance of normal bank
charges as usual with TM form and necessary supporting documents.
LCAFs can normally be utilized on CFR basis. Full LCAF value is
therefore not remittable as FOB value of goods. As such freight
charges payable on imports on FOB basis are to be adjusted against
the relative LCAF value. In case of FOB imports we should endorse,
beside FOB value, the freight payable in Taka as indicated in the
Bill of Lading etc. In cases where miscellaneous charges i.e.
handling charges, cartage/surface transportation, documentation
charge etc., are required to be paid by the importers on arrival of
goods through the Airlines, the ADs should also endorse on the
Exchange Control copy of the LCAFs the amount of such charges as
indicated in the Airway bill along with the freight in Bangladesh
Taka. ADs should also give a certificate to Importers in the form
given in Appendix 5/11 of Guidelines for foreign exchange
transactions to the effect that the amount of freight, handling
charges etc. have been endorsed on the relative LCAF. The issue of
this certificate is essential as the shipping companies etc. are
under instructions not to accept payment of freight in Taka unless
the above mentioned certificate is produced to them. In cases where
the FOB value and the amount of freight payable in Taka exceeds the
value of the LCAF the application should be referred to the
Bangladesh Bank for consideration with full particulars and
supporting documentary evidence.
ADs should establish LCs against specific authorization only on
behalf of our own customers who maintain accounts with us and are
known to be participating in the trade. Payments in retirement of the
bills drawn under LCs must be received by us by debit to the account
of the concerned customer or by means of a crossed cheque drawn on
the drawee’s other bankers.
· All LCs and similar undertaking covering imports into Bangladesh
must be documentary LCs and should provide for payment to be made
against full sets of on board (shipped) bills of landing, air
consignment notes, railway receipts, post parcel receipts showing
dispatch of goods covered by the Credit to a destination in
Bangladesh. All LCs must specify submission of signed invoices and
certificates of origin. If any particular LCAF require submission of
any other document or the remittance of exchange at certain
periodical intervals or in any other manner, the LC should
incorporate those instructions of the LCAF.
It is not permissible to open clean or revolving or packing credits.
Applications for opening such LCs should be referred to the
Bangladesh Bank with full particulars.
It is not permissible to open import LCs in favor of beneficiaries in
countries from which import into Bangladesh are banned by the
competent authority.
The ADs should, before opening an LC, see documentary evidence that a
firm order for the goods to be imported has been placed and accepted.
ADs should ensure while opening an LC that full description of the
goods to be imported are given in each Credit along with the unit
price of the merchandise.
ADs may establish LC to make payment to the country of origin of
goods or any other country except those countries import from which
are prohibited.
In case of import by post, we may make remittance without prior
approval of the Bangladesh Bank only if the parcel is addressed
directly to our Bank.
ADs may allow remittance against discrepant documents/documents
received directly by the importers after the goods have been cleared
from the Customs, on the basis of the relative LCAF, the exchange
control copy of the Customs Bill Of Entry for consumption or Customs
Certified Invoice in the case of import by post, and the relative
invoices.
All application for payment for import should be made on IMP form by
the importer and we have to endorse on the reverse of the IMP form in
the space provided for us.
In all cases of import, the importer must submit within 4 months from
the dates of remittance the relevant Exchange Control Copy of the
customs Bill of Entry.
In case of import by post, the importer must submit the invoice
certified by the Customs authorities in lieu of the exchange control
copy of the bill of entry.
ADs have to obtain the invoice in duplicate, both of which have to be
certified by us as usual. After recording in the IMP form the
particulars of the remittance effected, the original copy of the IMP
form alongwith the copy of the certified invoice have to be forwarded
to the Bangladesh Bank with the usual monthly returns.
The duplicate copy of IMP form will be retained by ADs. Subsequently
when the exchange control copy of the bill of entry/customs certified
invoice is submitted by the importer, the particulars therein should
be matched and checked with those in the IMP form and invoice filed
earlier, to see if the merchandise for which remittance was made has
been duly received in Bangladesh. If no material discrepancy is
detected, the case should be considered closed, with the duplicate
IMP form, invoice and custom bill of entry/custom certified invoice
field together for eventual inspection and disposal instruction from
inspection team from the Foreign Investment and Inspection Department
of Bangladesh Bank.
Cases with material discrepancy between the particulars of
merchandise for which remittance was made and the merchandise
actually received as evidenced by the exchange control copy of bill
of entry/customs certified invoice within four month of remittance
should be reported to the area office of Bangladesh Bank quarterly,
in proformas given at Appendices 5/14 and 5/15, by 15th day of the
month following the quarters ended March, June, September and
December. ADs should also follow up with the importers the cases
material discrepancies and of non-submission of bills of
entry/customs certified invoices within due time.
Uniform Customs and Practices for Documentary Credit (UCPDC 600)
Uniform Customs and Practices for Documentary Credit (UCPDC) is a set
of rules formulated by International Chamber of Commerce (ICC) to
apply to all transactions in Letters of Credit carried out by banks.
The purpose of the rules is to bring about uniformity in the form of
letter of credit and the practice and procedures adopted by banks in
handling the instruments. In order to provide common understanding
about the interpretation of the terms and terminology, a uniform code
is very essential. These uniform customs and practice is universally
accepted and letters of credit transactions everywhere are subject to
this set of rules.
The UCPDC formulated by ICC is a set of rules but it has no force of
law and should not be construed as law applicable to all cases, unless
the parties to a transaction voluntarily agree to apply the codes. If
a party to a credit by express reference wishes to exclude the
applicability of uniform customs from the LC contract, it can do so
and in such cases it is not bound by the uniform customs. Bank
regulate their operations in respect of issuing, advising and
confirming credits in accordance with this code and accept all
obligations arising under that. In some countries, even courts of all
have based their decisions regarding letters of credit on these rules.
The rules have made uniform both the forms of letters of credit and
all practices and procedures observed by banks in relation to them.
The ICC UCP does not have legislative force but today it is accepted
by the world banking community as universal codification of best
practice. Moreover, banks everywhere incorporate the UCP by reference
into virtually every documentary credit and other letter of credit. It
covers most practical aspects of credit operations including issuance,
confirmation and payment, the nature and extent of bank undertakings
and banking responsibilities, the requirements to be met by documents
presented in credit operations, and rules applicable to transferable
credit.
