foreign exchange report11

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FOREIGN EXCHANGE OPERATIONS OF BASIC BANK LIMITED 2009

Foreign Exchange Operations of Basic BankLimited 2009

Prepared By

Shaikh Razib Hasan

ID: 2009222451838

Contact: [email protected]

H/P: +880-1973-102030

Chapter 1

1
mailto:[email protected]:[email protected]


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Introduction

1.1: Authorization of the study:

Banking is one of the most important sectors for countrys wealth building activities.Commercial banks are certainly profit making Financial Institutions. Theseinstitutions play great role in the money market of every economy.

Due to recent financial crisis (Particularly in U.S.A, G.B, EU, Japan), globalization,technological innovation and deregulation in the banking system all over the worldhas been changing rapidly. Now a days banks have to compete in the market placenot only with local institutions but also with foreign financial institutions.The course under BBA program is designed with an excellent combination oftheoretical and practical aspects. The whole course is divided into eight semesters of 6months each. After completion of 8th semester consisting of theoretical exposure, thestudents are sent to different organizations to obtain some practical exposure indifferent sectors which would help them in taking up more professional courses inMBA. As a student of BBA, I have assigned to BASIC Bank Limited, BangshalBranch for my practical orientation.

As our program director directed us to present the report in a way that would be based on the personal observations from the department I worked in. I have

described the department by the following way:

1.1.1 Understanding:

In this part I have tried to be acquainted with every nook and cranny of foreignexchange section of BASIC bank Limited, Bangshal Branch.

1.1.2 Things are done here:

In this part I have tried to see the things which are being done in each section, i.e.;Loans and advance section, General banking section and foreign exchangesection.

1.1.3 Personal observations:

In this part I have tried to present my personal observations from foreignexchange section. I had an opportunity to be acquainted with the practicalbanking prevail in the Bangshal branch, BASIC Bank Limited. I have tried my

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best to show the knowledge which have been acquired in my practical orientationperiod.

1.2: Objectives of the study:

The Prime objectives of the study are to gather practical knowledge regarding

banking systems and operation. This practical orientation gives us a chance to co-ordinate the theoretical knowledge with the practical experience. The following arethe objectives for this practical orientation in bank:

To get an overall idea about the Foreign exchange Business of BASIC BankLimited.

To apply theoretical knowledge in the practical field.

To help the students in taking up professional courses in the MBA program.

To describe the organizational structure, management, background,functions and objectives of the bank and its contribution to the national economy.

To achieve overall understanding of BASIC Bank Limited.

To analyze the financing systems of the bank to find out any contributing

field. To examine the profitability and productivity of the bank.

To acquire knowledge about the every day banking operation of BASICBank Limited.

To understand the real management situation and try to recommend forimproving existing problems.

1.3: Schedule of internship:Following schedules of the internship program were fixed by Manager of BangshalBranch of BASIC Bank Limited.

20th May to 5th June 2009 General Banking Section

6th June to 10th August 2009 Foreign Exchange Section

1.4: Coverage of the study:

The report covers the following areas.

Overview of BASIC Bank Limited

Terms used in foreign exchange operations

Foreign exchange operations of BASIC Bank Limited

1.5: Methodology of the study:

From my educational background I have learnt different methodology to collectdata from different sources and analyze them. With the objective to make myreport sound one, I have the opportunity to implicate my educational knowledgein practical field. I have collected data from many sources. Such as:

5.0.1 Sources of Data

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5.0.1.1 Primary Sources

Personal Interview Face-to-face conversation and in depth interviewwith the respective officers of the branch.

Personal observation Observing the procedure of banking activities

followed by each department. Daily diary

Practical work exposures on different areas of the branch.

Informal conversation with the clients or customers.

5.3.1.2 Secondary Sources

Annual report (2005, 2006& 2007) of BASIC Bank Ltd.

Periodicals Published by Bangladesh Bank.

Different publications regarding Banking functions and foreign exchangeoperation

Internet will also be used as a theoretical source of information.

Use of different theories to make the report more relevant.

Printed Materials: This study is mostly dependent on the printedmaterials which may include the books, newspapers, magazines, journals,directories, annual reports, Bangladesh bank publications, BASIC BankLtds Annual Report etc

Internet: Internet was another major secondary source that we have usedto collect related information to conduct the study.

Newspapers: We have collected some information from the variousdailies and business articles.

1.5.2: Data analysis and Interpretation:

Both quantitative and qualitative analysis will be performed on the findings.The quantitative analysis will be done on the trend of export- import, growth pattern of export-import, pre and post facilities provided for easing the

export-import operations. Qualitative analyses will be based on themacroeconomic variables and foreign exchange policy provided byBangladesh bank, the central bank of Bangladesh. Different statistical toolswill be used for the analysis of the findings.

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1.6:Limitations of the study:To provide current information and to make the report read-worthy, support fromvarious sources is essential. In spite of having my wholehearted effort, I could notcollect some information required at the time of the study. So this study is not freefrom the following limitation:

Due to unavailability of latest annual report (Annual report 2008), I have to prepare the report on the basis of annual report 2007.As a result, analysis,presentation of data may not show the existing position/present condition ofBASIC Bank Limited.

For the whole internship I had only 90 days, out of which I get 80 days because of late commencement of internship program, which were totallyinsufficient. So I faced time shortage.

Lack of previous experience to prepare this type of report and it is totally newto me as an intern.

Foreign exchange division follows Uniform Customs and Practice for

Documentary Credits

(UCPDC), but within this short period, I was totallystunned to understand.

Learning all the banking functions within these short times was reallydifficult.

Another limitation of this report is Banks policy of not disclosing some dataand information for obvious reason, which could be very much helpful.

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Chapter 2

Overview of BASIC Bank Limited

2.1: Historical Background

The Bank of Bangladesh Small Industries & Commerce Limited (BASIC)established as Banking Company under the Companies Act 1993 on the 2nd ofAugust, 1988, started its operations from the 21st of January, 1989. The Bankingcompanies Act 1991 govern it.At the outset, the Bank started as a joint venture enterprise of the Bangladesh CreditCommerce (Bcc) foundation with 70 percent shares and Government of Bangladesh(GOB) with the remaining 30 percent shares. The BCC Foundation being nonfunctional following the closure of the BCCI, the Government of Bangladesh tookover 100 percent ownership of the Bank on 4th June 1992. The bank was establishedas the policy makers of the country felt the urgency for a bank in the private sector

for financing Small scale Industries (SSI).BASIC is unique in its objectives. It is a blend of development and CommercialBanks. The memorandum and Articles of Association of the Band stipulate that 50%of Loan able funds shall be invested in Small and Cottage industries Sector.

Table 1: Banks Capital Position

Authorized capital

(million taka)

Paid up capital

(million taka)

Total reserve & surplus

up to 2007(million taka)

2000 1247.40 1349.17*The Bank is required to transfer 20 percent of its net profit before Tax to Capital Fund as

per the Banking Companies Act 1991

2.2 Functions

The Bank offers-

Term Loans toindustries especially to Small-Scale enterprise.

Full fledgedcommercial banking Service including collection of deposit, short term tradefinance, Working capital finance in processing an manufacturing units andfacilitating international trade.

Financing & Technicalsupport to Small Scale Industries (SSI) in order to enable them to run theirenterprises successfully.

Micro Credit to theurban poor trough Linkage with NGOs with a view to facilitating their access tothe formal financial market for the mobilization of resources.

Financing in importand export business like other commercial Banks.

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General bankingfacility like Certificate of Deposits, Fixed Deposits Receipts, Savings account,Short Term Deposits, Foreign Currency Account etc are available here.

At a Glance of BASIC Bank Limited

NAME BASIC BANK LIMITED

Date of incorporation August 2, 1988

Date of inauguration of operation January 21, 1989

Registered office Bana Shilpa Bhaban73, Motijeel Commercial AreaDhaka-1000, Bangladesh.

Head Office Sena Kalyan Bhaban(6th floor)

195, , Motijeel Commercial AreaDhaka-1000, Bangladesh.

