Foreign Exchange System of Mercantile Bank Limited
Introduction Mercantile Bank Limited was incorporated in Bangladesh as a Public Limited Company with limited liability under the Bank Companies Act, 1991 on 20 May 1999 and commenced commercial operation on 02 June 1999. The Bank went for public issue of shares on in 2003 and its shares are listed with Dhaka Stock Exchange and Chittagong Stock Exchange. The Mercantile Bank Limited is a highly capitalized new generation Bank with an Authorized Capital and paid-up Capital of Tk. 3000.00 million and Tk. 1498.90 million respectively. The Bank provides a broad range of financial services to its customers and corporate clients. The Board of Directors consists of eminent personalities from the realm of commerce and industries of the country. The Main branch of Mercantile Bank Limited is located in the Dilkusha commercial area. The total manpower of this branch is 137.The total number of the senior vice president is 10.As it is the main branch of the bank, the customer appearance in the bank is very high. In the Mercantile Bank Limited, Main Branch, the people are mostly courteous, friendly in nature and eager to help despite the tremendous workload. Manpower is sufficient in the branch but there is no information booth for customer information. So as a new private bank, Mercantile Bank Limited is running steadily. The Mercantile Bank Limited (MBL) undertakes all types of banking transactions to support the development of trade and commerce in the country. MBLâ€™s services are also available for the entrepreneurs to set up new ventures and BMRE of industrial units. The bank gives special emphasis on Export, Import, Trade Finance, SME Finance, Retail Credit and Finance to women Entrepreneurs. To provide clientele services in respect of International Trade it has established wide correspondent banking relationship with local and foreign banks covering major trade and financial centers at home and abroad. In 2007, Mercantile Bank Limited remained at forefront of the banking industry of the Bangladesh, in the face of challenges of intense competition, ongoing reforms in the banking industry and a more challenging business and economic environment confronting its customers. The bank continued to play an important role in the governmentâ€™s drive to strengthening the rural economy as the driver of the future economic driver of the Bangladesh. Mercantile Bank Limited emerged as a new commercial bank to provide efficient banking services and to contribute socio-economic development of the country. With the passage of time it has expanded its number of branches and variety of services along with its core business of taking deposits and granting loans. Now MBL has emerged as a new commercial bank to provide efficient banking services and to contribute socio-economic development of the country. Rising trend of the banks profitability over the last 8 years is also materialized. The MBL is committed to the delivery
of the superior shareholders’ value. Foreign Exchange Department of the bank is one of the most important departments. Now it has become the backbone of the bank. With the aim to be the ‘bank of choice’, it is operating in the industry with a team of devoted personnel to excel both their own career and the bank’s future. MBL at A Glance Name Date of incorporation Date of inauguration of operation
Market value per share Earning per share E-mail Website
Mercantile Bank Limited 20th May, 1999 2nd June, 1999 61, Dilkusha Commercial Area Dhaka –1000, Bangladesh Tel-02-9559333, 0171-1535960 Fax: 880-2-09561213 Telex: 642480 MBLMB BI Mercantile Bank Limited efficiency Is our strength Md. Abdul Jalil(MP) A.K.M. Shahidul Haque 65(at the end of 2010) Deposit scheme, credit facility and foreign exchange services Corporate banking, Retail banking Shared quoted daily in DSE & CSE Member of Master Card Both conventional and foreign exchange system Member of SWIFT, online banking, UNIX based computer system BDT 412 (at the end of 2010) BDT 41.04 (at the end of 2010) email@example.com www.mblbd.com
Logo Name of the Chairman of the Board Name of the Managing Director Number of branches Services provided Diversification of Product And Services Publicly Traded Company Credit Card Banking operation system Technology used
Mercantile Bank Limited (MBL) Timeline:
Figure: MBL Timeline Management Hierarchy: The Corporate Structure Board of Directors
Board of Directors, the apex body of the Bank, formulates policy guidelines, provides strategic planning and supervises business and performance of management while the Board remains accountable to the company and its Shareholders.
Board of Directors
CHAIRMAN Managing director -HRD
Deputy Managing Director GSD, CAD, A&I, GB,
Senior Vice President
Deputy Managing Director Executive Vice President
Senior Vice President Vice President
Senior Asst. Vice President Asst. Vice President F.A.V.P
Senior Executive Officer
ID, IT, CREDIT, R&P
Senior Vice President
Figure: Management Hierarchy of MBL
Features of Mercantile Bank Ltd: There are so many reasons behind the better performance of Mercantile Bank Limited than any other newly established banks:
Highly qualified and efficient professionals manage the bank. • MBL has established a core Research &Planning Division with efficient persons. • The bank has established correspondent relationship with 240 of foreign banks. • The computerized operation systems in all branches of MBL have provided the frequent and prompt customer service. • The strict leadership along with the supervision of efficient management directs all the branches. • The inner environment and teamwork, of all branches in MBL motivated all experienced employees to achieve the ultimate object of MBL. • MBL has become a member of the SWIFT system expedite foreign trade transaction. • MBL has become introduced some scheme for the purpose of saving of low income people which are not available in other banks like “Family Maintenance Deposit (FMD)”, “Personal Loan Scheme”, “Car Loan Scheme” etc. • The bank offers attractive saving rate than other financial institutes. • MBL provides loan to the customers at lower interest with easy and flexible condition than the others do. • Along with the profit generation Mercantile Bank Limited also maintain social responsibilities. • Mercantile Bank Limited charges lower commission from their customer in comparison with other banks. • The Bank is always guided their potential customers by giving valuable advises. Mechanism: Global network banking facilities Commercial banking is the core activities of Mercantile Bank Limited. The bank serves all types of customer ranging from individual to corporate entities, both private and public. The standard service offered by mercantile bank Limited Include• • • • • • •
One counter service for all banking needs of the customer. Customer counseling Personalized services and relationship banking Deposit banking Loan and advances Export and import financing Inland and foreign remittance facilities
Long Term target Services of Mercantile bank Limited include• Investment banking supported technology knows how transfer program. • Leasing and lease financing. • Capital market operation. To reach the objectives, MBL has its basket of services among other• In house know how for feasibility study and strategic planning. •
Automated and computerized offices.
Mercantile Bank Foundation: The Bank has set up Mercantile Bank Foundation for extending benevolent services to the society. The Bank contributes 1% of operating profit or Tk.4.00 million; whichever is higher, to Mercantile Bank Foundation every year. The Foundation has been established with following objectives: Mercantile Bank Prize to 8(eight) eminent personalities of the country for the outstanding contribution in the fields of Economics and Economic Research, Bengali Language and Literature, Science and Technology, Education and Culture, Journalism, Sports, Research on Liberation War and Industry and Commerce. • • • • • •
Interest free education loan for the meritorious but poor students To conduct research on Bengali language and literature. Book purchase and Distribution Policy to encourage writers and publishers of the country. Interest free Loan to the unemployed educated people. Donation for handicapped artists, literature and distressed people. Project for the development of shelter-less children
Services Offer by MBL: The Bank launched several financial products and services since its inception. Among them are: 1. Deposit Schemes 2. Family Maintenance Deposit (FMD). 3. Monthly saving scheme (MMS). 4. Pension and Family Support Deposit (PFSD). 5. Monthly Benefit Scheme. 6. Quarterly Benefit Deposit Scheme. 7. 1.5 times Benefit Deposit Scheme. 8. Double Benefit Deposit Scheme (DBDS).
9. Special Saving Scheme (SSS). 10. Credit Schemes 11. Consumer Credit Scheme (CCS). 12. Car Loan Scheme. 13. Doctors Credit Scheme. 14. Rural Development Scheme. 15. Lease Financing. 16. Personal Loan. 17. Small Loan Scheme.
General Banking: THE BANKER – CUSTOMER RELATIONSHIP The Banker – Customer relationship is essentially a debtor-creditor contractual relationship. This relationship may be divided into two categories, Legal relationship Behavioral relationship After the contractual relationship is established between the banker and customer, they have to avoid by some implied conditions of the contract as well as practices of the bank. Some of the conditions and practices are as follows:
• • • •
Customer is to use cheque books while demanding payment from his account. Customer should keep cheque books in his safe custody. Customer must inform the bank on time for any loss of cheque leaf or cheque books. Customer while depositing money or presenting cheque, they must do that during business hour of the bank. Banker also should give necessary banking advice and help the customer in various banking activities.