The UCP rules are creatures of contract that apply when the parties
have voluntarily incorporated them. The LC application forms generally
contain a statement to the effect that the credit will be subject to
the UCP 600 which is considered legally to represent the parties’
willingness to submit interpretation of credit to the rules of the
UCP. However, there is an arrangement between ICC authority and SWIFT
authority according to which the LC advised through SWIFT or received
through SWIFT is automatically within the framework of UCPDC. Even
where the UCP is applicable, the provisions can not cover all cases,
and national regulations and guidelines are required to cover the
cases/areas.
The revision process of UCP 500 actively began in April 2003 at the
International Chamber of Commerce, Paris, and the new revision i.e.
UCPDC 600 [ 2007 revision ] was adopted in November 2006 and published
for the global trade and banking communities for implementation from
July 1 2007. The new version of UCP 600 are the result of more than
three years of intensive work by the Banking Commission. The new
version of UCP 600 has been reorganized and comprises 39 articles
without having any sub-head in contrast to UCP500 that has 49 articles
grouped under seven broad heads. UCP 600 represents improved clarity
in terms of language
In general, the articles that are stated in future form in UCP 500 are
restructured into present form in UCP 600. Important definitions of
the UCP and all interpretive issues that are placed in scattered form
under UCP 500 have been accumulated into two separate articles in the
beginning of the draft version of UCP 600. The term ‘parties’ has been
replaced by ‘banks’. The 2007 revision dropped the common phrase
‘unless otherwise expressly stipulated in the credit’ used in
different articles of UCP 500.
The definition of letters of credit in UCP 600 is having in a new
shape. Revocable letter of credit has been dropped out of the scope of
the new UCP and L/C means irrevocable letter of credit or definite
undertaking only. Dropping revocable LC out of the scope of UCP draft
seems to be correct. The revocable LC violates the basic protective
feature of letter of credit i.e., it cannot provide necessary
protection to the beneficiary in connection with receiving payments.
The UCP 600 has brought in the concept of ‘Second Advising Bank’ in
line with the practice in different countries. In addition to the
normal responsibility of checking the authenticity of the credit, it
enforces additional responsibility to the advising bank in connection
with giving notification about acceptance and rejection of amendments.
Remarkable changes have been made in the article number 14 on
‘Standard for Examination of Documents’ of the UCP 600; which deals
with examination of documents. The maximum period allowed to examine
the documents has been reduced to five banking days from seven banking
days, and the term ‘reasonable time’ is removed in connection with
time required for examination of documents. The text of the article 16
of UCP 600 in regard to discrepant documents, waiver and notice has
been placed in modified from in the new version of UCP. The article
comes out explicitly with the contents of the refusal notice that was
absent in UCP 500. Notice of refusal must be given by
telecommunication or if that is not possible, by other expeditious
means and it must be given not later than the close of fifth banking
day following the day of presentation.
The UCP 600 offers shift in the procedure of determining shipment date
in case of a few transport documents in certain scenarios. A major
change has been made in connection with determining shipment date in
case of ‘Marine Bill of lading’ at the presence of both pre-printed
wordings and on-board notation on the bill of lading. In contrast to
the UCP 500, in such a scenario, the date of on- board notation is to
be considered as shipment date. In regard to determining the date of
shipment of the air transport document, in the presence of a notation
of actual date of shipment, the date would be the shipment date if no
such indication calls for in the credit.
UCP 600 has 39 articles which clearly states different aspects of
international trade payment under letter of credit method. Article 1
states about the application of UCP as:
“The Uniform Customs and Practice for Documentary Credit, 2007 Revision, ICC Publication No.
600 are rules that apply to any documentary credit (including, to the extent to which they may
be applicable, any standby letter of credit) when the text of the credit expressly indicates that it
is subject to these rules. They are binding on all parties thereto unless expressly modified or
excluded by the credit.”
Article 2 and 3 provide the definitions and interpretations of various
parties and key terms under letter of credit. Credits v. Contracts has
been indicated in Article 4 where it has been stated that
“A Credit by it’s nature is a separate transaction from the sale or other contract on which it may
be based. Banks are in no way concerned with o bound by such contract, even if any reference
whatsoever to it is included in the credit. Consequently, the undertaking of a bank to honour, to
negotiate or to fulfill any other obligation under the credit is not subject to claims or defences
by the applicant resulting from it’s relationships with the issuing bank or the beneficiary.”
Article 7 and 8 clearly state the undertaking of issuing and
confirming bank whereas article 9 and 10 provide a guideline regarding
advising of credits and its amendments. One of the very important
aspects of international trade payment under LC method is the matter
of bank to bank reimbursement which has been stated in article 13
where it is inscribed that:
“If a credit states that reimbursement is to be obtained by a nominated bank (claiming bank)
claiming on another party (reimbursing bank)the credit must state if the reimbursement is
subject to the ICC rules for bank to bank reimbursement in effect on the date of issuance of the
credit.”
A very significant aspect of UCPDC 600 is its article 14 where
‘standard for examination of documents’ has been extensively stated.
At the inception of the article it has been said that “A nominated bank
acting on its nomination, a confirming bank, if any, and the issuing bank must examine a
presentation to determine, on the basis of the documents alone, whether or not the documents
appear on their face to constitute a complying presentation.”
Article 16 has said about discrepant documents, their waiver and
notice which very astutely states “When a nominated bank acting on its
nomination, a confirming bank, if any, or the issuing bank determines
that a presentation does not comply, it may refuse to honour or
negotiate.”
From article 18 to 28 the matter of various documents has been
discussed. Among the required documents commercial invoice, transport
documents, bill of lading, insurance documents are important. The rest
articles emphasize on Extensions of expiry date or last day of
presentation, Tolerance in credit amount, quantity and unit prices,
Partial drawings or shipments, Installment drawings or shipments,
Hours of presentation, Disclaimer on effectiveness of documents,
Disclaimer on Transmission and Translation, Force Majeure, Disclaimer
for acts of an instructed party, Transferable credits and Assignment
of proceeds. All these articles provide necessary guidelines for
international trade.