Logo

Name of the chairman of the Board Mr.Dewan Zakir HussainName of Managing Director Mr.AKM. Sajedur RahmanNumber of Branches 32

Services provided Deposit scheme, Credit facility and foreignexchange services

Paid up capital Taka 1247.40 million

Profit after tax and provision Taka 282.96 million

Ownership Government of BangladeshBanking software used CASTLETM

Technology used Member of SWIFT

Earnings per share 22.68(2007)

E-Mail [email protected]

Website www.basicbanklimited.com

SWIFT BKSIBDDH

Number of Authorized Dealer 15

Table 2:At a Glance of BASIC Bank Limited

2.3 Corporate Strategy

Financingestablishment of Small units of industries and business and facilitate their growth.

Small Balance sheetsize composed of quality assets.

Steady and sustainablegrowth.

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Investment in acautions way.

Adoption of newbanking technology

2.4 Organizational Goal

To employ funds for profitable purposes in various fields with special emphasis on small-scaleindustries.

To undertake projectpromotion to identify profitable areas of investment.

To search for neweravenues for investment and develop new products to suit such needs.

To establish linkagewith other institutions which are engaged in financing micro enterprises?

2.5 Lending Criteria

2.5.1 Entrepreneur

Entrepreneur/Promoter has to be creditworthy and competent enough to run theproposed project efficiently.

2.5.2 Viability of the Project

The project should be viable in line with organizational, technical, commercial,financial and economical points of view.

2.5.2.1 Technical Viability

Technical processproposed should preferably be a proven one.

The project should betechnically sound and environment friendly.

Technology transfer incase of borrowed know how ought to be ensured.

Building should be

well planned and well constructed at a suitable location.

2.5.2.2 Commercial Viability

Market prospect andpotential for the product has to be fully assured at competitive prices.

Marketing channelsexisting for the product should be accessible to the entrepreneurs.

2.5.2.3 Financial Viability

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There should bereasonable debt equity ratio as determined by the Bank on individual case basis.

Debt service coverageratio should be at least 2.5 times at the optimum level of production.

IRR should preferablybe not less than 20 percent

2.5.2.4 Economic Viability

The project shouldbenefit the national economy by creating employment and increasing income.

Savings/Earnings offoreign currency may give an additional dimension.

2.6 Organizational Structure

To achieve its organizational goals, the bank conducts its operation in accordancewith the major policy guidelines laid down by the Board of Directors, the highestpolicy making body. The management looks after the day-to-day operation of thebank.

2.6.1 Board of Directors

The Government holds 100% ownership of the bank. The Government ofBangladesh appoints all the directors of the Board. The Secretary of the Ministry ofIndustries is the chairman of the bank. Other directors of the bank are highgovernment and central Bank executives. The Managing Director is an ex.-officiomember of the Board of Directors. There are at present 7 directors including theManaging Directors of the Board. The present Board of Directors of the Bankconsists of the following members.

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NAME OF BOARD OF DIRECTORSAs on March 31, 2008

Name & Designation of Board of Directors

[1]

Mr.Dewan Zakir Hussain

Chairman

BASIC Bank Limited&

SecretaryMinistry of IndustriesGovt. of the PeoplesRepublic of Bangladesh

[2]

Mr. Mohammad

Mahmubur

Rahman

Director

BASIC Bank Limited&

ChairmanBangladesh Small andCottage IndustriesCorporation(BSCIC)

[3]

Dr. Mahbub Ahmed

Director

BASIC Bank Limited &Joint Secretary

Ministry of FinanceGovt. Of the Peoplesrepublic of Bangladesh.

[4]

Mr. Md.EhsanulHoqueDirector

BASIC Bank Limited&

Director GeneralChief Advisers Office

[5]

Mr. MostofaMohiuddin

Director

BASIC Bank Limited&

Joint SecretaryMinistry of CommerceGovt. of the PeopleRepublicof Bangladesh

[6]

Mr. AsaduzzamanKhanExecutive Director

BASIC Bank Limited&

Executive DirectorBangladesh Bank.

[6]

Mr. AKM. Sajedur Rahman.

Managing Director

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BASIC Bank Limited.Head Office

Dhaka.

Company Secretary

Mr.Md.Mesbaul Haque

Company Auditor

ACNABIN

Chartered Accountants

Table 3: Board of Directors

2.6.2 Management

The management is headed by the Managing Director. He is assisted by the GeneralManager and Departmental heads in the head office. BASIC is different in respect tohierarchical structure from other bank in that it is much more vertically integrated as for asreporting to the chief Executive is concerned. The Branches in charge of the Bank reportdirectly to the Managing Director and for functional purposes, to the Head of Departmentconsequently, quick decision making in disposal of cases is ensured.

[ORGANOGRAM OF BASIC BANK]

11

GM

(Operation)

IndustrialCredit

Division

PersonalDivision

CentralAccounts

Establishment

&

Branch Control

GM(Audit & Inspection)

DEVELOPMENT

GM

(Admin)

CreditDivision

InternationalDivision

BOARD OF DIRECTORS


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2.7 Resource & CapabilitiesBASIC is well prepared to and capable of meeting the demand for a broad range ofbanking services. It has got adequate resources, both human and physical, to providethe customers with best possible services.

2.7.1 Physical and Technological Resources

A great deal of investment for devolving the physical resource base of the bank hasbeen made. BASIC has its presence in all the major industrial and commercial hubsof Bangladesh in order to cater the needs of industry and trade. At present, there areThirty two conveniently located branches throughout Bangladesh. There are 11branches in the capital city of Dhaka, 7 in Chittagong and one each in Narayangonj, Narshingdi, Rajshahi, Saidpur, Bogra, Khulna, Jessore, Sylhet, Moulivibazar,Barisal, Comilla, Gazipur, Sirajgonj and Dewanghat.

Major features of these branches:

12

Manager

Deputy

Assistant

Assistant

Senior Officer

Officer

Clerical Staff: Banking Staff

Go-down Staff

Non-Clerical Staff:

Messenger Staff


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Figure 1: Employee position of BASIC Bank limited

2.7.2.1: Recruitment

The Bank follows a strict recruitment policy in order to ensure that only the bestpeople are recruited. The bank, so far, has recruited four batches of entry-levelmanagement staff, all of who have got excellent academic Background.

2.7.2.2: Training

Intensive training program, on a regular basis, is being imparted to employees ofboth management and non-management levels to meet the challenges in the bankingindustry and to help employees to adapt the changes and new working conditions.Human resource is the main driving force and quality human resources are the keysources for the success of today's banking business. Keeping this view in mind andrecognizing the importance of training for professional excellence BASIC Bank Ltd.has established its own training cell in 2005 with modern facilities. In 2007 the cellarranged 22 training courses and provided training to as many as 360 employees ofthe bank. To cater the needs of the employees and to keep pace with demand of thetime it will continue to arrange regular training courses in the days ahead. The bankalso sends its employees to BIBM and other local and foreign institutions with a

view to sharpening their knowledge base. During the year 2007, a total of 379employees of the Bank were provided with training in various fields. Out of them 16employees participated in training courses held abroad.

2.7.3 Financial Resources

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Like any other financial intermediaries, BASIC is no exception in performing itscore function viz. Mobilization of fund and utilizing such mobilized fund forprofitable purposes.

2.7.3.1 Mobilization of FundsThe main sources of fund for BASIC are:1) Deposit2) Borrowing

(1) Deposit: Deposit is the mainstay of BASICs sources of fund. Following usualpractices, it collects deposit through:

Current Deposit

Saving Deposit

Fixed Deposit

Others (Margin A/c, Retention quota A/c etc.)

Figure 2: Deposits mix of BASIC Bank Limited in 2007

(2) Borrowing for Development Finance: Apart from deposit BASIC received fundsfrom the following sources:

Bangladesh Bank. Asian Development

Bank.

KfW (Kreditanstalt furWieder-aufbau- Credit Institution for Reconstruction), a German DevelopmentBank.

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All of these funding sources fund are for relatively longer period. Receiving the creditlines from ADB and KfW has been recognition of BASICs highly satisfactoryperformance.