SWOT ANALYSIS OF MBL: In the competitive area of marketing are SWOT analysis is based on product, price, place and promotion of a financial institution like private Bank. By doing the SWOT analysis it is possible to find out the strengths, Weaknesses, opportunities, and threats of the MBL. From the SWOT analysis we can figure out on going scenario of the Bank. SWOT Analysis
Internal Internal Factors Factors
External External Factors Factors
Fig: SWOT Analysis SWOT analysis two factors act as prime movers Internal factors which are prevailing inside the concern which include Strength and Weakness. On the other hand another factor is external factors which act as opportunity and threat. Strength: • • •
The bank provides quality service to the clients compared to it other contemporary competitors. Experienced bankers and corporate personnel have formed the management. The bank recently introduce on line banking which enable it to automate all of its operations. At present, several banking functions are performed by computers. The
bank is also a member of SWIFT (Society for Worldwide Inter bank Financial Telecommunication) alliance Access which enables the bank to exchange critical financial messages swiftly and cost effective. Weaknesses: • • • • • •
Delegation of authority is centralized which makes the employee to realize less responsibility. Thus, the employee morale is deteriorated. The credit proposal evaluation process is lengthy. Therefore, sometimes valuable clients are lost and the bank becomes unable to meet targets. No substantive use of Annual Confidential Report (performance evaluation form of the employee) to reward or to punish the employee. Hence the employee becomes ineffective. The bank lacks aggressive advertising and promotional activities to get a broad geographical coverage. Computer facility for all the officers is not available. Moreover, all the officers have no computer knowledge. The bank has no any research and development division.
Opportunities: • • • •
The bank can introduce more innovative and modern products and services for then customers. It can diversity its portfolio by taking new sector. Many branches can be opened to reach the bank’s services to the remote areas. It can recruit more efficient and experienced persons to give fast and efficient service to the customers
Threats: • • •
The common attitude of Bangladeshi clients is default. Multinational as well as the fast growing local banks with modern products and services are capturing huge market within short period a resulting to switch over the existing customers of the bank. Bangladesh Bank Sometimes requires Private Commercial Banks to be abides by such rules and regulations which are not suitable for every commercial Bank
Branch Network of MBL: MBL with 45 branches now in many corners of the country. The branch network of the country is shown in the map below:
Map Branch Network In the above marked districts, MBL is in operation with its 45 Branches
2.11 OPERATIONS OF THE BANK: Deposits
Figure Deposit The Bank mobilized total deposits of BDT 39,348.00 million as of December 31, 2007 as compared to BDT 33,332.65 million in 2006. Competitive interest rates, attractive deposit products, deposit mobilization efforts of the Bank and confidence reposed by the customers in the Bank contributed to the notable growth in deposits. The Bank evolved a number of attractive deposit schemes to cater to the requirement of small and medium savers. This improved not only the quantum of deposits; it also brought about qualitative changes in the deposits structure. Advances:
Figure Advances The Bank has formulated its policy to give priority to small and medium businessmen while financing large-scale enterprises through consortium of banks. Total loans and advances of the Bank stood at BDT 31,877.86 million as of December 31, 2007 as compared to BDT 26,842.14 million in 2006. Trade and commerce, garments industry, large and medium scale industries and construction are major sectors in which the Bank extended credit.
Figure Import Trade Mercantile Bank Limited opted quality financing while facilitating import trade in 2007 in a changed scenario. This year the Bank executed a total of 17,464 letters of credits amounting to BDT 40,380.10 million. The principal items were capital machineries, garments & accessories, rice, wheat, sugar, CDSO, vegetable oil, cement clinkers, hot roll steel, raw cotton, old ships etc. Export Trade
Figure Export Trade The Bank remained selective in export trade financing in 2007. A total of 13,078 businesses were handled worth BDT 32,670.10 million in 2007. The main focal point of the Bank in export financing was garments industry, the lone driving force of the economy of Bangladesh in single biggest source of foreign exchange and employment provider of the country. Other notable items were jute & jute goods, leather, handicrafts, tea, frozen food & fish products.
Foreign Remittances Total foreign remittance in a single year, i.e., in 2007 made a record high to the tune of BDT 3,510.40 million. The Bank has deepened its step on the foreign soils further by establishing more and more remittance arrangements with overseas exchange companies where Bangladeshi expatriates are working. These include United Kingdom, U.A.E, Kuwait, Bahrain, Canada, Italy and France etc. Moreover, for prompt & safe delivery of this hard earned money to their near and dear ones in every corner of the country we have established agency arrangements with some big banks. Operating Revenue The operating revenue of the Bank stood at BDT 1,385.15 million in 2007 as against BDT 1,178.76 million in 2006. After necessary provision net profit after tax stood at BDT 540.50 million as of December 31, 2007 as against BDT 494.22 million in 2006. An amount of BDT 658.34 million has been set aside for income tax contribution to National Exchequer in 2007 as compared to BDT 475.90 million in 2006. Total Income
Figure Total Income Total income increased from BDT 4,631.41 million in 2006 to BDT 5,560.95 million in 2007. Interest income accounted for 80.04%, exchange gains 7.63%, commission 6.59% and other income 5.75% to total income in 2007 as against 75.54%, 8.96%, 8.18% and 7.32% respectively in 2006. INTEREST INCOME: TOTAL INCOME Components Interest income Exchange gains Commission Other income Total
(BDT in millions) Amount % 4,450.90 424.04 366.32 319.69 5,560.95
of Total 80.04 7.63 6.59 5.75 100.00
Table Total Income Interest Income Interest income increased from BDT 3,498.67 million in 2006 to BDT 4,450.90 million in 2007. Interest on loans and advances accounted for 80.11%, Interest on Treasury and T & T Bond 7.71%, interest on deposits with other Banks 2.72%, Interest on Treasury Line 2.69%, Interest on Treasury Bills 1.97% and other interest income 4.82% of total interest income in 2007 as against 85.00%, 3.65%, 2.70%, 2.36%, 3.35% and 2.94% respectively in 2006. Interest Income Components Interest on loans and advances Interest on Treasury and T&T Bonds Interest on deposits with Banks Interest on Treasury Line Interest on Treasury Bills Other Interest Income Total
(BDT in millions) Amount % of Total 3,565.41 80.11 343.00 7.71 121.00 2.72 119.58 2.69 87.55 1.97 214.36 4.82 4,450.90 100.00
Table Interest Income Interest Expenses Interest expenses moved up from BDT 2,662.58 million in 2006 to BDT 3,159.30 million in 2007. Interest on deposits under schemes was the largest component of interest expenses and accounted for 46.87% of total interest expenses in 2007 as compared to 47.00% in 2006. Interest on FOR accounted for 46.85%, interest on savings deposits 3.84%, interest on shortterm deposits 1.62%, interest on call deposits 0.68% and other interest expenses 0.14% of total interest expenses in 2007 as against 43.45%, 3.58%, 1.55%, 3.82% and 0.60% respectively in 2006. Interest Expenses Components Interest on deposit schemes Interest on fixed deposits Interest on savings deposits interest on STD Interest on call deposits Other interest expenses Total