Uniform Rules for Bank to Bank Reimbursement [ URR 525]
The Uniform rules from Bank to Bank reimbursements [URR], ICC
publication no 725 deals with bank-to-Bank reimbursements arrangement.
This arrangement involves a third bank in the process of documentary
credit in making reimbursement to the claiming bank. As the third bank
is not a party to the credit, the relationship between issuing bank
and reimbursing bank is not within the framework of UCPDC. In UCP, the
first specific reference to reimbursement from a third bank was
contained in UCP 290 [ article 13] 1974 revision. The current revision
of UCP 600 refers about the arrangement. With the implementation of
URR 725, the documentary credit arrangement for the first time got a
set of international rules on bank-to- bank reimbursement arrangement.
To get coverage under URR, banks are to incorporate in their
reimbursement instructions that the reimbursements are subject to URR
publication no – 525.
Incoterms 2000
In the trade operation, the ownership and risk in the movement of
goods from seller to buyer are usually linked to transport operation.
It is vital for the exporter and the importer to determine with
precision, matters such as which party arranges and pays for the
carriage of the goods, who takes out the cargo insurance, whether the
goods travel at the risk of the seller or the buyer and who affects
custom clearance. Over the years, traders operating internationally
evolved standard definitions known as trade terms covering the main
alternative arrangements that buyers and sellers may make with regard
to shipment of the goods. The current ICC version of trade terms is
known as ‘Incoterms-2000’ that includes 13 items placed under four
groups : E Group (Departure), F Group (main carriage unpaid), C Group
(Main carriage paid) and D Group (Arrival). E Group includes EXW or Ex
works. “Ex works” means that the seller delivers when he places the
goods at the disposal of the buyer at seller’s premises or another
name place not cleared for export and not loaded on any collecting
vehicle. The F terms (FCA- Free Carrier, FAS- Free Alongside Ship,
FOB- Free on Board) require the seller to deliver the goods for
carriage as instructed by the buyer. The C terms (CFR- Cost and
Freight, CIF- Cost, Insurance and Freight, CPT- Carriage Paid to, CIP-
Carriage and Insurance paid to) require the seller to contract for
carriage at his own expense. According to the D terms (DAF- Delivered
At Frontier, DES- Delivered Ex Ship, DEQ- Delivered Ex Quay, DDU-
delivered Duty Unpaid, DDP- Delivered Duty Paid); the sellers are
responsible for the arrival of the goods at the agreed place or point
of destination at the border or within the country of import.
International standard Banking Practice (ISBP)- A Practical Complement
of UCP600
ISBP is acronym for International Standard Banking Practice for the
Examination of Documents under Documentary Credits. It is widely
acclaimed by letter of credit practitioners worldwide. It provides an
intelligent checklist of items; document checkers can refer to in
determine how ICC’s rules on documentary credits known as UCP600 apply
in daily practice. It fills a needed gap in the market between the
general principles in the UCP and the daily job of practitioners. It
is not the substitute for the UCP, but it demonstrates how the UCP is
to be integrated into everyday practice.
UCP600 incorporates international standard banking practice, which
includes the practices described in it. ISBP covers the terms commonly
seen on a day-to-day basis and the documents most often presented
under documentary credit. It also explains how the practices
articulated in UCP600 are applied by documentary practitioners. The
ISBP and the UCP600 should be read in their entirely and not in
isolation in order to avoid ambiguity.
In the latest version of ISBP there are explicit guidance on how to
deal with documents covering at least two modes of transport (UCP600,
Article19), insurance documents and coverage (UCP600, Article 28);
transferable credits (UCP600, Article 38 ) and a broad range of other
issues. However, the incorporation of ISBP into the terms of a
documentary credit is being discouraged.
ISBP at a glance
The latest revision of ISBP is composed of 185 articles under 11
broad categories.
Articles 1-5 articulate the limitation of incorporating terms in the
documentary credit and encourages the applicants’ acquaintance with
some articles of UCP600
Articles 6-42 provide guidelines and interpretations explicitly those
are not articulated in UCP600 to determine that the documents
fulfilled required terms and conditions of the credit.
Articles 43-56 constitute composite guidance in respect of making
endorsing and determining payment date of drafts under documentary
credits.
Articles 57-67 indicates contents including different issues related
to invoices and also clarify tolerance in amount and quantity.
Articles 68-90 form a set of directives in relation to multimodal or
combined transport documents.
Articles 91-114 constitute a set of directives in relation to bill of
lading.
Articles 115-133 constitute a set of directives in relation to
charter party bill of lading
Articles 134-156 constitute a set of directives in relation to air
transport documents
Articles 157-169 constitute a set of directives in relation to road,
rail or inland waterway transport documents.
Articles 170-180 constitute a set of directives in relation to
insurance documents and coverage.
Articles 181-185 provide guidance in relation to issuance and
particulars of certificate of origin.
CHAPTER FOUR: LETTER OF CREDIT OPERATION IN BANGLADESH
Import Procedure
One of the important functions of the commercial banks in the world is
to undertake import of merchandise into the country and payment of
foreign exchange towards the cost of the merchandise to foreign
suppliers. In almost all the countries of the world there is import
trade control in one form or the other which supervises the import
into the country and controls certain items of exports depending upon
national exigencies. The main object of the import trade control is to
conserve the scarce foreign exchange resources of the country with a
view to meeting the needs of development of its expanding economy. In
Bangladesh, the import of goods is regulated by the Ministry of
Commerce in terms of the Import and Export (Control) act, 1950; with
Import Policy Orders, and Public Notices issued from time to time by
the Chief Controller of Imports and Exports (C.C.I.& E), while
payments for these imports are regulated by Central Bank, i.e.
Bangladesh Bank, through its Exchange Control Department.
According to the Imports and Exports Act, 1950 as adopted in
Bangladesh, any one willing to carry import business needs
registration with the licensing authority, i.e., Chief Controller of
Imports Exports and its offices at the important trade centers of the
country.