Table 5: Borrowing for Development Finance (Taka In million)

Year 2004 2005 2006 2007Amount 839.61 937.52 830.06 1385.81

2.7.3.2 Utilization of Funds

Utilization of banks fund was more of less satisfactory during the year 2007. Giventhe difficult economic situation, the management of bank focused on theconsolidation and quality of assert rather than in growth. The total assets of the Bankincreased to Taka 38,773.91 million at end 2007 from Taka 29,417.09 million in theprevious year. The growth rate was 31.81 percent. Deposit rose from Taka 31,947.98million (82.40% of total liabilities) in 2007 to Taka 24,084.65 million (81.87% of

Total liabilities) in 2006 showing a growth rate of 32.65 percent.

2.7.3.2.1: Banks Assets

During the year 2007, total assets of the bank increased by 31.81 percent to Taka38,773.91 million from Taka 29,417.09 million in 2006.As expected for a bank,loans and advances comprised the largest share in the assets portfolio of the Bankconstituting 57.51 percent. Balances with other banks and financial institutions andinvestment were the second and the third largest constituents being 17.89 percent and13.67 percent of the assets portfolio respectively. Cash & money at call and shortnotice came next in size with 5.48 percent and 3.40 percent of the total assets

portfolio.

Balance sheet of BASIC Bank Limited as on December, 31, 2007

BASIC Bank Limited

Balance Sheet (Partial)

As on 31.12.2007

Particulars Amount (BDT)

%

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Property and Assets

Cash 2,125,018,037.00 5.48%

Balance with other Banks and financial institutions 6,937,531,606.00 17.89%

Money at call and short notice 1,320,000,000.00 3.40%

Investments 5,303,391,104.00 13.68%

Loans And Advances: 22,263,349,608.00 57.51%Fixed Assets including premises: 196,107,160.00 0.51%

Other Assets: 579,144,820.00 1.49%

Deferred Tax Assets 49,363,500.00 0.13%

Non-Banking Assets - 0%

Total assets 38,773,905,835.00 100%

Table 6: Balance sheet as on December, 31, 2007

2.8 Performance of Bank

The performance of BASIC has been satisfactory since its inception in respect to allthe measurement parameters, a good year for the Bank again. It performed fairly in2007 in spite of severe competition in the banking sector of the country. The Boardof Directors was happy with the overall performance of the Bank, particularly formaintaining quality of assets and improving shareholders value.

During the year 2007, total assets of the Bank increased by 31.81 percent to BDT38,773.91 million from BDT 29,417.09 million in 2006. As expected for a bank, loanand advances comprised the largest share in the assets portfolio of the Bankconstituting 57.51 percent. Total deposits of the bank at the end of 2007 stood atTaka 31,947.98 million (82.40% of total liabilities) compared to taka 24,084.65

million (81.87% of total liabilities) in 2006. Performance and position of BASICBank Limited are shown in the next page.

2.8.1 Dividend

In the year 2007 the Bank declared (1:20) bonus share amounting to BDT 62.37million (6.237 crore). And 5% cash dividend amounting to BDT 62.37 million(6.237 crore). All of these have gone to the sole shareholder, the Ministry ofFinance.

BASIC Bank Limited

Head Office, DhakaBUSINESS POSITION OF BASIC BANK LTD AT A GLANCE

Table 7:

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BASIC BANK LIMITED

GROWTH AT A GLANCE

Table 8

18

SI.#

Particulars Position as on2007

Position as on

2006

Position as on

2005

Position as on2004

1 2 3 4 5 6

01. Paid Up Capital 1,247,400,000 945,000,000 810,000,000 675,000,000

02. Total capital 2,947,858,896 2,489,523,909 1,952,002,043 1,623,732,250

03 Capital surplus/(deficit) 663,726,896 619,126,000 445,474,000 453,632,080

04 Total Assets 38,773,905,83

6

29,417,094,93

9

27,136,370,67

6

19,436,566,270

05 Total Deposits 31,947,979,101

24,084,659,391

22,325,581,340

15,509,176,960

06 Total loans & Advances 22,263,349,608

19,000,004,688

15,339,350,847

12,000,145,123

07 Total contingentliabilities & commitments

10,189,525,373

8,579,394,196 6,102,505,592 5,580,954,700

08 Credit-deposit ratio 69.69% 78.89% 68.71% 77.37%

09 Percentage of classifiedloans against total loans

and advances

3.25% 3.70% 4.55% 3.70%

10 Profit after tax andprovision

282,965,086 554,138,494 285,494,792 291,484,207

11 Amount of classifiedloans and advances

723,233,815 703,269,923 698,443,122 443,854,593

12 Provision kept againstclassified loan

436,543,180 323,218,141 274,845,923 179,798,406

13 Provision surplus /(deficit)

0 0 734,147 8,050,949

14 Cost of funds 8.31% 6.77% 7.34% 6.86%

15 Interest earning assets 35,046,030,90

0

26,469,275,53

6

24,437,566,81

4

17,449,378,068

16 Noninterest bearingassets

3,727,874,936 2,947,819,403 2,698,803,862 1,987,188,202

17 Return on investment 7.89 % 5.78 % 6.59% 6.50%

18 Return on Assets .83 % 1.94 % 1.23% 1.68%

19 Incomes on Investment 206,480,219 225,733,106 162,531,619 132,356,456

20 Earnings per share 22.68 58.64 25.25 35.99

21 Net income per share 22.68 58.64 25.25 35.99

22 Price earning ratio N/A N/A N/A N/A


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(Taka in million)

Continued..

(Taka in actual value)

19

SL. Particulars Position as on

2007

Position as on

2006

Position as on

2005

Position as

on 2004

6. Total Classified Loan

(a) Sub-standard 25,738,415 27,157,947 12,285,090 27,060,600

(b) Doubtful 88,173,184 33,957,068 20,458,450 3,081,500

(c) Bad/Loss 609,322,215 642,155,358 242,102,384 141,626,000

7. Foreign Exchange Business Position:

a) Import 21,266,570,000

17,804,270,000

14,094,960,000

12,507,80,000

b) Export 16,794,960,00

0

15,463,740,00

0

11,097,230,00

0

79,080,000

c) Income fromRemittance

6,069,670,000 4,231,450,000 5,766,150,000 4,055,380,000

8. Number ofBranches

30 28 27 27

9. Number ofemployees

721 651 601 578


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2.9: Orientation of BASIC Bank Limited, Bangshal Branch:

BASIC Bank Limited, Bangshal Branch is located in 230, North south road,Bangshal, Dhaka-1000. The branch consists three divisions (General banking, Loansand Advances and Foreign Exchange) and I worked in Foreign Exchange division.The In-charge of the branch is Assistant General Manager and the lower rank isassistant officer. The positional hierarchy of BASIC Bank Limited, Bangshal Branchis given bellow:

Assistant General Manger (1)

Manager (3)

Assistant Manager (7)

Officer (6)

Assistant Officer (1)

Staff (5)

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Graphical Presentation

Figure 3: Combination of Deposits & loans and Advances

Figure 4:

Gross

income &

Expenditure

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Figure 5: Amount of profit before & after tax

Figure 6: Amount of Tax paid (Cumulative)

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Figure 7:Year-wise Loan portfolio

Figure 8: Core capital position of BASIC Bank Limited.

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Figure 9: Classified loan during 2007

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Chapter 3

Terms used in foreign exchange operations

Foreign exchange, like foreign trade, is a part of economic science. It deals with the

means and methods by which rights to wealth in one countrys currency are

converted into those of another country. By the same token, it covers the methods

used for conversion, the forms in which such conversions take place and the causes

which render this conversion necessary. Foreign Exchange means exchange foreign

currency between two countries. If we consider Foreign Exchange as a subject,

then it means all kind of transactions related to foreign currency. In other words

foreign exchange deals with foreign financial transactions.

Activities of Foreign Exchange:

There are three kinds of foreign exchange transactions:

Import

Export

Remittance

3.1 Import:

Under the import policy of Bangladesh the Importer has get the valid Import

Registration Certificate (IRC) from the Chief Controller of Import & Export

(CCI&E).

3.1.1 Letter of credit:

Letter of credit means any arrangement whereby a Bank (the issuing Bank) is

committed (on behalf of the buyer/applicant) to pay certain amount at the sellers

disposal under some agreed conditions.

Types of documentary credit:

Documentary credit may be of three types-

Recoverable credit

Irrecoverable credit

Add confirmed credit

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3.1.2 Recoverable credit:

This type of credit can be cancelled or amended at any time by the issuing Bank

without prior notice to the seller. It is not in use.