(BDT in millions) Amount % of Total 1,480.86 46.87 1,480.09 46.85 121.41 3.84 51.26 1.62 21.41 0.68 4.27 0.14 3,159.30 100.00
Table Interest Expenses Net Interest Income Net interest income increased from BDT 836.09 million in 2006 to BDT 1,291.60 million in 2007. Gross interest income of the Bank amounted to BDT 4,450.90 million and interest expenses amounted to BDT 3,159.30 million in 2007. Non-interest Income
Non-interest income decreased from BDT 1,132.74 million in 2006 to BDT 1,110.05 million in 2007. Non-interest income was 19.96% of the total income in 2007 as compared to 24.46% in 2006. Exchange gains 38.20%, commission accounted for 33.00% and other non-interest income 28.80% of non-interest income in 2007 as against 36.63%, 33.44% and 29.93% respectively in 2006. Non-Interest Income Components
(BDT in millions) Amount % of Total
Exchange gains Commission
Other non-interest income Total Table Non-Interest Income
Figure Total Expenses The total expenses of the Bank stood at BDT 4,175.81 million during 2007 as compared to BDT 3,452.65 million in 2006. Interest expenses accounted for 75.66%, salaries and allowances 11.78%, rent, rates, taxes etc. 2.98%, depreciation and repairs 1.44%, stationery, printing and advertisements 1.36%, postage, stamp and telecommunication 0.68% and other expenses 6.11% of total expenses in 2007 as against 77.12%, 13.11%, 2.49%, 1.20%, 1.29%, 0.67% and 4.12% respectively in 2006. Total Expenses (BDT in millions) Components Interest expenses Salaries and Allowances Rent, Rate, Taxes etc Depreciation and Repairs Stationery, Printing & Advertising Postage, Stamp and Telecom Other Expenses
Amount 3,159.30 492.02 124.31 60.17 56.74 28.29 254.98
% of Total 75.66 11.78 2.98 1.44 1.36 0.68 6.11
Table Total Expenses Non-interest Expenses Non-interest expenses moved up from BDT 790.07 million in 2006 to BDT 1,016.51 million in 2007. Non-interest expenses was 24.34% of the total expenses in 2007 as compared to 22.88% in 2006. Salaries and allowances accounted for 48.40%, rent, rates, taxes etc. 12.23%, depreciation and repairs 5.92%, stationery, printing and advertisements 5.58%, postage, stamp and telecommunication 2.78% and other expenses 25.08% of total noninterest expenses in 2007 as against 57.32%, 10.89%, 5.24%, 5.65%, 2.93% and 17.97% respectively in 2006. Non-Interest Expenses Components Salaries and allowances Rent, Rate, Taxes etc Depreciation and Repairs Stationery, Printing & Advertising Postage, Stamp and Telecom Other Expenses Total
(BDT in millions) Amount % of Total 492.02 48.40 124.31 12.23 60.17 5.92 56.74 5.58 28.29 2.78 254.98 25.08 1,016.51 100.00
Table Non Interest Expense Asset Portfolio: The Bank's total assets outstanding as of December 31, 2007 amounted to BDT 44,940.54 million as compared to BDT 37,159.65 million in 2006. Of the total assets outstanding in 2007, loans and advances constituted 70.93%, investments 15.80%, cash 8.27%, money at call and short notice 1.16%, balances with other banks 0.47%, and other assets 3.37% as against 72.23%, 14.55%, 7.92%, 1.06%, 0.64% and 3.60% respectively in 2006. Asset Portfolio Components Loans and Advances Investments Cash Money at call and Short Notice Balance with other Banks Other Assets Total
(BDT in millions) Amount 31,877.86 7,099.98 3,717.35 520.00 209.20 1,516.15 1,016.51
% of Total 70.93 15.80 8.27 1.16 0.47 3.37 100.00
Table; Asset Portfolio Corporate and Financial Reporting: The Board of Directors confirms compliance with the financial reporting framework for the followings: the Financial Statements prepared by the Management of the Bank present fairly its state of affairs, the results of its operations, cash flows and changes in equity; proper books and accounts of the Bank have been maintained; appropriate accounting policies have been consistently applied in the preparation of Financial Statements and accounting estimates are based on reasonable and prudent judgment; International Accounting Standards, as applicable in Bangladesh, have been followed in preparation of Financial Statements and any departure, therefore, has been adequately disclosed; the system of Internal Control is sound in design and has been effectively implemented and monitored; There are no significant doubts upon the Bank to continue as a going concern. Financial Summary:
Figure Financial Summary
Financial Highlights Highlights for the year 2008 and 2007 (BDT in million) SL PARTICULARS NO.
Total Capital Fund
Total Loans and Advances
Total Contingent Liabilities and Commitments
Credit Deposit Ratio (in %)
Percentage of Classified Loans against Total Loans and Advances 2.96 (in %)
Profit after Tax and Provision
Amount of Classified Loans during the year
Provision kept against Classified Loans
Cost of Fund (in %)
Interest Earning Assets
Non-interest Earning Assets
Return on Investments (ROI) (in %)
Return on Assets (ROA) (in %)
Income from Investments
Earning Per Share (BDT)
Net Income Per Share (BDT)
Price Earning Ratio (approximate)
10 Times 12 Times
Table Financial Highlights Introduction to Foreign Exchange Foreign Exchange- its meaning and definition: Foreign exchange refers to the process or mechanism by which the currency of one country is converted into the currency of another country. Foreign exchange is the means and methods by which rights to wealth in a country's currency are converted into rights to wealth in another country's currency. In banks when we talk of foreign exchange, we refer to the
general mechanism by which a bank converts currency of one country into that of another. Foreign Trade gives rise to foreign exchange. According to Foreign Exchange Regulation Act (FERA) 1947, "Any thing that conveys the right to wealth in another country is foreign exchange. Foreign exchange means and includes all deposits, credits and balances payable in foreign currency as well as foreign currency instruments such as drafts, TCs. Bill of Exchange, promissory Notes and Letters of Credit payable in any foreign currency. ". Types of Foreign Trades: There are mainly three types of transactions which lead to foreign exchange. These are: a) Import b) Export c) Foreign Remittance Regulations for Foreign Exchange: Local regulations: our foreign exchange transactions are being controlled by the following local regulations: Foreign Exchange Regulation Act: Foreign Exchange Regulation (FERA) Act. 1947 enacted on 11th March 1947 in the then British India, provides the legal basis for regulation the foreign exchange. This act was adapted in Pakistan and lastly in Bangladesh. Guidelines for Foreign Exchange Transaction: This publication issued by Bangladesh Bank in the year 1996 in two volumes. This is a compilation of the instructions to be followed by the Authorized Dealers in transactions relating to foreign exchange F.E. Circular: Bangladesh Bank issues F.E. circular from time to time to control the export import business and remittance that is to control the foreign exchange., Export-Import Policy: Ministry of commerce issues Export Policy and Import Policy giving basic formalities for Import and Export Business. Public Notice: Some times CCI &E issues public notice for any kind of change in Foreign Exchange Transaction. Instructions from different ministry: Different ministries of the Govt. sometimes instruct the authorized dealer directly or through Bangladesh Bank to follow something required for the government. International Regulations: There are also some international organizations influencing our Foreign Exchange transactions. Few of them are discussed bellow: ICC: International Chamber of Commerce is a worldwide Non-Governmental Organization of thousands of companies. It was founded in 1919. ICC National committees throughout the world present ICC views to their Governments and alert Paris Headquarters about national business concerns. ICC has issued some publications like Uniform Customs and Practice for Documentary Credits (UCPDC)-600, URC and URR, Incoterms-2000, etc., which are being followed by all the member countries. There is, also an International Court of Arbitration to solve the international business disputes.