The following documents are required to be submitted to the licensing
authority for registration as importers.
i) Questionnaire form duly filled in and signed
ii) Income tax registration certificate
iii) Trade License from the Municipal or Local
Authority
iv) Bank certificate
v) Nationality certificate
vi) Partnership Deed where applicable
vii) Certificate of Registration with the Register of
Joint Stock Companies and Memorandum and Articles of Association in
case of Private and Public Limited Company.
viii) Certificate from the Chamber of Commerce / registered
Trade Association
ix) Ownership documents or rent receipts of the place
of business
x) Any other documents required under the relevant
import policy
On receipt of the application along with relative documents, the Chief
Controller of Imports and Exports and its regional offices scrutinizes
the documents and conducts physical verification (if considered
necessary) and on being satisfied, requests the applicant to pay fees
towards registration through treasury challan.
After submission of the above documents and payment of requisite fees,
if the documents are found in order and the C.C.I & E is satisfied,
the Import Registration Certificate (IRC) is issued to the applicant-
importer.
The IRC is a security document issued under embossing seal and duly
signed by authorized officials of C.C.I & E and to be kept safe
custody. The IRC is required to be renewed every year on payment of
usual fees.
Import in Bangladesh can take place in two ways
(1) By way of opening L/C
(2) Without opening L/C.
(I) Import by way of opening L/C requires fulfilling following
criteria of private sector importer;
a) Registered importer having valid IRC
b) Trade license (valid)
c) Membership certificate from local chamber of commerce of related
association (valid).
d) Income tax clearance/ declaration in case of new comer.
e) VAT registration certificate.
If a private sector importer fulfils above requirements, a banker can
process an L/C for import of goods & services from abroad but
following papers/documents are to be obtained before opening of LC in
addition it the above mentioned papers/documents:
1. L/C application.
2. Indent / Performa invoice / purchase order / contract /
agreement.
3. Charge documents duly & properly executed.
4. Letter of Credit Authorization Form (LCAF) duly sealed &
signed.
5. Insurance cover note
The importer must be a customer of the L/C issuing bank / branch & the
L/C may be opened after sanction by the competent authority.
Liability vouchers
Debit- Customer’s Liability for L/C
Credit- Banker’s Liability for L/C
Other vouchers
Debit- Party’s account
Credit- Marginal Deposit
Credit- Commission
Credit- Postage
Credit- Vat
Credit – Other Charges
(2) Import into Bangladesh without opening L/C may be made in the
following cases against LCAF:
a) Books, journals, magazines, periodicals against sight draft or
usance bills. Any importable item by making payment from Bangladesh to
the tune of maximum USD. 2500/ -in a year
b) The items allowed by the credit, Loan, Grant.
c) International chemical reference by registered allopathic
industrial unit with the approval of Director, Drug Administration.
Scrutiny of Documents
The letter of credit constitutes one of the most important methods of
financing trade. Under a banker’s letter of credit, the issuing bank
gives a undertaking on behalf of the buyer that the bank will honor
the obligation of payment on presentation of stipulated documents.
Thus letter of credit provides security if the beneficiary observes
its terms and conditions. The beneficiary of the documentary letter of
credit when presents the stipulated documents to the negotiating bank,
he expects the bank to honor its obligation under the credit in
return. The negotiating bank scrutinizes the document in strict
accordance with the L/C terms and negotiates the bill if the documents
are in order. After negotiation, the bank claims reimbursement as per
L/C terms. The L/C issuing bank / draw bank, after receiving of the
above documents, scrutinizes all the documents before lodgment of the
same in their books / registers.
After completion of careful scrutiny of the documents steps should be
taken to lodge the documents. If minor discrepancies are detected,
acceptance/nonacceptance in writing from the party concerned should be
obtained. While writing letter to the party the discrepancies should
be pointed out specifically.
Steps for Lodgment
Following steps are maintained for lodge the documents.
1. Intimation is given to the party in time
2. Conversion of foreign currency in to Bangladesh currency.
3. Entry in to PAD register, along with PAD number
4. Entry in to L/C opening register by rounding the L/C no with date
5. Relative LCAF is to be endorsed showing the utilization of credit
amount. The utilized amount also to be noted in L/C file.
6. IMP forms duly signed by the importer are to be filled in.
7. Passing of vouchers
a) Reversal of contra liability vouchers
Debit- Bankers Liability for L/C
Credit- Customer’s Liability for L/C
b) Lodgement voucher i.e.,
Debit PAD(Payment Against Document) (At BC selling rate)
Credit ID, Head Office (name of
Foreign bank, T.T/OD rate)
Credit I/A Exchange Earnings (Difference
amount)
Retirement of Documents
After the arrival of goods in the port the party comes to retire the
documents. Then the following entry is passed.
1. Calculation of Interest
2. Determination of other Charges
3. Passing of Vouchers:
Dr. Party’s A!C
Dr. Marginal Deposit A/C
Cr. PAD
Cr. Interest A!C; Interest and other charges
4. Entry into the register
5. After retirement, document along with custom purpose copy of LCAF
to be delivered to the importer giving following endorsement:
a) Draft/Bill of Exchange is to be endorsed as “Receive payment”
b) The invoice value is to be certified as “certified (the
amount-Foreign Currency) converted @ …………. Dated………………Tk…………
6. The Bill of Lading / Transport document is to be endorsed for
taking delivering of goods as “Please deliver to ………………. Or to the
order of M/S………….”.
Interest is calculated on be amount from the date of reimbursement to
the date of retirement. If the margin is kept with the bank a minimum
30 days, then interest is paid to the party at the savings rate and
following vouchers are passed.
Dr. Expense control A!C Interest paid on margin L/C cash.
Cr. Party’s A!C.
Original documents are handed over to the importer after proper
endorsement along with original LCA. The importer clears the goods on
showing all these documents. The customs authority gives a bill of
entry as a document of entering the importer goods in the country. The
importer surrenders this bill of entry to the bank and forwards the
bill of entry to Bangladesh bank along with the duplicate of IMP from.
Import Financing
Banks are playing a very important role in financing foreign trade of
a country. Basic task in case of foreign trade is the same as in the
home trade, i.e., to receive payments from the buyers and to make
payments to the sellers. In our country import financing is made by
the way of Payment Against Documents (PAD), Loan Against Imported
Merchandise (LIM), Loan Against Trust Receipt (LTR).