3.1.3 Irrecoverable credit:

This type of credit cant be cancelled or amended by the issuing Bank without

agreement of parties concerned thereto. All the credits issued in our country are of

recoverable nature.

3.1.4 Add confirmed credit:

When a third Bank provides guarantee to the beneficiary to make payment, if issuing

Bank fail to make payment, the L/C is called confirmed L/C. In case of a conformed

L/C a third Bank adds their confirmation to the4 beneficiary, to make payment, in

addition to that of issuing Bank. Confirmed L/C gives the beneficiary a double

assurance of payment.

3.1.5 Special documentary letters of credit:

The following five major steps are involved in the operation of a documentary letter of

credit:

Opening

Advising

Amendment

Presentation

Settlement

3.1.6 Import Financing:

The post import finance extends the import credit in the following forms:

PAD (Payment against documents)

LTR (Loan against trust receipt)

LIM (Loan against imported merchandise

3.2 Export:

Under the export policy of Bangladesh, the exporter has to get the valid export

registration certificate (ERC) from chief controller of export & import (CCI&E). The

ERC is required to renew every year. The ERC number is to be incorporated on

export Form & other paper connected with exports.

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3.2.1 Receiving the letter of credit:

After getting contract for sale, exporter should ask the buyer for L/C clearly starting

terms & condition of export & payment.

3.2.2 Procuring the materials:

After knowing that the L/C has opened in his favor, the next step for the exporter is

to set about the task of procuring or manufacturing the contracted merchandise. If the

exporter has to procure the raw materials from another supplier (local or abroad) he

has to open Back-to-Back L/C.

3.2.3 Back-to-Back L/C:

Back-to-Back L/C is one type of L/C, which is opened against lien on a valid export

L/C. It is opened for inland & abroad as well. Bank will supply the following

papers/documents for opening a Back-to-Back L/C.

L/C application form

LCA form

IMP form

Charge document papers

The above papers must be completed, filled & signed by the party thereto. The party

will submit the entire filled document along with application in printed form of the

designated Bank which is also an agreement between application & the Bank.

3.2.4 Export Financing:

An export is who exports the goods to another customer whether in domestic country

or in abroad. In exporting the stipulated goods he may require financing. So export

financing may be required at two stages.

Pre shipment credit

Post shipment credit

3.2.4.1 Pre shipment credit:

Pre shipment credit is the credit, which is given to finance the export activities of anexporter for the actual shipment of goods. The purpose of each credit is to meet the

working capital needs from the procuring of raw materials to the transportation of

goods for the export the foreign country. Before sanctioning of that credit the Bank

takes into consideration the credit worthiness, export performance of the exporters

together worthiness all other information required for sanctioning the credit in

accordance with the existing rules & regulations.

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3.2.4.2 Post shipment credit:

There is a time gap between export of the goods and realization of the proceeds. So

exporter may require finance in that period to continue his business. So Bank may

finance against export documents ensuring the following:

Export documents comply with the credit terms

Partys past performance is satisfactory

Any other security in case of exporting under contract

3.3 Foreign Remittance:

Foreign remittance means remittance of foreign currencies from one place/person to

another place/person. In broad sense, foreign remittance includes all sale and purchase of

foreign currencies on account of Import Export, Travel and other purposes. However,

especially foreign remittance means sale & purpose of foreign currencies for thepurposes other than export and import. BASIC Bank Limited performs the remittance

function with different countries. It maintains the foreign remittance in the following

form:

Foreign Demand Draft

Inward

Outward

3.3.1 Foreign Demand Draft (FDD):

A foreign demand draft is a negotiable instrument issued by a Bank drawn on otherBank with another country the instruction to pay a certain amount to the beneficiary

on demand. Remittance through demand draft may be inward or outward.

3.3.2 Inward Remittance:

Inward remittance refers to the extent where the bank makes payment to the client

against foreign demand draft. Bank will make payment to the client by verifying the,

test number, and signature of the authorized officer.

3.3.3 Outward Remittance:

It refers to the extent where by the bank issues foreign demand draft. The bankcharges TK.300 per Demand Draft.

Two forms are used for Outward Remittance of foreign currency such as:

IMP Form: All outward remittance on account of Imports is done by from IMP.

TM Form: For all other outward remittance from TM is used.

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Chapter 4

Foreign exchange Operations

4.1: Introduction:

The foreign exchange has played a vital role in the last decade or so in guiding the

purchase and Sale of goods, services and raw materials globally. Every country has

certain natural advantages and disadvantages in producing certain commodities while

they have some natural disadvantage as well in other areas .As a result, we find that

some countries need to import certain commodities while others need to export their

surpluses .Foreign trade brings the fruits of the earth to the homes of the humblest

among the countries .These transactions are the basis upon which international trade

is made.

As more than one currency is involved in foreign trade, it gives rise to exchange of

currencies, which is known as Foreign Exchange .The term Foreign exchange has

three principal meanings .Firstly, it is a term used referring to the currencies of other

countries on terms of any single one currency .To a Bangladeshi, Dollar, PoundSterling, etc. are foreign currencies and as such foreign exchanges. Secondly, the

term also commonly refers to some instruments used in international trade, such as

bill of exchanges, drafts, travelers cheques and other means of international

remittance. Thirdly, the term foreign exchange is also quite often referred to the

balance is foreign currencies held by a country. In the fiscal year 2007-2008,

Bangladesh economy was confronted with serious challenge, among others, the

impact of divesting floods, the excessive price hike of oil, global financial crisis and

some other importable in the international market, in addition to the termination of

the multi fiber arrangement (MFA). To cope with these challenges, the government

and the Bangladesh Bank adopted a series of policies to enhance the resilience of theeconomy, while maintaining macro economic stability. These polices significantly

contributed toward maintaining real Growth Rate of Bank 5 percent in the fiscal year

2007-2008.

Again, Foreign Exchange deals with the means &methods by which rights to wealth in

one country's currency are converted into those of another currency. It is a part of

economic science of foreign trade. By the same view, it covers the methods used for

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conversion, the forms in which such conversions take place and causes which render

these conversions necessary.

In Bangladesh, we have the unit of money is 'Taka' for domestic transaction; also

have other obligations by exchanging foreign currencies. To meet-up the obligation that

arise import of goods & services from other countries, other foreign necessity, that part ofthe economic science, which deals with the conversion of domestic currency into

foreign currency for the purpose of setting international obligations, is called Foreign

Exchange.

There are three types of modes of foreign exchange market, which are as follows:

Export Finance

Import Finance

Foreign Remittance

Foreign trade finance:

So far the bank has established correspondence relationships with as many as 22foreign banks in order to facilitate foreign trade. The Bank handled total exportbusiness of Taka 16,794.96 million and import business of Taka 21,266.53 million in2007.The Banks export and import business grew by 8.61 percent and 19.45 percentrespectively. Major items of exports were ready made knit & woven garments,sweater, jute products, leather and leather goods, handicrafts etc. Items of importincluded mainly industrial raw materials, garments accessories, and capitalmachinery, raw cotton, electronic consumer goods, chemicals, tyres and tubes,reconditioned vehicles, bicycle spare parts, food items such as rice, wheat, garlic,onion, sugar, chilly and other essential commodities.

4.1.1: EXPORT FINANCE:

In case of export business finance is perceived as one of the important elements. It islinked to nearly all the stages of conversion cycle- procurement of raw materials,processing of goods, packing storage, transportation to the port, shipment to the buyer,

assembling of shipping documents & finally, collection of payments. The term ExportFinance should therefore mean moneys needed by an exporting farm at each stage ofthe conversion cycles.

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4.1.1.1: Export financing sectors of BASIC Bank Limited:

Export financing can play a vital role in the development process of Bangladesh.With earning on export we can meet our import bills. The export trade is alwaysencouraged because the major portion of foreign exchange earning is derived from

export. Because of shortage of adequate capital exporters have to come in contactwith commercial bank and financial institution to get finance from them. BASIC bank Limited as a state-owned scheduled bank provides certain facilities to theexporters to boost up export earnings.The traditional & non-traditional sectors in which BASIC Bank Limited providesexport-financing facilities are as follows:

Ready Made Garments in all sorts.