W.T.O.: World Trade Organization is another International Trade Organization established on 1st January 1995. GATT (General Agreement on Tariff & Trade) was established on 1 st January 1948. After completion of it's 8th round, the organization has been abolished and replaced by WTO. This organization has vital role in international trade through its 124 member countries. Letter of Credit: A Letter of credit is a letter issued by a bank (know as the opening or the issuing bank) at the instance of its customer (known as the opener) addressed to a person (known as beneficiary) undertaking that the bills drawn by the beneficiary will be duly honored by it (opening bank) provided certain conditions mentioned in the letter gave been complied with. Classification of Letter of Credit: In different considerations there are many kinds of L/Cs. Some of them are discussed bellow: Irrevocable L/C: Irrevocable L/C cannot be amended or cancelled without the consent of the beneficiary or any other interested parties. Banks commonly open this type of L/C. Revocable L/C: This kind of L/C can be amended or cancelled by the Issuing Bank, without the consent of the beneficiary or any other interested parties. If it is not indicated in the L/C, whether it is Revocable or Irrevocable, then the L/C to be treated as Irrevocable. Add-confirmed L/C: When a third bank provide guarantee to the beneficiary to make payment, if Issuing Bank fail to make payment, the L/C is called Add-Confirmed L/C. In case of a confirmed L/C a third bank adds their confirmation to the beneficiary, to make payment, in addition to that of Issuing Bank. Confirmed L/C gives the beneficiary a double assurance of payment. Clean Claused: It is a normal claused L/C without third bank's confirmation. Revolving L/C: It is an L/C where the original amount restores after it has been utilized. How many times and how long, the amount will restore must be specified in the L/C. For example, an L/C opened for USD 1000 and shipment effected for USD 500, now the L/C restored for full value i.e. There is scope to effect further shipment of USD 1000 revolving L/C may be opened to avoid difficulties of opening new L/C. This L/C is not allowed in our present import policy. Transferable L/C: If the word "Transferable" incorporated in an L/C, then the L/C is transferable. The 1st beneficiary can transfer transferable L/C to the 2 nd beneficiary. But 2nd beneficiary cannot transfer it further to another beneficiary. Transfer may be done to more than one beneficiary, partially, if not prohibited in the L/C. Restricted L/C: If advising and/or negotiation of an L/C are restricted to a particular bank, the L/C is called a restricted L/C. Red Clause L/C: A red clause L/C is an L/C, where a special clause is incorporated into it that authorizes the confirming or any other nominated bank to make advances to the
beneficiary, before presentation of the documents. In other words this is an L/C, where the Issuing Bank authorizes the negotiating bank to provide pre-shipment finance to the beneficiary. The L/C is called red-clause because, the special clause was originally written in red-ink to draw attention to the unique nature of this documentary credit. Red clause L/C is not allowed in our present import policy. Green Clause L/C: It is an L/C, where the Issuing Bank authorizes the Negotiating Bank to grant storage facilities to the beneficiary. The special clause was originally written in Greenink, so the L/C is called Green Clause. In both the case of Red Clause and Green Clause L/C, if the exporter fails to ship the goods the financing bank has the right to demand repayment from the Issuing Bank and that bank would have a similar right of recourse against the applicant. Clean Letter of Credit: This is a commercial letter of Credit, wherein the Issuing Bank does not ask any documents as evidence of execution of the deal under the L/C. Under the said L/C only bill of exchange may be negotiated or may be paid without any supporting documents. Clean Letter of //Credit is not permissible in our import policy. Documentary Letter of Credit: All the commercial letter of credits, where export related documents such as invoice, B/L etc. are required to present with the bill of exchange, is called Documentary Credit. Under this L/C, bill of exchange will not be honored without other required documents. Straight Documentary Credit: Under the irrevocable straight documentary credit, the obligation of the Issuing Bank is extended only to the beneficiary, in honoring draft(s)/ documents and usually expires at the counter of the Issuing bank. This L/C. does not authorize any body to negotiate, purchase the documents. This L/C. is available for payment only at the Issuing Bank's counter, not available for negotiation. Irrevocable Negotiation Documentary Credit: This L/C. is available for negotiation by a nominated bank/any bank and expiring for presentation of document at the offices of negotiating bank. The Issuing Bank is bound to reimburse the Negotiating Bank, if it negotiates the documents complying with the credit terms. With Recourse and Without Recourse to Drawers: These terms are related with bill of exchange. If the L/C allow a Bill of Exchange with recourse to the drawer, that means the Negotiating Bank has the right to claim the amount back, from the drawer, if the B/E is dishonored by, the drawee. And in case of without recourse, the Negotiating Bank has no right to claim the amount back. From the drawer, if the B/E is dishonored by the drawee. So in case of without recourse the negotiating Bank would be care-full to negotiate the document. L/C can be classified according to source of fund: Back-to-Back L/C: Back to Back import L/C is backed by another export L/C. where import of the goods to be made to execute the export L/C and payment of Back to Back bills to be made normally from related export process, the import L/C is called Back to Back L/C. A Back-to-Back L/C is opened against an irrevocable L/C. The L/C is lien marked with the back-to-back L/C issuing branch. Back to Back L/C may be opened up to 75% of export L/C,
(FOB value) and up to 80% where export price is more than USD 60/- per dozen in case of garments industries. Cash L/C: Where payment of import bills under L/C is being made from (i) Foreign Currency reserve in Bangladesh Bank or (ii) F.C. account with authorized Dealer, the L/C is called Cash L/C. Barter L/C: Where final settlements are being made through commodity exchange between the nations, the L/C is called Barter L/C. According to Payment terms, there are mainly three types of L/Cs such as: 1. Sight Credit: 2. Accepted Credit: 3. Deferred Payment Credit: Different parties involved Foreign exchange transaction: Normally the following parties are involved to a documentary credit: Importer: The buyer or the importer is he who initiates the credit. He applies to bank for issue foreign a documentary credit. The obligations between the importer and the issuing bank are governed by the application-cum-agreement submitted by the importer to the bank. He is bound to reimburse the bank, which effects payment or incurred a deferred payment undertaking or has accepted or negotiated under the credit as per terms, and to take up the documents. Opening Bank: The issuing or opening bank is the importer's bank and it issues a letter of credit normally pursuant to the terms of sales contract as set out in the application for the credit by the importer. The issuing bank should nominate the bank, which is authorized to pay or to accept drafts or to negotiate, unless the credit allows negotiation by any bank. Exporter: The seller or exporter is the beneficiary of the credit. The letter of credit is opened in his favor and addressed to him-. The beneficiary has the obligation to make export as per the contract and produce the documents as required by the credit. The Advising Bank: It is the bank in the exporter's country (normally the exporter's bank), which is usually the foreign correspondent of importer's bank through which the L/C is advised to the supplier. If the intermediary bank simply advises/notifies the L/C to the exporter part, it is called "Advising Bank".
The Confirming Bank: If the advising bank also adds its own undertaking to honor the credit while advising the same to the beneficiary, he becomes the confirming bank. In addition, becomes liable to pay for documents in conformity with the L/C's terms and conditions. The liability of the confirming bank is the primary liability and it is not contingent on the fulfillment of the obligation by the issuing bank. The Accepting Bank: Accepting bank is the bank nominated in the letter of credit to accept usance bills drawn under the credit. If the bank so nominated accepts the nomination, its responsibility to the beneficiary is not only to accept the drafts drawn but also to make payment on their due dates. The Paying Bank: Paying bank is a bank in the beneficiary's country nominated in the letter of credit to make payment against documents to be tendered under the credit. Paying Bank must examine all documents with reasonable care to ascertain that these are drawn in accordance with the terms and conditions of the credit. The Transferring Bank: If the L/C is transferable, then the 1st beneficiary of the L/C may transfer the L/C to the 2 nd beneficiary, through a bank nominated by the Issuing Bank. This bank is called the Transferring Bank.
International Trade Diagram: The international trade can be illustrated by the following diagram:
Contract of sale (1)
Exporter London (Beneficiary)
Forwards L/C to (4)
Ships Goods to (5)
Presents documents and obtains payment from (6)
Midland Bank London/ advising negotiating Bank
Importer Dhaka (Applicant)
Recovers Amount from (8)
Obtains reimbursement from (7)
Applies for opening of L/C (2)
Mercantile Bank Ltd., Dhaka (Issuing Bank)
Opens L/C and send it to (3) Figure Trade Diagram List of Major Correspondents :
1. Citibank, N.A. 3. The Bank of Tokyo Mitsubishi Ltd. 2. Wachovia Bank, N.A.
4. The Hongkong and Shanghai Banking Corporation Limited.
23. United Bank of India 24. ICICI Bank etc.
5. Sumitomo Mitsui Banking Corporation 25. Woori Bank 6. Commerzbank 26. Bank of America, N.A. 7. Standard Chartered Bank 27. ABN AMRO Bank (Deutschland) AG 8. The bank of Nova Scotia 28. Korea Exchange Bank 9. HypoVereinsbank 10. Commonwealth Bank of Australia
29. Bank of Maldives Pl c 30. Credit Lyonnais
11. Toronto Dominion Bank 31. Sevenska Handelsbanken 12. UniCredito Italiano 32. Nordea Bank Sweden AB (PUBL) 13. American Express Bank 33. UBS AG 14. MashreqBank 34. Habib Bank AG Zurich 15. Hatton National Bank 35. Bank of Cyprus Ltd. 16. Bank Austria Creditanstalt 36. British Arab Commercial Bank Ltd. 17. Mizuho Corporate Bank Ltd. 37. Swed Bank 18. Dresdner Bank AG 38. HBZ Finance 19. UTI Bank 39. Habib American Bank 20. UBAF 40. Nepal Bangladesh Bank Ltd. 21. Danske Bank A/S 41. China Merchants Bank 22. ING Bank Import IMPORT: Import trade in Bangladesh is controlled under the Import and Export control Act 1950. Authorized Dealer Banks will import the goods into Bangladesh following the import policy, public notice, F.E. circular and other instructions from competent authorities from time to time. The import functions of the branch as far I have understood are discussed bellow.