Payment Against Documents (PAD)
When an import bill is received under a letter of credit, issuing bank
carefully examine the documents as these are in accordance with the
terms of the letter of credit. If the documents received in order, the
bank lodge the shipping documents in their book and the debit entry
originated there against by the negotiating bank / reimbursement bank
is responded to the debit of advance portfolio “Payment Against
Documents” or “Bill of Exchange” as the case may be and intimation is
sent to the importer asking him to retire the import bills
immediately. Thus, liability under the letter of credit is converted
to bank’s advance. It is a practice that allows the importer to retire
the documents until ship carrying the goods arrives. Normally,
outstanding under “PAD” should not take more than 21 days for
adjustment. When the importer retires the bill, the transaction ends
there.
Loan Against Imported Merchandise (LIM)
When the importer requests the bank for clearance of goods or the
importer fails to retire the documents on payment, the liabilities
under PAD or Bill of Exchange are converted to LIM account and the
overdue interest from the date of accompanying Bill of Exchange or
negotiation date to the date of transfer to LIM account is charged and
incorporated to LIM. The advance against merchandise account is a loan
account and only amounts for clearance charges, such as, custom duty,
sales tax or VAT etc are allowed to be debited to the LIM account. A
definite repayment schedule is also given to the importer to take
delivery of the goods from bank’s custody against payment. Usually
this loan is granted for 90 days within which importer should repay
the loan and take delivery of the goods.
Loan Against Trust Receipt (LTR)
Letter of Trust Receipt is a document duly stamped and signed in
bank’s prescribed format by the importer before getting delivery of
the import shipping documents. In the Trust Receipt the importer
specifies the goods and agrees that he is holding the goods not as
their owner but as an agent for the bank until the goods are sold or
used for the express purpose for which they were released to him.
Thus, the bank continues to have the rights of the pledge. In getting
such facility, the importer is to offer sufficient tangible securities
acceptable to the bank equivalent to loan account.
Export Procedure
The general framework for control of exports is similar to that of
imports but the objectives of import and export control are quite
different. While import control is aimed at curbing imports to the
extent possible, export control mainly aims at regulating the flow of
foreign exchange into the country. Our Government always encourages
exports to the extent possible so as to earn valuable foreign exchange
for the country.
Any firms / parties desirous of undertaking export trade are required
to obtain Export Registration Certificate (ERC) from the offices of
the Chief Controller of Imports and Exports (C.C.I & E), Government of
Bangladesh. No person is allowed to export any goods from Bangladesh
to any other country without obtaining such a certificate. Authorised
Dealer should, therefore, ensure before certifying any export form, as
required that the person is so registered. The registration number
should be quoted on the relative EXP form.
For the purpose of registration, an application in the prescribed form
is required to be submitted to the C.C.I & E authority along with the
following documents:
1. Nationality certificate from the local authority
2. Trade License from the Municipal authority
3. Bank certificate
4. Income Tax certificate
5. Registered partnership deed in case of Partnership concerns,
memorandum and Articles of Association and Certificate of
Incorporation in case of Limited Company.
6. Copy of rent receipt of the business premises.
An exporter has to obtain a firm contract or an export L/C/Firm
contract he has to make the goods ready and necessary arrangement for
shipment particularly the following arrangements have to be done:
Booking of shipping space.
Packing of the goods with shipping makes as per instruction of Export
L/C/contract.
Booking of space for storage of export cargo at the port of loading.
Arrangement for transportation of goods to the port.
Approaching bank (A.D) for issuing EXP.
Whenever an exporter approaches the branch for issuing and certifying
EXP. Branch is to satisfy that he maintains a CD A/c with the branch.
He is a manufacturer, producers or supplier of the goods to be
exported. Market reputation is satisfactory. Being satisfied
following papers and documents are to be obtained:
Application for the exporter.
Valid export Registration certificate (ERC).
o Original copy of export L/C/Firm contract.
Examination of papers and documents by the branch
i. Application:
Items are permissible for export.
Arrangement made for realization of Export Proceeds within 4(Four)
months.
Arrangement has been made for receipt of title of the goods like Bill
of Lading (B/L), Air Way Bill etc.
ii. Export L/C:
Irrevocable / Confirmed L/C issued by an internationally reputed bank
under UCPDC in force and transfer made (if transferable) as per
provision of article 48 of ICC- 500.
Genuineness of Advising or Transferring the L/C is to be verified.
Time for shipment is sufficient.
Negotiation authority is provided therein.
Reimbursement clause is definite.
B/L clause conforms to the provision of Guidelines for foreign
Exchange Transactions.
All other terms and conditions are favorable.
iii) Contract:
Contract is confirmed and duly signed by the seller and the
purchaser.
Buyer consignee is bonafide (Branch has to obtain credentials of the
buyer through Foreign Correspondence).
Full description of the goods to be exported with quantity, quality,
price and unite price are given.
Mode of transport with port of shipment and destination.
Date of shipment.
Delivery Term-FOB, CRE, CIF etc. mentioned clearly.
Payment clause at Sight DC/ DP/ USANCE.
Validity of the Contract.
Being satisfied branch is to issue a set of EXP. Duly recorded in
Export Register as per specification given in appendix in 5/65 of
Guidelines For Foreign Exchange Transaction Volume-1 published by
Bangladesh Bank.
Exporter is to fill up and sign EXP. Under his seal. Branch is to
check that all the copies EXP have correctly been filled in as per
particulars of export L/C/contract. Signature of the export is to be
verified and certify under seal and signature of the branch manager
on the space provided.
Papers and documents are to be handed over to C& F Agent:
EXP duly signed by Export and certified by the bank.
Copy of Export L/C Contract.
Commercial invoice duly issued and signed by the exporter.
Packing List.
Insurance cover note in case of Export on CIF basis.
From VBF-9 (Prescribed by Custom Authority for declaration of Export
Cargo).
Detail instructions regarding shipment:
Date by which the goods should be put on board.
Name of the bank in Bangladesh to whose order BL/air way duty Bill
should be drawn.
Number of original and non-negotiable B.L to be obtained.
A proof of export from the Custom Authority for claiming duty draw
back (wherever admissible).
C & F Agent has to arrange:
Booking of shipping space.
Storage of Export Cargo at the port.
Marking the shipping marks on each packet / container.
Issue instruction to the carrier regarding the date by which goods
are to be shipped on board and shipping documents to be issue with
necessary clauses and number of copies to be supplied.