Jute manufactures

Jute - raw & meshta

Fish & Prawns.

Hides, Skins & Leather. Tea

Fertilizer etc.

4.1.1.2: Export financing system of BASIC Bank Limited:Bangladesh as a developing country depends mainly on foreign exchange earning forits development activities. The major portion of foreign exchange earnings is derivedfrom export obviously, to boost export, government provide certain incentives to theexporters namely:

Export Financing

Development Financing

Export Credit Guarantee Scheme

Export performance benefits

Duty draw back

Rebate on duty & tax

Income tax rebate

Insurance premium rebate

Conditional cash subsidy to Garments Industry , vegetables, handicrafts etc

4.1.1.3: PRE-SHIPMENT & POST-SHIPMENT:In BASIC Bank Limited export finance is required by the exports at two stages namelyPre-shipment & Post-shipment stages:

1. Pre-shipment: It is required to purchase of raw materials, to meet cost of production, procurement of exportable goods, packing, transport, payment ofinsurance premium, inspection fee, freight charges, ware housing etc.

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2. Post-shipment: It is required by the exporters after actual shipment of goods inorder to bridge the period between shipment of the goods and receipts of salesproceeds from abroad.

An exporter owns resource may not be adequate to meet all such expenses. So he / she hasto come in contact with commercial bank and financial institutions to get finance

from them. As a state owned scheduled bank BASIC Bank Limited provides credits toexporters at a consideration rate of interest as an export promotion measure as pergovernment directive.

4.1.1.4: PRE-SHIPMENT FINANCING OF FOREIGN EXCHANGE:The classes of pre-shipment financing extended to the exporters by the BASIC Bank Limitedare as follows:

4.1.1.4.1: Export Cash Credit - Pledge:

This facility is allowed for a short period. Under this credit the exportable goods are kept underthe effective control of bank either at exporter's go down or bank own go down. In either of the

cases, the bank engage full time security (chowkider) to observe over the goods & themovement the goods are done under the supervision of the bank who maintain its properrecords through go down storage, challan, delivery order, go down register etc.

4.1.1.4.2: Export Cash Credit - Hypothecation:

This advance is allowed for a short period or 3 to 6 months mainly to purchase raw

materials or for procurement of exportable goods. So virtually the goods are kept under

the control of the exporter but by creating charge on the goods at the time of disbursing

credit. The bank has the right to take possession of the goods. The exporter will submit

stock report to the bank usually on monthly basis & the bank will verify them.

Documents & Security to be obtained:

Exportregistration certificates (ERC)

Bank usually charge documents to be signed by exporter or his / her dulyauthorized agent.

Confirmed irrevocable export letter of credit or firm contract made by thebuyer with the exporter.

Insurance coverage Collateral securities.

4.1.1.4.3: Packing Credit:

This facility is generally extended when the goods become ready for shipment for a

very short period usually from the date of dispatch of the stock from the go down up

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to the date of actual shipment of the goods that is for the transit period of shipment

for further purchase of raw materials or procurement of exportable goods by exporter.

4.1.1.4.4: Back to back letter of credit:

Pre-shipment facilities are also credited in the form of back- to-back letter of credit. When

the beneficiary of an export letter of credit is not the actual manufacturer or producer of

exportable goods mentioned in the relative export letter of credit as securities with his /

her banker for procurement of exportable goods to enable him /her to execute the export

letter of credit and such letter of credit is called inland back to back letter of credit.

Precautions used by BASIC Bank Ltd to sanction pre-shipment credit:

Before making lien on the original export letter of credit all the terms and

conditions should be scrutinized so that no detrimental clauses including violation of

foreign exchange regulation and UPCDC terms are included there in.

Expiry date of letter of credit should be properly recorded in the book and no

drawing is to be allowed against expired letter of credit.

The credit worthiness or solvency of the foreign buyer as well as the exporters

must be ascertained before hand.

In case of mortgage of properties as collateral securities, the bank by engaging

lawyer together with valuation certificate from proper authority must scrutinize therelative documents.

The exporter should arrange forward sale of foreign exchange loss at the time of

negotiation of export documents.

In case of packing credit, the export letter of credit and relative documents have to

submit in, such a way that the bank may not face any problem in negotiation of shipping

documents in due course.

To dispatch goods for shipment to post under packing credit the bank must

verify the shipping mark on the each packet or cartoon and the relative invoice.

4.1.1.5: POST-SHIPMENT FINANCING OF FOREIGN EXCHANGE:

Post shipment financing refers to the credit facilities extended to the exporters by BASIC

Bank Ltd after actual shipment of the goods against export documents. BASIC Bank Ltd

generally finance the exporters at post shipment stage after verifying the credit worthiness and

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export performances of the exporters as well as the reputation and financial soundness of

the foreign buyers provided the shipping documents are drawn strictly in accordance

with letter of credit terms and in accordance with foreign exchange regulation in force.

Post shipment financing is extended to the exporters by the following terms:

Negotiation of export documents under letter of credit.

Purchase of askance bills drawn on D. A. basis.

Providing loan against export bills tendered collection.

Discountingof export bills.

A.Negotiation of export documents under letter of credit:

Most important and widely used method of financing export at post-shipment stage isnegotiation of export documents. After the shipment of the goods the exporter generally

submits the following documents to the bank for negotiation:

Bill of exchange.

Bill of lading or air way bill.

Commercial invoice - eight copies within these four original copies.

Custom invoice of importer's country.

Certificate of origin-original copy.

Packing list - eight copies within these four original copies.

Weight certificate.

Declaration of shipment to the insurance company.

Pre-shipment inspection certificate.(CFR-Clean Reports of Findings)

Quality control certificate when required.

Acknowledgement letter indicating received sample / approval letter.

Frig

htful letter.

Any

other document if called for letter of credit.

B. Purchase of uses bills drawn on D.A. basis:

Sometimes export letter of credit stipulates payment at 30 to 40 months; the period is called

askance period. The bills drawn under this letter of credit is termed as askance bill. On

presentation of documents foreign buyers give written acceptance on the bill of exchange to

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pay after the askance period. In dealing such documents the banker must take proper pre-

caution to realize the proceeds in time.

C. Providing loan against export bills tendered for collection:Export bills are sending abroad generally by banks on collection basis in the following cases:

Export bil ls not drawn under letter of credit. Bills drawn under letter of credit but contains.

Against the above collection documents bank may allow loans keeping substantial margin

on the basis of banker customer relationship with the exporter. While handling such documents

the banker must remain vigilant to refer the exporter proceed with a view to adjust the credit so

extended.

D. Discounting of export bills:

When the export bills are not drawn under letter of credit or the goods send on consignment

basis, the exporter may approach the bank for discounting the export bills on commission

basis. Bank generally does not accept such proposal excepting on exceptional cases. If the

exporters have very good credit worthiness and previous good export performance and

foreign buyers have also good report & good reputation for past transaction.

4.1.1.6: Export Form:

The customer, now issued by the authorized dealers, must declare all export of whichthe requirement of declaration of exchange control manual of Bangladesh Bank applies onthe Export Forms.Disposal of Export Forms:

Origin:From custom authority to Bangladesh Bank (ECD ) after shipment goods.

Duplicate:From negotiating bank to Bangladesh Bank after negotiation.

Tripl icate:From negotiating bank to Bangladesh Bank after realization of the proceeds ofthe exportbill.

Quadruplicate: Retained by the negotiating bank as office copy.

4.1.1.7: Export Development Fund:

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The main objective of creating an export development fund at the Bangladesh Bank is to

assure a continued availability of foreign exchange to meet the import requirement of

non-traditional manufactured items, this facility is available to the non-traditional exporters,

particularly newer exporters, exporters diversify into higher value export and exporters

diversify into new markets. An exporter identified above is eligible on the basis of the

conditionally stated below: -

One must be an exporter of non-traditional manufacturing items.

The value added of these products could be 20% except in the case of garments

where it has to be 30% & above.

The loan should be utilized in the case of importing raw materials for

manufacturing the exportable products.

The exporter must have an export letter of credit.

One must create a back-to-back for importing raw

materials. The period of loan is 180 days.