Documentary Requirements for Opening L/C: Importer shall submit following documents for opening L/C: (a) Valid Import Registration Certificate (IRC) (commercial/industrial) The following persons/purposes are exempted from Registration: i) Govt. Departments ii) Local Authorities & Statutory Bodies iii) Recognized Educational Institutions iv) Hospitals v) Import of Capital Machinery for own use (b) Tax Identification Number Certificate (c) VAT Registration Certificate (d) Membership Certificate of a recognized Trade Association as per IPO (e) A declaration, in triplicate, that the importer has paid income-tax or submitted income lax return for the preceding year (f) Pro forma Invoice or Indent duly accepted by the importer (g) Insurance Cover Note with Money Paid Receipt covering value of goods to be imported plus 10 (Ten) percent above h) L/C application Form (MF-fx l3) duly signed by the importer i) Letter of Credit Authorization Form (LCAF), commercial or industrial as the case may be, duly signed 'by the importer and incorporating New ITC number of at least 6(six) digits under the Harmonized System as given in the Import Trade Control Schedule 1988. j) IMP Form duly signed by the importer Precautionary Steps: • • • • • • •
The Branch must ensure that they deal only with known customers having a place of business in Bangladesh and can be traced easily, should any occasion arise for this purpose. The Branch shall all assess the financial standings & credibility of the customers with a view to ensure satisfactory arrangement for retirement of the documents. The Branch should also obtain confidential report on the exporter in all cases where the amount of the L/C exceeds Tk.2, 00,000.00 against P/invoice and Tk.5, 00,000.00 against indents. The Branch shall verify prices so as to ascertain competitiveness of the commodities to be imported. The Branch shall also see the marketability of the commodities to be imported. The Branch shall verify signature of the Importer on L/C Application Forms, LCAF & IMP Form. The Branch will not open L/Cs for import of goods through the customs stations/routes like Sonamasjid, hili, Burimary. Birol etc. unless the importers pay 100% margin or prior Head Office approval is obtained.
Sanctioning; Documentation & Legal Formalities :
Approval of Head Office and/or Branch Manger (where L/Cs are to be opened under his delegation) is to be obtained before opening L/C(s). Security documentation is to be completed as per sanction/approval terms prior to opening of L.C. Charge Forms such as Demand Promissory Note, Letter of Undertaking, Letter of Debit Authority & Letter of Guarantee (where applicable) to be obtained with due stamps as per prevailing Stamp Act rate. Opening L/C: With the little understanding of L/Cs and after completing necessary formalities, the branch may now proceed for opening the credit on behalf of their own customers who maintain accounts with them, except government organizations. Necessary entries to be given in the L/C opening Register (MB/FX-03) by allocating an L/C number and following vouchers are to be passed for completion of opening transactions at Bill Clean (BC) Selling rate (Spot): Dr. Customers Liability on L/C Cash Cr. Bankers (Liability on L/C Cash (Amount to be rounded off to the nearest thousand Taka) (b) Margin/Commission & Charges: Dr. Customers A/c: Margin + Commission + F.C.C + Postal/Telex + Stamp + Misc. Cr. Sundry Deposit A/c: Margin on L/C (Cash) Cr. Income A/c: Commission on L/C Foreign Cr. Income A/c: Postal/Telex Recoveries Cr. Income A/c: Miscellaneous Earnings (Handling charges, stationery charges, etc.) Cr. Sundry Deposit A/c.: F.C.C Cr. Other Assets A/c: Stamps in Hand Time Limit for Opening of L/C: L/Cs shall be opened within 150 days from the date of issuance of LCAF. Terms of L/C S All description of the goods along with quantity and unit price is to be incorporated in the L/C and shall take all precautions to quote the correct H.S. Codes of the goods. Prices to be quoted on CFR or FOB basis according to P/Invoice or indent. No import shall be made on CIF basis without prior approval from the Ministry of Commerce. L/Cs should provide for payment to be made against full sets of On Board (shipped) transport documents drawn or endorsed to the order of Mercantile Bank Limited showing dispatch of goods covered the credit to a destination in Bangladesh. All LCs must specify submission of signed invoices, certificates of origin & pre-shipment Inspection certificate. L/Cs shall also incorporate any other documents which are mandatory specified for that Commodity in the IPO/Public Notices/Bangladesh Bank Circulars. It is not permissible to open import L/Cs in favor of beneficiaries or to use shipping carriers of the countries from which import into Bangladesh are banned by the competent authority. Is also not permissible to open clean or revolving or packing credits. Shipment Validity & Expiry
All L/Cs must specify shipment validity as per terms of the P/Invoice or indent or L/C application. However, shipment validity under any circumstances shall not exceed 9(nine) months from the date of issuance of LCAF or registration of LCAF with Bangladesh Bank, except capital machinery and spare parts, shipment of which shall be made within 17 (seventeen) months. All LCs must stipulate an expiry date and a place for presentation of documents for payment/acceptance. Additional Confirmation to the L/Cs: By the request of the importer, the branch may request a third correspondent bank (having prior arrangement of credit line) to add their confirmation to the L/Cs. The branch shall send a request letter to the International Division, Head Office for their record and necessary instructions to be advised to the concerned confirming bank for this purpose. Confirmation charges are to be recovered from the importer as per schedule of charges of the bank unless it is waived or directed otherwise as per agreement between the supplier and the importer. Vouching Procedure: Dr: Customerâ€™s A/c. Cr: Income A/c: Commission on L/C (confirmed) Manipulation of Reimbursement terms and issuance of Reimbursement Authorization The branch shall stipulate reimbursement term in the L/Cs mentioning name of the Reimbursing Bank and Nostro Account Number (preferably in the country of the currency denominated in the L/Cs so as to avoid possible loss due to conversion of' differential currencies). The branch shall issue and send Reimbursement Authorization to the Reimbursing Bank immediately after opening of the L/Cs. Amendments The Branch may allow amendments to the L/Cs only upon requests of the L/C applicants that do not violate foreign exchange regulations and import control regulations. Necessary charges and/or margin (where L/C value is increased by subsequent Amendments) arc also to be realized /recovered from the customer before amending the L/Cs. Vouching Procedure Dr. Party Account (for margin and/or commission + Postage/Telex + F.C.C) Cr: S/D A/c: Margin on L/C (Cash) (if the L/C value is increased) Cr. Income A/c: Commission on L/C Foreign Cr. Income A/c: Postal/Telex Recoveries Cr. Sundry Deposit A/c: F.C.C Contra liability if the L/C value is increased: Dr. Customerâ€™s liability on L/C cash (for increased amount) Cr. Backer's liability on L/C cash Cancellation of L/Cs:
An Irrevocable L/C cannot be cancelled without the agreement of the beneficiary and the confirming bank, if any. The branch, at the request of the importer, may approach the L/C advising bank for cancellation of the L/C and such cancellation will only be effective upon consent of the beneficiary advised to the branch through the L/C advising bank. However, the branch may cancel the L/C without the consent of the beneficiary, advising bank and confirming bank, if any, if the L/C expires and the brand", receives no shipping documents within 15 days" of expiry of the L/C. The branch should send a message to the concerned bank advising; such cancellation and closure of L/C file due to expiry of the same. The branch will then cancel the Reimbursement Authorization which has been provided to the Reimbursing Bank while opening the L/C. The branch will reverse L/C contra liabilities, refund margin and recover charges from the L/C applicant as per schedule of charges. Scrutiny, Lodgment & Retirement of Import Bill: Scrutiny/Examination of Documents: Upon receipt of the documents the branch shall examine the documents with the LCs and determine whether (to take up or refuse the documents and to inform the negotiating bank from which it received the documents within seven banking days following the day of receipt of the documents. If the documents appear on their face not to be in compliance with the terms and conditions of the credit, branch must refuse the documents by sending Notice to that effect by telecommunication or by other expeditious means to the negotiating bank without delay but not later than the close of the seventh banking day following the day of receipt of the documents. Such Notice must state all discrepancies in respect of which the bank refuses the documents and must also state whether it is holding the documents at the disposal of or is returning them to the presenter. The branch may then approach the L/C applicant for a waiver of the discrepancy (ices). Import Bill Scrutiny Checklist: (a)Forwarding schedule of the negotiating bank Whether there is any discrepancy mentioned in it Whether there is any 'special instruction that cannot be complied with Whether there is any commission/charge payable/realized beyond L/C terms (b)General Late shipment Late Presentation Early shipment L/C expired L/C over-drawn Partial shipment or transshipment beyond L/C terms