After shipment Exporter will submit the following documents to the
branch:
All negotiable copies of B/L
Commercial Invoice duly signed.
Bill of Exchange.
Consular invoice (If required).
Packing list.
Certificate of Origin.(If required).
Pre-shipment inspection certificate (If required).
GSP certificate (wherever necessary).
Original copy of export L/C/Contract.
EXP duly certified by the custom authority.
Any other documents required as per export L/C Contract.
Exporter is to submit the export documents under cover of a letter
mentioning a number of documents submitted and detail instructions
regarding payment and delivery of documents.
Branch is to verify that-
The number of the documents mentioned in the forwarding letter is
found intact.
Instruction regarding payment and delivery of documents are in
confirming with the terms and conditions of Export L/C contract.
i) Sight Documents are to be delivered against payment at sight of the
draft.
ii) D.A Documents to be delivered against acceptance of the draft by
the 1 drawee and documents are to
presented on due date for payments.
iii) D-P-Documents are to be delivered against payment.
iv) All the documents required as per terms and conditions of L/C
contract are
submitted.
Documents submitted are to be scrutinized and the discrepancies are to
be noted on the scrutiny sheet. Exporter
is to be informed of the discrepancies immediately. Export will
rectify the discrepancies which are rectifiable by them.
Export Financing
Financing of exports constitutes an important part of a bank’s
activities. Exporters require financial services at different stages
of their export operation. During each of these phase exporters need
different types of financial assistance depending on the nature of the
export contract. Export financing can be classified into two
categories.
1) Pre-shipment credit
2) Post-shipment credit
Pre-shipment credit
Pre-shipment credit, as the name suggests, given to finance the
activities of an exporter prior to the actual shipment of goods for
export. The purpose of such credit is to meet working capital needs
starting from the point of purchasing of raw materials to
transportation of goods for export to foreign country. Pre-shipment
credit takes place 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 letter of credit
6) Credit against Red-Clause letter of credit
Export Cash Credit (Hypothecation)
Under this arrangement a credit is sanctioned against hypothecation of
the raw materials or finished goods intended for export. Such facility
is allowed to the first class exporters. As the bank has got no
security in this case, except charge documents and lien of export L/C
or contract, bank normally insists on the exporter in furnishing
collateral security. The letter of credit creates a charge against the
merchandise in favor of the bank but neither the ownership nor the
possession is passed to it.
Export Cash Credit (Pledge)
Such credit facility is allowed against pledge of exportable goods or
raw materials. In this case, cash credit facilities are extended
against pledge of goods to be stored in the godown under bank’s
control by signing letter of pledge and other pledge documents. The
exporter surrenders the physical possession of the goods under bank’s
effective control as security for payment of bank dues.
Export Cash Credit against Trust Receipt
In this case, credit limit is sanctioned against Trust Receipt. 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. This
facility is allowed only to the first class party and aollateral
security is generally obtained in this case.
Packing Credit
In this cash credit, facilities are extended against security of
Railway Receipt / Steamer Receipt / Barge Receipt / Truck Receipt
evidencing transportation of goods to the port for shipment of the
goods in addition to the usual charge documents and lien of export
letter of credit. This type of credit is sanctioned for the
transitional period from dispatch of the goods till negotiation of the
export documents. The drawings under Export cash credit
(Hypothecation/Pledge) limit are generally adjusted by drawings in
packing credit limit which in turn, liquidated by negotiation of
export documents.
Back to Back Letter of Credit
Under this arrangement, the bank finances export by opening a letter
of credit on behalf of the exporter who has received a letter of
credit from the overseas buyer. 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. The need for a back to back
letter of credit arise because the beneficiary of the original
(export) letter of credit may have to procure the goods from the
actual producer who may not supply the goods unless its payment is
guaranteed by the bank in the form of letter of credit. The bank’s
credit related to back to back letter of credit is realized
subsequently from export proceeds.
Credit against Red-Clause 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 and store the exportable
goods in anticipation of his effecting the shipment and submitting a
bill under the L/C. as the clause containing such authority is printed
/typed in red ink the L/C is called Red clause and Green Clause L/C
respectively. Though it is not prohibited, it is very rare in
Bangladesh.
Post-shipment credit
This type of credit facilities extended to the exporters by the banks
after shipment of the goods against export documents. Necessity for
such credit arises as the exporter can not afford to wait for a long
time for without paying manufacturers / suppliers. Banks in our
country extend post-shipment credit to the exporters through:
1) Negotiation of documents under L/C
2) Purchase of DP and DA bill’s
3) Advance against Export Bills surrendered for collection
Negotiation of documents 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. If the documents are found complying the terms and
conditions of L/C, the bank may purchase/discount the
drafts/documents.
Purchase of DP and DA bill’s
In such case, the banks purchase/discount the DP (Documents against
Payment) and DA (Documents against Acceptance) bills operated under
the payment method of documentary collection. While doing so, the
banks scrutinize all the export documents separately and minutely.
Clear instructions is to be obtained from the drawer of the bill in
regard to all important issues related to the negotiation of the
bills.
Advance against Export Bills surrendered for collection
Banks generally accept export bills for collection of proceeds when
they are not drawn under a L/C or when the documents, even though
drawn against an L/C contains some discrepancies. Bills drawn under
L/C, without any discrepancy in the documents, are generally
negotiated by the bank and the exporter gets the money from the bank
immediately. However, if the bill is not eligible for negotiation, the
exporter may obtain advance from the bank against the security of
export bills. In addition to the export bills, banks usually ask for
collateral security like a guarantee by a third party and equitable /
registered mortgage of property.
Payment Methods used in Foreign Exchange Transactions in Bangladesh
Like most other countries in the world, in Bangladesh, Documentary
Letter of Credit is the most popular and widely used for making import
and export payment settlement. In more than 80% cases documentary
letter of credit is used to make import payments. In a very few cases
and in some cases of export proceeds realization, especially in
exporter’s retention quota accounts, Cash in Advance method is used to
import accessories.
It is found in a survey that in more than 65% cases L/C method is used
for getting export proceeds whereas only in 30% cases Documentary
Collection is used. Although Cash in Advance method is used to some
extent, Open Account is completely absent. According to Choudhury and
Habib (2006), this absence may be due to the superior bargaining power
of the foreign exporters and the lack of credibility of our importers
and the greater use of L/C in Bangladesh as main method of payment.