4.1.1.8: Scrutiny of Export Document:

After the shipment of goods the exporters submit export documents to authorized dealer

for negotiation of the same. As bankers deal with documents only, not with commodity

they are required to be very much careful about the genuineness and correctness of the

documents evidencing shipment of the respective commodities. The bankers are to ascertain

that the documents are strictly as per the terms of letter of credit. Before negotiation of the

export bill, the bankers are to scrutinize and examine each & every document with greatcare. Negligence in the part of the bankers may result in non-repatriation or delay in

realization of proceeds as incorrect documents may put the importers abroad into unnecessary

troubles. The scrutiny procedure is as follows:

I. Scrutiny of Draft or Draft of Exchange:

The draft should be drawn by the party indicated as the beneficiary of the crediti.e. the exporter; drawee must be in accordance with the terms of the credit.

The tenor and amount of the draft be in conformity with the credit terms.

The bill of exchange should be properly stamped if necessary with the requisitevalue and the cost must be recovered from the drawers unless it is providedotherwise in the letter of credit.

The draft or bill must bear the correct date and must be drawn or endorsed tothe order of the bank.

The drawer's signature must be verified.

II. Scrutiny of invoice:

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The physical description of the goods i.e. price, quantity, quality, markings etc. in

the invoice must correspond with the specifications in the credit.

If the credit stipulates a consular invoice, the requisite invoice should be

furnished. All copies must be signed and certified as correct shipper.

If the credit stipulate for any other particulars to be stated in the invoice these

must complied with. It should not include charges such as postage; cable etc. unless

specifically authorized under the credit.

III. Scrutiny of shipping bill:

The bill of lading should be a full set clean on board ocean bill of lading, unless

the credit stipulates otherwise. 'Received for shipment' bills of lading must not be

accepted unless permitted by the credit.

It must agree with the invoice as regards quantity and description of goods as

well as in respect of ports of shipment and destination.

The bill of lading must also indicate where it is 'freight paid' (C & F, GIF) or

freight payable at destination (FOB transaction).

Transshipment and port shipment clauses in the shipping bill should be in

accordance with credit terms and the provisions of the uniform custom and practice.

Credit frequently stipulates for shipment not letter than a specified date. Bill of

lading must be examined to ensure that these are dated not later than the datementioned.

Must be properly signed by or behalf of the carries, must be properly

stamped

and must be endorsed, expect when the relative credit stipulate for bill of lading to order

of a named firm.

Dock shipment not permitted unless specifically authorized and covers by

insurance.

Bill of lading must not be a stale one.

IV. Scrutiny of Insurance:Where insurance is to be effected by the beneficiary for GIF consignment, the policy

accompanying the documents should be examined to ensure:

That the insurance covers the merchandise for the value stipulated in the credit.

That the document is of the class stipulated in the credit.

That the insurance documents describe the merchandise covered and mention the

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name of the carrying steamer. In case where 'on board' bi ll of lading are not

presented the following clause or words of similar indent must follow the name of the

steamer' and / or 'following steamer'.

That all risk stipulate in the credit is properly covered in the insurance

documents. When the credit stipulates that 'all risk' are be covered, it is not sufficient

that various risks are mentioned but a clause to the credit that 'all risk' are covered, is

required.

That the policy is in the name of the bank and the importer.

That the party designed in the documents to perform such act properly

countersigns the insurance document.

That the insurance document complies with the conditions of the letter of credit is

in negotiable form that it is endorsed by the party to when the loss payable, unless the

credit stipulates that the insurance must be issued 'loss payable to a specified party inthe country of destination'.

That the date appearing on the insurance document is not later than the date

appearing on the bill of lading.

That the insurance document covers transshipment when the bill of lading

indicates that transshipment would take place.

That the insurance claims are payable at the port of destination, that insurance

certificate / policy acknowledges the payment of the premium.

V. Scrutiny of other documents:

The other documents i.e. certificate of origin, packing list, weight / measurement

certificate, inspection certificate, survey report, quality control certificate etc. should be issued or

signed by the proper authorized and description of 'export - order' given in these documents

not be in contradiction to the credit terms.

4.1.1.9: RISK OF EXPORT FINANCING:

In the trade - there are so many risk factors involved. In banking sector - the bank face risk

basically from loans & advances and foreign exchange. In this section I discuss the risk of

Export Financing.

While there are many advantages to exporting it is not without risk. In deed there are often

factors present in international market, which make foreign exchange substantially

more risky than domestic ones, including the credit risk of non-payment or non-acceptance

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of the merchandise by the buyer. For international sales, these risks are far more

pronounced than they are domestically. For these reasons BASIC Bank Ltd also

accompanied with elements of uncertainty some which are as follows:

I. Commercial risk:

Insolvency of overseas buyer, which result in non-realization of export proceeds.

Failure of the buyer to retire credit already accepted by him / her in case of

askance bill within stipulated period.

Willful negligence of the importer to accept of pay bill or to accept goods for no

fault of the exporter.

II. Political risk:

Sudden out break of war revolution or civil disobedience in buyer's country.

Imposition of restrictions on remittance on any government action in the

buyer's country which may block or delay payment.

Imposition of trade embargo or blockade against any country.

New import restriction on the buyer or cancellation of the license.

Additional handling transport or insurance charges due to interruption or

diversion of voyage, which cannot be recovered from buyer.

Bankrupt or closure of a bank or stoppage of operation of a bank may hamper

repatriation of exports proceeds of letters of credit opened by such a bank.

Any other cause of loss occurring outside the exporter's country beyond the

control of importer or exporter.

III. Informational risk:

Often credit information on the importer is not available or at best sketchy because buyers

and sellers live in different socio-economic & political environment. It is much harder

to judge the financial strength, reputation, integrity of a buyer who is thousands of miles

away and belongs to a different culture. Moreover, many importers may have good

reputation in their own environment based on local value system; they may - never the less

engage in some surprising business practices when judged by a different set of standard.

IV. Pre-shipment export credit risk:

Pre-shipment export credit risk involves the following additional risks:

There may be diversion of fund because of low interest rate.

Uncertainties relating to non-availability of new materials may hamper

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processing of exportable products.

The exporter may not be able to make shipment within the stipulated time due to powerfailure, strike, natural calamites etc.

The materials under back-to-back letter of credit may not reach well in time toallow the exporter to process goods within the expiry date of original export letter of

credit.

---------------------------------------------------

4.1.2: IMPORT FINANCE:

All over the world there is no country, which can meet its requirements from its own

sources. Some imports raw materials, some finished goods & some food products or other

commodities. As it is in export & import are invariably conducted through commercial

banks. BASIC Bank Limited is engaged to extend the facilities to the importers.After getting the completed registration, application for opening letter of credit is made through

a bank where applicant has a current account. An importer is required to fill up import

application form & letter of credit authorization form (LCAF) & importer has to deposit margin

money to the bank from 5% to 40% of the import value, depending on the credibility of the

importer. After the letter of credit is established the exporter after executing the export,

submits the negotiable document through its bankers and in terms of exporters bank submit the

documents to the corresponding bank of the importer's bank in the country. If the documents are

found correctly fulfilling all the terms & conditions stipulated in the letter of credit the

corresponding bank of import's bank will realize payment that will debited to the importer's

account. In banking term this is known as PAD and the importer has to pay the PAD amount in 30days with the bank interest rate. After 30 days when importer is unable to pay the PAD amount, he

can take documents but the PAD turns into Loan against Trust Receipts (LTR)

4. 2.1.1: Import financing sectors ofBASIC Bank Ltd:

BASIC Bank Limited is one of the financers of import business in our country. In extend

credit, grant and other facilities BASIC Bank Ltd finance to the following sectors:

Machinery & transport equipment.

Petroleum & petroleum products

Textile, yarn, fabrics, article & related products

Chemicals

Bicycle parts

Iron & steels

Cereal & cereal preparations

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Dairy products & eggs

Other including loans & grants.

4.2.1.2: Import financing system of BASIC Bank Limited:

Registration of import

Income tax registration certificate

Partnership deed in the cases of partnership concern

Certificate of registration with the register of joint stock companies

Articles & Memorandum of association in the case of limited companies.