Bill of exchange Amount of B/E differ with Invoice Not drawn on L/C issuing Bank Not signed j Tenor of B/E not identical with L/C Full set not submitted Invoice: Not issued by the beneficiary Not signed by the beneficiary Not made out of the name of the applicant Description, price, quantity, sale terms of the goods not correspond to the credit Not marked one fold as original Shipping marks differ with B/L & packing list Packing list: Gross weight, net weight, measurement, number of cartoons/ packages differs with B/L. Not marked one fold as original Not signed by the beneficiary Shipping marks differ with B/L Bill of Lading/ Airway bill, etc: Full set of B/L is not submitted B/L is not drawn or endorsed to the order of Mercantile Bank Limited “Shipped on Board”, “Freight Prepaid” etc notations are not marked on the B/L Name address of the notify parties are not mentioned or differ with L/C B/L does not indicate the name and capacity of the party “Shipped on Board” notation not showing the name of pre-carriage vessel/intended vessel “Shipped on Board” notation not showing the port of loading and vessel name Short form of B/L Charter party B/L Description of goods in B/L not agreed with that of invoice. B/E, P/L Alteration of B/L not authenticated Loaded on Deck Stale B/L PSI Certificate: CIF value not shown Description, quantity, quality, H.S. code and price of goods differ with L/C and invoice. Etc Others: Inadequate number of Invoice, Packing list, B/L, and others submitted Certificate of origin differ with L/C terms Shipping Company Certificate regarding ownership of vessel not submitted LCA Form, IRC, HS Code, and L/C Number are not mentioned in all the documents, etc. Disposal of Discrepant Documents:
If the importer refuses to accept the documents because of discrepancies advised to him, the branch should immediately advise the same to the negotiating bank by telex/cable and dishonored documents will then be handled, according to the instruction of the negotiating bank. If no reply is received regarding disposal of the document, the bank will return the full sets of documents to the presenter by courier service/Registered postal Mail. The branch should cancel the Reimbursement Authorization provided to the Reimbursing Bank while the opening branch of the L/C and/or claim refund of reimbursement with interest from the remitting bank, of any reimbursement which has been made to the negotiating bank. The branch shall reverse the contra liability which has been passed at the time of opening and recover/realize postal and other charges incurred by the bank on his behalf. Lodgment of Documents: If the documents are found in order or the discrepancies in the document, if any, are subsequently accepted by the applicant, the branch will record the particulars of the documents in the PAD Register (MB fx-05) and the following vouchers are to be passed for completion of lodgment transactions: i) Reversal of L/C 1iability to the extent of documents: Dr. Bankerâ€™s liability on L/C Cash\ Cr. Customerâ€™s liability on L/C Cash ii) PAD Vouchers: Dr. PAD A/c for Bill value including interest @ B.C selling rate prevailing on the date of lodgment less Margin amount Cr. Sundry Deposit A/c: Margin on L/C Cash Dr. MBL General A/c: CAD ID on respective Nostro A/c. for bill value at Ready Selling Rate in case of USD & ACU Dollar or TT OD rate for all other currencies. Cr. Income A/c: Interest on PAD Cr. Income A/c: Exchange Gain on F.C. Retirement of Documents: Importer is to be advised on the date of lodgment of documents with full particulars of shipment to retire the documents against payment or to dispose the import documents as per pre-arrangement, if any. Subsequent reminders are also to be issued every week till retirement of the bill. Such bills will be considered and be reported as overdue if the importer fails to retire the documents within 21 days of arrival of the relative import consignments at the port of destination. When the importer intends to retire the documents, the branch will prepare the following retirement vouchers or adjustments of PAD liabilities there against: Dr. PAD A/c for the interest amount accrued from the date of lodgement to the date of retirement. Cr. Income A/c: Interest on PAD Dr. Party A/c for PAD amount with accrued interest Cr. PAD A/c There after the documents may be handed over to importer after certification and endorsement. L/C on Deferred Payment basis:
L/Cs may be opened on deferred payment (DA) basis in the following cases subject to approval of' Head Office: Capital machinery imports on up to 360 days usance basis, Industrial raw material imports for own use of industrial importers on up to 180 days usance basis, Import of coastal vessels including oil tankers and ocean going vessels including those procured for scrapping on up to 360 days usance basis, Import of agricultural implements and chemical fertilizer on up to 180 days basis, (v) Import of life saving drugs on up to 90 days usance basis. For such deferred payment imports, the prices must be internationally competitive and usance interest, if any, should not be at rate higher than the LIBOR for the relative period or the equivalent rate prevailing in the currency of the country of the supplier. (iii) Vouchers for charges, such as Telex/ Postal charges for advising maturity date and others Dr. Party's Account Cr. Income A/c: Postal/ Telex Recoveries BACK TO BACK L/Cs: The branch may open back to back import L/C against export L/C received by export oriented industrial unit operating under the bonded warehouse system, subject to observance of domestic value addition requirement prescribed by the NBR/Ministry of Commerce from time to time. The following instructions should be complied with while opening Back to Back Import L/C: The unit requesting for this facility should possess valid IRC, ERC and valid bonded warehouse license. The branch shall hold the Master Export L/C affixing Bank's lien stamp thereon and keep in safe for security purpose. The Master Export L/C should have validity period adequate to cover the time needed for importing inputs, manufacture of merchandise and shipment to consignee. The Back to Back L/C value shall not exceed the admissible percentage of net FOB value of the relative Master Export L/C (as per prescribed value addition requirement). For computation of net FOB value of a master export L/C, the freight charge, insurance cost and commission if payable by the exporter shall be deducted from the L/C value. If the freight element is not shown separately, freight certificate from the shipping company or agent should be asked for, The Back to Back import L/C shall be opened on up to 180 days usance (DA) basis, except in case of those opened against Export Development Fund, administered by Bangladesh Bank, in which case the back to back L/C will be opened on sight (DP) basis, Interest for the usance period shall not exceed LIBOR or the equivalent interest rate in the currency of settlement,
All amendments of the master export L/C should be noted down carefully to rule out chances of excess obligation under the back to back import L/C. Back to Back L/C can either be local or foreign. Inland BTB L/C denominated in foreign exchange may be opened in favour of local supplier/ manufacturer of inputs against master export L/C and BTB L/C may, in turn, be opened for import of inputs against inland BTB L/C in favour of local supplier/manufacturer under bonded warehouse system up to value limits applicable as per prescribed value addition requirement. Vouching Procedure (a) Creation of L/C liability Dr. Customerâ€™s liability on BTB L/C Cr. Banker's liability on BTB L/C (Applicable rate: B.C Selling rate) (b) Commission & others charges Dr. Customers A/c: Commission for 180 days + FCC + Postal/ Telex Recoveries + Misc. Cr. Income A/c: Commission on L/C foreign. Cr. Income A/c: Postal/ Telex Recoveries. Cr. Income A/c: Miscellaneous earnings (Handling charges, stationery, etc.) Cr. Sundry Deposit A/c: FCC Cr. Other Assets A/c: Stamps in Hand c) Amendment charges i) If the L/C value is increased Dr. Customerâ€™s liability on BTB L/C (for increased amount) Cr. Banker's liability on BTB L/C Dr. Customers A/c: Commission for increased amount + other charges Cr. Income A/c: Postal /Telex Recoveries Cr. Income A/c: Miscellaneous earnings (Handling charges if any) Cr. Sundry Deposit A/c: FCC ii) If L/C expiry time is extended beyond 180 days Dr. Customers A/c: Commission for further one quarter Cr. Income A/c: Commission on L/C (Foreign) & other vouchers Acceptance & Lodgment of BTB Import Bill: On receipt of import documents against the L/C, the documents should be subjected to usual scrutiny. If found in order, the customer should be asked to accept the usance bill of exchange. When the bill of exchange is returned by the drawee (i.e. importer) after duly accepted by him, the maturity date of the bill is to be worked out and noted in the PAD register and also in Due Date Diary (MBFx-16). The date of maturity of tie Bill of Exchange is communicated to the negotiating or collecting bank by telex/ fax.