Moreover, another discouraging factor is the existence of Bangladesh
Bank’s requirement that export receipts must enter into the country
within a period of 4 months from the date of export, failing of which,
the exporter as well as the AD and it’s officials certifying the
export forms becomes liable to punitive action under FER Act.
Table 4.1: Methods of Payment used in Making and Getting Payment
Methods used Import
Payment(no of
cases)
Export
Payment(no of
cases)
Documentary
credit
84% 67%
Documentary
Collection
14.5% 29%
Cash in
Advance
1.5% 4%
Open Account 0 0
Source: Based on data collected from sampled banks
Formalities and Margin Requirement while Opening L/C
Unless otherwise specified, no import License will be necessary for
import of any item in Bangladesh. However, registration to the
Authorised Dealer is a requirement to import into the country. Other
than filling up L/C application form, submission of the copy of
proforma invoice and insurance cover note along with LCAF to the bank
is a regulatory requirement. Issuing Bank has an agreement with the
applicant while opening a Letter of Credit on his or her behalf.
Before 2003, there were some restrictions by the Ministry of Commerce
on LC margin in some specific items. However, this restriction of
margin requirement becomes open from the year 2003 and now this LC
margin is determined/negotiated by the relationship between the AD and
the LC applicant.
Forms of L/C in Use
In Bangladesh, all letter of credits opened and received are
irrevocable in nature as required by the domestic regulation of the
country as well as UCPDC 600. Considering LC establishment about 42%
out of the total credits are Deferred Payment Back-to-Back in nature
due to the garments sector import raw materials to meet up their
export orders. Whereas only about 3% LCs are Confirmed and 55% are
Irrevocable at sight L/C. Even though Revolving LCs are rare, there is
not a single case of Red Clause LC as there are some restrictions
imposed by the Central Bank i.e. Bangladesh Bank.
On the other hand in cases of Export LCs about 72% is transferable in
nature due to the existence of a large number of Buying Houses as they
require to transfer the LCs to the manufacturers. Moreover the
practices of subcontracting by the garments manufacturers are also
very common for which LC is transferred. In contrast to import LC,
back-to-back letter of credit is completely absent in case of export
LC. Very insignificantly (only 1%) Bangladeshi exporters receive
confirmed LC.
Table 4.2: Forms of LC opened and received
Forms Import LC Export LC
Irrevocable 55% 27%
Confirmed 3% 1%
Back-to-Back 42% 0
Transferable 0 72%
Red Clause 0 0
Source: Based on data collected from sampled banks
Documents Called for by a Credit
For Import L/C, issuing bank asks for
a) Bill of Exchange or Draft
b) Transport Documents like Bill of Lading, Airway Bill, Truck
Receipt etc.
c) Commercial Invoice
d) Certificate of Origin and
e) Others as required by Bangladesh Bank Guideline or Import
Policy Order (IPO).
Even though transport documents (title documents), commercial invoice
(sellers bill) and insurance documents are essential as per UCP 600,
insurance documents are rarely asked in Bangladesh. According to the
country’s Import Policy Order, insurance is to be covered through
domestic Insurance companies. Therefore, there will be no CIF LC in
our country.
Submission of signed commercial invoice is another regulatory
requirement. Under UCP 600, commercial invoice needs not to be signed.
But as per BB Guidelines, all LCs must ask for submission of signed
invoices. Submission of certificate of origin is a must in Bangladesh
according to the Import Policy. Besides these, Packing List is another
very frequently asked documents with Weight List, PSI certified
Invoice, various Beneficiary’s Certificate are also asked less
frequently or depending of case basis.
It is worth mentioning here that if the import is made from India
through land customs, a Custom House Certified Invoice and/or Indian
Application for Export Bills are asked with the original documents.
For Export L/C, exporters in our country are asked for the documents
like
a) Bill of Exchange
b) Transport Documents
c) Commercial Invoices
d) Packing List and
e) Certificate of Origin.
It has been observed that insurance documents are less frequently
asked in the export LCs. Weight list and PSI certificates are also
asked but less frequently based of case to case basis.
Table 4.3: Documentary Requirements
Documents
Asked
Frequency for
import LC
Frequency for
export LC
Transport
Document
All All
Commercial
Invoice
All All
Certificate
of Origin
All Very
Frequently
Bill of
Exchange
Very
Frequently
Very
Frequently
Packing List Very
Frequently
Very
Frequently
Insurance
Document
Very Rarely Less
Frequently
Weight List Less
Frequently
Less
Frequently
PSI
Certificate
Less
Frequently
Less
Frequently
Source: Based on data collected from sampled banks
Examination of Documents
In connection with examination of documents ‘Standard For Examination Of
Documents’reflected in the article 14 of UCP 600 is the guideline.
As any LC opened in our country has to comply with domestic
regulations, guidelines on foreign exchange transactions along with FE
circulars issued by Bangladesh Bank and the Import Policy Order and
the Export Policy Order of the country are followed, these issues
effect scrutinizing of import documents. However, it is to be
remembered that whenever an LC is established only the ‘LC terms’ are
‘terms’ and only they are to be considered for examining a set of
import documents.
As per article 14 of the UCP 600 any bank shall have a maximum of five
banking days following the day of receiving of the document to
determine if a presentation is complying. In some banks there is a
practice of sending the discrepancy notices within 2-3 days after
receiving the documents. Banks consider the act as a protective
measure on their part. Charging of discrepancy fee appears to be
another reason of such practice. Banks have been observed to approach
to the importers to get their opinion before rejecting the documents.
In regard to discrepancies, late shipment, late presentation, expiry
of the L/C are very common.
Availability of Credit
A letter of credit must point out whether the credit is available at
sight, deferred, acceptance or negotiation basis. The issuing bank is
also required to mention that whether the payment will be made from
the counter of the issuing bank or a nominated bank (negotiating
bank). In most cases, LC issued from the country are freely negotiable
which means any bank is negotiating or nominated bank at the counter
of which documents are submitted by the foreign exporter or
beneficiary. In such a case, exporter can submit documents at the
counter of it’s bank in the country of his or domicile. In most cases
(68%) payments are designated on negotiation basis from the counter of
the nominated bank. Another 20% cases use acceptance basis payment
and 12% deferred payment.