Nationality certificate & Bank certificate

Ownership documents in place of business

Trade license from the relevant authority.

Survey clearance from the relevant authority

Other documents prescribed in the import policy.

4.2.1.3: Import Registration Certificate (IRC):In case of import, IRC is the first necessity for the importer. The IRC is not required

for import goods by government departments, Local authorities, statutory bodies,

recognized educational institutes, Hospitals. In addition, registration is not required for

import goods, which do not involved remittance of foreign exchange like -medicine,

reading materials etc. can be imported without IRC by the users within monetary limit.

Procedure for obtaining IRC:For IRC the interested person / firm's submit the application along with the following

documents directly to the Chief controller of Import & Export respective zonal office (CCI&E):

Income tax registration certificate.

Nationality certificate.

Certificate from chamber of commerce & industry registered trade association.

Bank solvency certificate. .

Copy of trade license.

Any other document if required by CCI&E.

On receiving application the respective CCI&E office will scrutinize the documents,

conduct physical verification, and issue demand note to the prospective importers to furnish

the following documents through their nominated bank:

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Original copy of treasury deposited as IRC fees.

Assets certificate.

Affidavit from 1s'class magistrate.

Rent receipts.

Two passport size photograph.

Partnership deed in case of partnership firms.

Certificate of registration

Memorandum & Articles of association in case of limited company.

After securitization and verification the nominated bank will forward the same to the

respective CCI&E office with forwarding schedule in duplicate through banks

representative. CCI & E then issues import registration certificate to the applicant.

4.2.1.4: IMPORT PROCEDURE:

Imports & Exports (control) Act 1950 regulates the import & export trade of the

country. There are a number of formalities, which on 'importer has to fulfill before

import goods. The importer follows the following steps:

The buyer & the seller conclude a sales contract provided for payment bydocumentary credit.

The buyer instructs his / her bank i.e. issuing bank to issue a credit in favor of the

seller i.e. beneficiary. The issuing bank asks another bank usually in the country of the seller, theadvice or confirms the credit.

The advising or confirming bank informs the seller that the credit has beenissued.

As soon as the seller receives the credit and is satisfied that he / she can meet itsterms & conditions, he/she are in a position to load the goods & dispatch them.

The seller then sends the documents evidencing the shipment to the bank where

the credit is available i.e. the nominated bank. This may be the issuing bank, or theconfirming bank, bank named in the credit as the paying, accepting or negotiating

bank.

The bank if other than the issuing bank, sends the documents to the issuing bank,

The issuing bank checks the documents and if they meet the credit requirementeither

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Affect payment in accordance with the terms of the credit either to the

seller if s/he has sent the documents directly to the issuing bank or to the bank that

has made funds available to him/her in anticipation. Or

Reimburses in the pre-agreed manner the confirming bank or any bank that

has paid, accepted or negotiated under the credit. The bank checks the documents against the credit. If the documents meet therequirements of the credit, the bank then pay, accept or negotiate accordingly to terms of

credit. In case of a credit available by negotiation, issuing bank or the confirming bank

wi ll negotiate with recourse; another bank including the advising bank has not

confirmed the credit, which negotiates will with recourse.

When the documents have been checked by the issuing bank and found to meetthe credit requirements, they are released to the buyer upon payment of the amount

due or upon other terms agreed between importer & the issuing bank.

The buyer sends transport documents to the carrier who will then proceed todeliver the goods.

4.2.1.5: IMPORT SCRUTINY:

The import bills consist of the following documents & the order of their scrutiny should be asbelow:

Forwarding schedule of negotiating bank.

Bill of exchange.

Commercial Invoice (Before shipment).

Bill of lading

Insurance cover note

Certificate of origin

Packing List

PSI Report (CRF- Clean Report of findings)

Pro-forma Invoice (After shipment)

Any other documents.

Lodgment:

a) Intimation should be given to the party in time.

b) Conversion of foreign currency in to Bangladesh Currency.

c) Entry in PAD (payment against document) register

d) Entry in Letter of Credit opening register by rounding the letter of credit number

with date.

e) Scrutinize the shipping documents meticulously.

f) Inform the importer to deposit balance amount of letter of credit and to release the

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necessary documents.

g) Enter the shipping documents in inward foreign bills register.

4.2.1.6: Import Bills Retirement:

a) Banker will prepare & pass retirement vouchers.

b) Importer will deposit the claim amount.

c) Certifying Invoices.

d) Passing & prepare the vouchers.

e) Entry in the register.

f) Endorsement in the Bill of Exchange and Transport documents i.e. Bill of

Lading; T.R. etc.

g) Accounting treatment of voucher passing:

Party's A/C ..............................Dr.

Margin on import A/C. ................Dr.

PAD A/C.Cr.

Interest & other charges A/C.................Cr.

h) At the end of the total procedure, taking the retirement of import bills or clearing

certificate from the bank, the importer will clear the goods from the port through the

clearing & forwarding agent.

i) On the other hand, completing the above all steps the issuing bank will prepare

"foreign exchange transaction schedule" and send one copy to international division of

Head Office and another one copy to reconciliation.

4.2.1.7: RISK OF IMPORT FINANCING:

In the trade - there are so many risk factors involved. In banking sector - the bank face risk

basically from loans & advances and foreign exchange. In this section I discuss the risk of

import financing.In international trade transaction takes place between buyers and sellers living in different

socio-economic and political environments. There may be abrupt changes in socio-economic

or political situation in the buyer's country or in the seller's country. Even the exchange value

of currencies of the two countries had gone so much down that they were not acceptable

or exchangeable in international market. More over the importer or the exporter may not

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be able to comply with the terms of credit for some reasons. Therefore, risk inherent in all

credits. The bank has to consider following risk in financing the import procedure:-

(A) Commercial risk:

I. Violation of the requirement of letter of credit authorization or letter of credit:

Shipment effected before authentication of the letter of credit authorization

from by the nominated bank and registration with the Bangladesh bank,

whenever necessary and before opening of letter of credit or after expiry of the

validity of the letter of credit authorization or letter of credit shall be treated as

import in contravention of this order. Letter of credit authorization obtained in

the basis of false or incorrect particulars or by adopting any fraudulent means

shall be treated as invalid and void.

II. Import against indent and Performa invoice: Letter of credit may be opened

against and indent issued by a local registered indenter or against a Performa invoice

issued by a foreign manufacturer or seller or supplier.(b)Political risk:

In addition to the credit and commercial risk we have outlined, international transaction

such as import financing take on the whole new dimensions of political risk. They are as

follows:

Sudden outbreak of war, revolution, coups or civil disobedience in the seller's

country.

Imposition of restriction on remittance.

Imposition of trade embargo or blockade.

New import restriction on the buyer or cancellation of the license.

Additional handing transport or issuance charges due to interruption or diversion

of voyage, which can't be recovered from the buyer.

(c)Informational risk:

There may be informational risk inherent in import financing on the importer because of

shortage of required information. So it is much harder to judge the financial strength,

reputation and integrity of a seller or buyer who is thousands of miles away and belongs

to a different culture.

-----------------------------------------

4.2.1.8: DOCUMENTS USED IN FOREIGN EXCHANGE:

Letter of Credit (L/C):

Itis the most important and commonly used in connection with foreign trade.

Letter of Credit is an undertaking by a banker of the importer to the exporter, to the effect that the

amount of the L/C will be duly paid. The banker on behalf of the importer issues the L/C in favor

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of the exporter (beneficiary) and forwards the same to the exporter to the effect that the bill drawn

by him shall be duly accepted and paid. It creates confidence in the mind of the exporter so far as

payment of the bill is concerned. It is also facilitate the exporter to get the benefit of discounting the

bill before the date lf maturity.

Bill of Exchange:

A Bill of Exchange is an instrument in writing, containing an unconditional order, signed by

the maker, directing a certain person to pay on demand or on fixed or determinable future time

a certain sum of money only to or to the order of a certain person or to the bearer of the

instrument. From the definition - we get the features of bill of exchange. In generally there are

three parties like- Drawer: The person who prepare the bill; Drawee: The person who is

ordered for the payment in future specified time; Payee: The person who is the amount of

bill receiver as per the order of the drawer to the drawee.