Simultaneously the documents are lodged under ABP (Accepted Bills for Payment). Vouchers to be passed: i) Reversal of L/C liability Dr. Banker's liability on BTB L/C Cr. Customer's liability on BTB L/C ii) Creation of Acceptance liability Dr. Customer's liability on BTB Bills From: Mercantile Bank Limited Cr. Banker's liability on BTB Bills (Applicable rate: B.C Selling rate) (iii) Vouchers for charges such as Telex/ Postal charges for advising maturity date and others Dr. Party's Account Cr. Income A/c: Postal/ Telex Recoveries of Back to Back L/C Payment of BTB L/C shall be made at maturity, out of export proceeds. The required foreign exchange, out of repatriated export proceeds, will be set aside in a separate foreign currency account called FC held for BTB L/C. The branch will pay BTB bills according to their maturity within 3 working days from the date of realization of export proceeds. If export proceeds are not available, the ABP liability should be liquidated by grant of SOD (Export). Voucher to be passed: (i) Reversal of acceptance liability Dr. Bankerâ€™s liability on BTB bills Cr. Customer's liability on BTB bills (ii) Out of export proceeds settlement in FC Dr. Exporters F.C held A/c: Bill value with usance interest @ prevailing O.D sight (export) Cr. MBL General A/c: On Nostro A/c @ prevailing OD sight (export) (iii) Out of Export Proceeds settlement in B.D Taka Dr. Experts F.C held A/c Cr. MBL General A/c: On Nostro A/c Dr. MBL General A/c: F.C amount on Nostro Account Cr. Income A/c: Exchange gain on FC Cr. Bills payable A/c: Payment Order Dr. Income A/c: Commission on Pay Order Cr. Income A/c: Postage recoveries (iv) If export proceeds arc not available - settlement in FC Dr. SOD (export) A/c Cr. MBL General A/cCr. Income A/c: Exchange gain on FC (v) If export proceeds are not available - settlement in BD Taka Dr. SOD (export) A/c: Cr. Bills Payable A/c Cr. Income A/c: Exchange gain on FC Cr. Income; A/c: Commission on Pay Order
Cr. Income A/c: Postage recoveries (vi) If export proceeds are not adequate to cover BTB Bill - settlement in FC Dr. Exporters FC held A/c Cr. MBL General A/c Dr. SOD (export) A/c Cr. MBL General A/c Cr. Income A/c: Exchange gain on FC (vii) If export proceeds are not adequate to cover BTB bill - settlement of BD Taka Dr. Exporters F.C held A/c Cr. MBL General A/c Dr. MBL General A/c Dr. SOD (export) A/c: Cr. Income A/c: Exchange gain on FC Cr. Bills payable A/c (export) less PO commission & Postal charges Cr. Income A/c: Commission on Pay Order Cr. Income A/c: Postage recoveries Export Export Operation of MBL: From the very beginning a Commercial Bank like MBL is involved in financing foreign trade apart from financing internal credit requirements in the economy. This involves handling of import business through opening Letter of Credit and Handling of export business. As banking has become very keenly competitive, banks find it convenient to involve in foreign exchange business as lucrative sources of earning income and profit. Bangladesh exports a large quantity of goods and services to foreign households. Readymade textile garments (both knitted and woven), Jute, Jute-made products, frozen shrimps, tea are the main goods that Bangladeshi exporters exports to foreign countries. Garments sector is the largest sector that exports the lion share of the country's export. Bangladesh exports most of its readymade garments products to U.S.A and European Community (EC) countries. Bangladesh exports about 40% of its readymade garments products to U.S.A. Most of the exporters who export through MBL are readymade garments exporters. They open export L/Cs here to export their goods, which they open against the import L/Cs opened by their foreign importers. Export L/C operation is just reverse of the import L/C operation. For exporting goods by the local exporter, bank may act as advising banks and collecting bank (negotiable bank) for the exporter. Export policy: Export policies formulated by the Ministry of Commerce, which provide the overall guideline and incentives for promotion of exports in Bangladesh. Export policies also set out commodity-wise annual target. It has been decided to formulate these policies to cover a fiveyear period to make them contemporaneous with the five-year plans and to provide the policy regime. The export-oriented private sector, through their representative bodies and chambers
are consulted in the formulation of export policies and are also represented in the various export promotion bodies set up by the government. Export incentives : Different incentives are: a) Financial Incentives: Restructuring of Export Credit Guarantee Scheme;& convertibility of Taka in current account; Exporters can deposit 40% of FOB value of their export earnings in own accounts in dollar and pound sterling; Expansion of export credit period from 180 days to 270 days;50% tax rebate on export earnings; Duty draw back; Bonded warehouse facilities to 100% export oriented firms; Duty free import of capital equipment for 100% export oriented firms; General incentives: National Export Trophy to successful exporters; training course on external trade; Arrangement of international trade fairs, commodity-based exhibitions in the country and participation in foreign trade fairs; Other incentives: Assistance in improvement of quality and packaging of exportable items; Simplification of export procedures etc. Export procedures: The import and export trade in our country are regulated by the Import and Export (Control) Act, 1950.Under the export policy of Bangladesh the exporter has to get valid Export registration Certificate (ERC) from Chief Controller of Import & Export (CCI&E). The ERC is required to renew every year. The ERC number is to incorporate on EXP forms and other papers connected with exports. Step 1 - Registration of exporters For obtaining ERC, intending Bangladeshi exporters are required to apply to the controller/ Joint Controller/ Deputy Controller/ Assistant Controller of Imports and Exports, Dhaka/ Chittagong/ Rajshahi/ Mymensingh/ Sylhet/ Comilla/ Barishal/ Bogra/ Rangpur/ Dinajpur in the prescribed form along with the following documents: Nationality and Assets Certificate; Memorandum and Article of Association and Certificate of Incorporation in case of Limited Company; Bank Certificate; Income Tax Certificate; Trade License etc. Step 2 - Securing the order
After getting ERC Certificate the exporter may proceed to secure the export order. He can do this by contacting the buyers directly or through agent. In this purpose the exporter may get help from: 1.License Officer; 4.Bangladesh Mission Abroad; 2.Export Promoting Organization; 5.Chamber of Commerce (local & foreign) 3.Buyerâ€™s Local Agent; 6.Trade Fair etc. Step 3 - Signing the contract After communicating buyer, exporter has to get contracted (writing or oral) for exporting exportable items from Bangladesh detailing commodity, quantity, price, shipment, insurance and marks, inspection and arbitration etc. Step 4 - Receiving letter of credit After getting contract for sale, exporter should ask the buyer for Letter of Credit (L/C) clearly stating terms and conditions of export and payment. The following are the main points to be looked into for receiving/ collecting export proceeds by means of Documentary Credit: The terms of the L/C are in conformity with those of the contract; The L/C is an irrevocable one, preferably confirmed by the advising bank; The L/C allows sufficient time for shipment and negotiation. (Here the regulatory framework is UCPDC-500, ICC publication) Terms and conditions should be stated in the contract clearly in case of other mode of payment: Cash in advance; Open account; Collection basis (Documentary/ Clean) (Here the regulatory framework is URC-525, ICC publication) Step 5 - Procuring the materials After making the deal and on having the L/C opened in his favor, the next step for the exporter is to set about the task of procuring or manufacturing the contracted merchandise. Step 6 - Shipment of goods Then the exporter should take the preparation for export arrangement for delivery of goods as per L/C and inco terms, prepare and submit shipping documents for Payment/ Acceptance/ Negotiation in due time. Documents for shipment: EXP form, ERC (valid), Shipping Instruction, Transport Documents Other Documents, Certificate of Origin, Inspection Certificate, Quality Control Certificate,
Step 7 - Final step
L/C copy, Customer Duty Certificate, Insurance Documents, Invoice, Bills of Exchange (if required) G.S.P. Certificate, P hyto-sanitary Certificate
Submission of the documents to the Bank for negotiation. Export documents checking: General verification: L/C restricted or not. Exporter submitted documents before expiry date of the credit. Shortage of documents etc. Particular verification: a) Each and every document should be verified with the L/C. Cross verification a) Verified one documents to another. Discrepancies: After proper examination or checking of a described Export document banker may find following discrepancies: General: Late shipment & presentation L/C over-drawn
L/C expired Partial shipment or transshipment beyond L/C terms.
Bill of Exchange (B/E): Amount of B/E differ with Invoice. Tenor of B/E not identical with L/C.
Not drawn on L/C issuing Bank & not signed Full set not submitted.