Charges and Commissions
Charges in documentary credit are much higher as compared to other
forms of payment as involvement of banks is significant in this mode.
At different stages of involvement, banks charge different rates of
commissions as issuing bank, advising bank, negotiating bank,
confirming bank, reimbursing bank etc. Commissions vary from bank to
bank and in some cases also from client to client.
CHAPTER FIVE: OBSERVATION AND CONCLUSION
In Bangladesh, international trade and foreign exchange transactions
are generally made through Letter of Credit. It is the most popular
method out of many others described earlier for importing and
exporting goods and for making and receiving payments to and from
abroad. It is also notable that the Import and Export policy of the
country and Foreign Exchange Guideline provided by the Central Bank
are also encourage this Documentary Credit system. For example import
without LC is restricted for upto $35000/per year and to some
restricted items like books, journals etc. (Import Policy Order 2006-
2009) and import against advanced payment is comparatively complex
(Foreign Exchange Guideline Vol – 1).
From our above dissertation the following findings are worth noting:
1) Due to regulations and policies of the country, there are
great differences in the documentary requirements of export and import
LCs in Bangladesh. LCs issued from abroad i.e. export LC asks for
fewer documents than the LCs issued from our country. However, both
import and export LCs, submission of insurance documents are rarely
asked for their requirement to be covered by domestic insurance
companies.
2) As both Bangladeshi Importer and Exporters are dominated by
the foreign suppliers and buyers respectively, imports are made on CNF
basis and exports are made on FOB. Due to this our country losses a
substantial amount of Foreign Currency.
3) About one third of the cases collection method is used in
export transactions. However, in recent times, trend of the use of
documentary collection is increasing both in export and import payment
transactions. Though open account is widely used in trades among
developed countries, its use in Bangladesh is completely absent.
Absence or insignificant cases of use of cash in advance and open
account might be attributed to the regulatory requirement of the
country, relative bargaining power, reputation of the country’s
traders and mutual trust and relationship of the domestic traders with
their counterparts.
4) The beneficiary of an irrevocable documentary credit enjoys
maximum protection against commercial risks since it is assured that
the buyer’s bank will pay the value even if the buyer defaults to meet
it’s payment obligation. If the credit is confirmed by a bank in the
seller’s country, the seller also obtains protection against transfer
risks since the confirming bank is obliged to pay even if the buyer’s
bank is unable to transfer funds out of the country. However, of the
four methods documentary letter of credit is the most expensive.
5) All letter of credits issued and received in Bangladesh are
irrevocable in nature as opening or receiving revocable credit is
completely banned by regulations of the country as well as by the
UCPDC 600.
6) In the Garments Sector imports are made through back-to-back
DP LCs to meet up the requirements for complete production and export
in due time.
7) In our country garment exports are financed by the banks
making lien and pledge on Export LC commonly called as Master LC. But
as our exporters in many times become unable to make the shipment
within validity the documents becomes discrepant. Therefore
repatriation of the related proceeds becomes risky and vulnerable.
Sometimes exporters can not ship the goods or due to discrepancies
repatriation of proceeds fails and thus the goods become ‘stock lot’
and this way the exporter lost its business and the Bank falls in
trouble.
8) Absence of Red Clause and Revolving LCs in the trade payment
is mainly due to the country’s regulatory barriers.
9) In cases of LC advising banks generally prefer to select those
banks available by their correspondent relationship. However, some
banks also try to accommodate exporters’ choice but in doing so some
banks avail the services of a second advising bank. This actually
imposes additional cost burden on the trading parties.
10) Almost in all cases, confirming banks are selected by the issuing
bank though in some cases banks try to accommodate exporters’ choice
if they have arrangement with that bank.
11) For amendment of letter of credit, generally importers approach
to the bank on behalf of the exporters. An amendment can only be made
if all 3 (three ) prime parties i.e. the importer, the export and the
LC issuing bank agrees to do so. But in our country it is observed
that the banks without receiving any request from the beneficiary make
amendment to an LC only receiving an amendment application from the
importer.
12) Some banks are found to have practices to give a deadline for
notification of acceptance or rejection of amendment, and note that if
they do not receive any message within the given period from the
beneficiary, the amendment deemed to be accepted.
13) Banks in our country tends to send discrepancy notice on each and
every import documents even based on negligible discrepancies to safe-
guard its position on making its confirmed foreign payment. This makes
payments against import documents delayed and surely hampers the good
will of the country. This is one of the reasons why UCPDC 500 year
1993 was rectified as UCPDC 600 year 2007. But these commercial banks
more or less become bound to do so due to less effective legal
structure in our country.
CONCLUDING REMARKS
Even at this real time communication world, letter of credit is
considered to be the one of the safest way to remit and get proceeds.
But still there are some factors to be re-considered like:
a) Restructure of legal enforcement against defaulter importers
and exporters in Bangladesh.
b) Necessary changes in import policy to permit imports to be
made without LC to reduce import cost and subsequently reduce prices
on essential and consumable goods.
c) Financing in the garments sector by the banks should be made
more secure etc.
In some countries of tight control on foreign trade operations,
documentary credit is a very strong device in the government’s control
and supervisory mechanism. In our country, this controlling over
imports and exports are seen in a liberal ways but still some
considerable changes in import and export policy and re-structuring
and up-to-date foreign exchange guideline is required for our
country’s smooth growth.
BIBLIOGRAPHY
Awasthi, G. S ( 1997 ), Trade Payments, International Chamber of Commerce,
Paris.
Bangladesh Bank (1997), Guidelines for Foreign Exchange Transactions,
Volume 1 and 2, Bangladesh Bank, Dhaka, Bangladesh.
Byrne, James E. ( 2001 ), “ Overview of Letter of Credit Law and
Practice’’ in Byrne, James E and Christopher S. Byrnes ( eds. ) Annual
Survey of Letter of Credit Law and Practice, Institute of International Banking Law
and Practice, USA.
Choudhury, Toufic A. and Shah Md. Ahsan Habib ( 2006 ), ‘ An
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( eds. ), Annual Survey of Letter of Credit Law and Prcitce, Institute of
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