Bill of Lading:

A bill of lading is a document that is usually stipulated in a credit when the goods are

dispatched by sea. It is evidence of a contract of carriage, is a receipt for the goods, and is

a document of title to the goods. It also constitutes a document that is, or may be, needed to

support an insurance claim. The detail on the bill of lading shouldinclude:

A description of the goods in general terms not inconsistent with that in the credit.

Identifying marks & numbers(if any). The name of the carrying vessel.

Evidence that the goods have been loaded on broad.

The ports of shipment &

discharge.

The names of shipper, consignee and name & address of notifying party.

The number of original bills of lading issued.

The date of issuance.

A b ill of lading specifically stating that goods are loaded for ultimate destination specifically

mentioned in the credit.

Commercial invoice:

A commercial invoice is the accounting document by which the seller charges the goods to the

buyer. A commercial invoice normally including the followinginformation:

Date

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Name & address of buyer & seller.

Order or contract number, quantity & description of the goods, unit price and the

total price.

Weight of the goods, number of packages and shipping marks & number.

Terms of delivery & payment.

Shipment details.

Certificate of origin of goods:A certificate of origin is a signed statement providing evidence of the origin of the goods.

Inspection certificate:

This is usually issued by an independent inspection company located in the exporting country

certifying or describing the quality, specification or other aspects of the goods, as called

for in the contract and / or the letter of credit. The buyer who also indicates the type of

inspection usually nominates the inspection company he /she wish the company to undertake.

Insurance policy or Certificate:The insurance certificate document must:

Be

specified in the credit

Cov

er the risks specified in the credit.

Be

consistent with the other documents in its identification of the voyage and description

of the goods.

Unl

ess otherwise specified in the credit:

a) Be a document issued and / or signed by an insurance company or its agent, or by

underwriters.

b) Be dated on or before the date of shipment as evidenced by the shipping

documents or establish that cover is effective at the latest from such date of shipment.

c) Be for an amount at least equal to the GIF value of the goods and in the

currency of the credit.

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Pro-forma invoice or indent:

Simply speaking, it is a Seller's quotation or agreement between seller & buyer. In this-the

seller declared the rate, quantity, quality, manufacturing & other information about goods

and that accepted by buyer. .

Other Documents are:Packing list; Master's receipt.

1. DOCUMENTARY CREDIT:

In simple terms a documentary credit is conditional bank undertaking of payment.

Expressed more fully, it is written undertaking by a bank (Issuing Bank) given to the

seller (Beneficiary) at the request and in accordance with the instructions of the

buyer (applicant) to effect payment (i.e. by making a payment or by accepting or

negotiating bills of exchange) up to a stated sum of money, within a prescribed time

limit & against stipulated documents.

These stipulated documents are likely to include those required those required for

commercial invoice, certificate of origin, insurance policy or certificate and bill of

lading or combined transport document.

There are various types of documentary credits.

A revocable credit can be amended or cancelled at any time without prior warning or

notification to the seller.

An irrevocable credit can be amended or cancelled only with the agreement of allparties. As there are often two banks involved the issuing bank & the advising bank,

the buyer can ask or an irrevocable credit to be confirmed by the advising bank. If

the advising bank agrees, the irrevocable credit becomes a confirmed irrevocable

credit.

There are four types of documentary credits according to payment methods:

1. Sight credit

2. Acceptance credit

3. Cash credit

4. Deferred payment credit

2. DOCUMENTARY LETTER OF CREDIT:The documentary Letter of Credit is an arrangement where by a bank (issuing bank)

acting at the request of a customer (applicant of the Letter of Credit):

a) To make payment to or to the order of other person (the beneficiary) or to pay

accept or negotiate Bill of Exchange (Drafts) drawn by the beneficiary.

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b) Authorizes such payment to be made or such drafts to be paid, accepted or

negotiated by another bank against stipulated documents, provided the terms &

conditions of the Letter of Credit are complied with.

Procedure of documentary credit:

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Seller

Issuing BankAdvisin / Confirmin Bank


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Details of the diagram:a) The buyer & the seller conclude a sales contract providing for payment by

documentary credit.

b) The buyer instructs his / her bank i.e. issuing bank to issue a credit in favor of the

seller i.e. beneficiary.

c) The issuing bank asks another bank, usually in the country of the seller, to

advice or confirms the credit.

d) The advising or confirming bank informs the seller that the credit has been issued.

e) As earl as possible the seller receives the credit & is satisfied that he / she can meet

its terms and conditions, he / she is in a position to load the goods and dispatch them.

f)The seller then sends the documents evidencing the shipment to the bank where the

credit is available in bank. This may be the issuing bank, or the confirming bank, or any

bank named in the credit as the paying, accepting or negotiating bank, or it may be the

advising bank or any bank willing to negotiate under the credit.

g) The bank checks the documents against the credit. If the documents met therequirements of the credit, the bank will pay, accept, or negotiate according to the terms of

the credit. In case of a credit available by negotiation, the issuing bank or the confirming

bank will negotiate without recourse. Any other bank including the advising bank if it

has not confirmed the credit, may negotiate, same for payment.

h) The bank if other than the issuing bank sends the documents to the issuing bank

i)The issuing bank checks the documents and if they meet the credit requirements,

either

Effects payment in according with the terms of the credit, either to the

seller if he / she have sent the documents directly to the issuing bank or to the

bank that has made funds available to him in anticipation. Or

Reimburses in the pre-agreed manner the confirming bank or any bank that

has paid, accepted or negotiated under the credit.

j)When the documents have been checked by the issuing bank and found to meet the

credit requirements, they are released to the buyer upon payment of the amount due, or

upon other terms agreed between him / her & the issuing bank.

k) The buyer sends the transport document to the carrier who will then proceed to

deliver the goods.

4.2.1.9: LETTER OF CREDIT (L/C):Letter of Credit is an undertaking by a banker of the importer to the exporter, to the effect that the

amount of the L/C will be duly paid. The banker on behalf of the importer issues the L/C in favor of

the exporter (beneficiary) and forwards the same to the exporter to the effect that the bill drawn by

him shall be duly accepted and paid. It creates confidence in the mind of the exporter so far as

payment of the bill is concerned. It is also facilitate the exporter to get the benefit of discounting the

bill before the date lf maturity.


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4.2.1.9.1: Parties of Letter of Credit transaction: Issuing Bank: It is the buyer's bank. The bank that agrees to the request of the

applicant and issues its letter of credit in terms of the instructions of the applicant.

Advising Bank: It is the seller's or beneficiary's Bank. The bank usually

situated in the seller's or beneficiary's country (most of the time with which there

exists corresponding relationship with the buyer or issuing bank), request to advice the

credit to the beneficiary.

Confirming Bank: Sometimes issuing bank request advising bank or another bank

to add confirmation to the letter of credit. When that bank do this then such bank is

called confirming bank. So advising bank can be act as confirming bank.

Reimbursing Bank: This is the bank that is nominated by the issuing bank to pay

(it is also known as paying bank) or to accept drafts. It can be situated in another

country. In this connection it is to say that American Express Bank & HSBC act as

reimbursing bank in case ofBASIC Bank Ltd. The account, which maintains BASIC

Bank Ltd with HSBC & American Express Bank, is called "Nostro Account" and inrivers the account, which is maintained by HSBC & American Express Bank with

BASIC Bank Ltd, is called "Vostro Account"

Negotiating Bank: The bank, which makes payment to the exporter after

scrutiny, the documents submitted by the exporter with the original letter of credit

then it is called Negotiating Bank.

Nominated Bank: The bank that is nominated by the issuing bank to pay

(nominated bank is known as paying bank) or to accept drafts (nominated bank is known

as accepting bank) or to negotiate (nominated bank is known as negotiating bank).

Usually the advising bank is request & authorized to be the nominated bank unless the

credit allows negotiation by any bank.

Seller: Beneficiary of the letter of credit is seller.

4.2.1.9.2: Classification of Letter of Credit or Basic forms of

documentary letter of credit:

The letter of credit can be either revocable or irrevocable. It needs to be clearly indicated

whether the letter of credit Revocable or Irrevocable. When there is no indication then the

letter of credit will be deemed to be a revocable L.C. The details are as follows:

Revocable letter of credit: A r