Commercial Invoice (C/I): Not issued by the Beneficiary. Not signed by the Beneficiary. Not made out in the name of the Applicant Description, Price, quantity, sales terms of the goods not corresponds to the Credit. Shipping Mark differs with B/L & Packing List. Packing List: Gross Wt., Net Wt. & Measurement, Number of Cartoons/Packages differ with B/L. Not market one fold as Original. Not signed by the Beneficiary. Shipping marks differ with B/L. Bill of Lading/Airway Bill etc (Transport Documents): Full set of B/L not submitted. B/L is not drawn or endorsed to the Order of Prime Bank Ltd. “Shipped on Board”, “Freight Prepaid” or “Freight Collect” etc. notations are not marked on the B/L. Short Form B/L Charter party B/L Loaded on Deck.
Checking: While checking the export documents following things must be taken in consideration. L/C terms: Each and every clause in the L/C must be complied with meticulously and ensure the following: That the documents are not state; That the documents are negotiated within the L/C validity, It a credit expire on a recognized bank holiday its life is automatically become valid upto the next works day. That the documents value does not exceeds the L/C value. Export financing: Financing exports constitutes an important part of a bankâ€™s activities. Exporters require financial services at four different stages of their export operation. During each of these phases exporters need different types of financial assistance depending on the nature of the export contract. Mainly there are following two types of financing: Pre-shipment credit Post-shipment credit Pre-shipment credit: Pre-shipment credit, as the name suggests, is given to finance the activities of an exporter prior to the actual shipment of the goods for export. Before allowing such credit to the exporters the bank takes into consideration about the credit worthiness, export performance of the exporters, together with all other necessary information required for sanctioning the credit in accordance with the existing rules and regulations. Pre-shipment credit is given for the following purposes: Cash for local procurement and meeting related expenses. Procuring and processing of goods for export.& Packing and transporting of goods for export etc. An exporter can obtain credit facilities against lien on the irrevocable, confirmed and unrestricted export letter of credit in form of the followings i) 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 on exports L/C or contract, bank normally insists on the exporter in furnishing collateral security. ii) Packing credit: Packing Credit is essentially a short-term advance granted by a Bank to an exporter for assisting him to buy, process, manufacture, pack and ships the goods. This type of credit is sanctioned for the transitional period starting from dispatch of goods till the negotiation of the export documents. The drawings under Export Cash Credit limits are generally adjusted by the drawing in packing credit limit, which is, in turn liquidated by the negotiation of export documents. iii) Back To Back Letter of Credit (BTB)
Bangladesh is a developing country. After receiving order from the importer, very frequently exporters face problems of scarcity of raw material. Because some raw materials are not available in the country. These have to be collected from abroad. In that case, exporter gives lien of export L/C to bank as security and opens an L/C against it for importing raw materials. This L/C is called Back To Back L/C. Sometimes there is provision in the export L/C that the importer can use the certain portion of the export L/C amount for importing accessories that are necessary for the making of the product. Only in that case, BTB is opened. Payment of Back to Back L/C: Client gives the payment of the BTB L/C after receiving the payment from the importers. But in some cases, client sells the bills to the MBL. But if there is discrepancy, the MBL sends it for collection. b) Post shipment credit: This type of credit refers to the 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 cannot afford to wait for a long time for without paying manufacturers/suppliers. Before extending such credit, it is necessary on the part of banks to look into carefully the financial soundness of exporters and buyers as well as other relevant documents connected with the export in accordance with the rules and regulations in force. Remittance FOREIGN REMITTANCE: Opening and Operation of Different Types of Foreign Currency Accounts: Convertibility of Taka in current account transactions symbolised a turning point in the country's exchange arrangement and exchange rate system. Now the operation of foreign currency accounts have been more liberalized. Funds from this A/Cs are freely remittable to any country according to the needs of A/c holders. Types of FC Account: (a) Resident Foreign Currency Deposit (RFCD) Account: Persons ordinarily resident in Bangladesh may maintain foreign currency accounts with foreign currency brought in at the time of their return in Bangladesh from visits abroad. These accounts are termed as RFCD accounts. (b) Non-resident Foreign Currency Deposit (NFCD) Account: Non resident Foreign Currency accounts may now be maintained as long as the account holder desire. Amount brought in by non-resident Bangladeshi can be deposited in FC account any time after to Bangladesh. Who can Open FC Accounts: The Branch with Authorized Dealership Licence may, without prior approval of Bangladesh Bank, open foreign currency A/Cs in their books in the name of:
(a)Bangladeshi nationals residing abroad (b) Foreign nationals residing abroad or in Bangladesh (c) Foreign firms and companies registered abroad and operating in Bangladesh or abroad (d) Foreign missions/Embassies/UN organizations and their expatriate employees (e) Diplomatic bonded warehouses (duty free shops) (f) Local and Joint venture contracting firms employed to execute projects financed by foreign donors/international donor agencies. (g) Bangladeshi nationals working as employees/consultants in international bodies in Bangladesh and drawing pay and allowances/consultancy fees/honorarium in foreign currency. (h) Merchandise and service exporters (i) Bangladeshi Nationals who are ordinarily resident in Bangladesh may open foreign currency accounts with foreign exchange brought in at the time of their return to Bangladesh from visits abroad. (j) Industrial enterprises in EPZ. Currency in which FC A/C can be opened: FC Accounts can be opened either in (a) Pound Sterling (b) USD (c)EURO (d) Japanese Yen (e) GBP Documents required for Opening FC A/Cs: (a) For Bangladeshi Wage Earners: Photocopy of first 7 (seven) pages of valid passport and visa page/arrival page Photocopy of employment contract/appointment letter/work permit Two copies of passport size photograph of each account holder and nominee duly attested. (b) For Foreign National/Company/Firm Two copies of photograph of account holder for individual and operators of other account holder Copies of relevant pages of passport for individual and operators of other account holder Copy of service contract/appointment letter/work permit, if any for individual Copies of registration in Bangladesh with Board of Investment / Bangladesh Bank for Foreign Joint Venture Firm. Copies of the Memorandum and Articles of Association/Laws/Bye Laws, etc. or Joint Venture Agreement for Joint Venture Company Mode of Operation: Foreign currency accounts opened in the name of Bangladesh nationals working abroad or self employed abroad can now be maintained as long as the account holder desires. Such accounts may also be opened by the eligible persons within six months of their return to Bangladesh.
Deposits: Credit to a foreign currency account may be made against inward remittance of foreign exchange in any form or transfer from another FC account or Non-Resident Taka Accounts of bankers abroad. ADs may also raise credits to such accounts with the proceeds of convertible foreign exchange viz. currency note, travelers' cheques, drafts, etc. brought into Bangladesh by the account holders while on temporary visit to Bangladesh, provided such foreign exchange in excess of US$ 5000 or its equivalent has been duly declared by them to the customs at the time of their arrival. Portion of repatriated export proceeds of Merchandise/service exporters are allowed to credit to the exporters retention quota account. Foreign exchange earned through business done or services rendered in Bangladesh can not be put into F.C account. Withdrawals: Payments may be made freely abroad from these FC accounts to the extent of balance lying therein. Local disbursements may also be made freely in Taka from such foreign currency accounts. Funds lying in FC Accounts can be utilized for import of goods and commodities as per instructions issued by the CC1&E and Bangladesh Bank. No payment in foreign exchange may be made to or on behalf of any resident in Bangladesh out of the FC accounts except foreign diplomats or privileged persons who have specific authority from Bangladesh Bank to accept such payment. OUTWARD REMITTANCE: The term "Outward Remittance" include not only remittance i.e. sale of foreign currency by TT, MT, Drafts, Travelers cheque but also payment against imports into Bangladesh & Local currency credited to Non-Resident Taka Accounts of Foreign banks or convertible Taka account. Two forms are used for Outward Remittance of Foreign Currency, such as (a)IMP Form: All outward remittances on account of imports are done by form IMP. (b)T.M. Form: For all other outward remittances form TM is used. Private Remittance: For the following private purposes, outward remittances are permitted: 1. Family remittance facility: 2. Remittance of Membership Fees/Registration Fees etc.: 3. Education: 4. Remittance of Consular Fees: 5. Remittance of Evaluation Fees: 6. Travel
7. Health & Medical: 8. Seminars and workshops: 9. Foreign Nationals: 10. Remittance for Hajj: 11. Other Private Remittances Official & Business Travel: For the following official and business purposes, outward remittance is permitted: Official Visit: Business Travel quota for New Exporters: Business Travel Quota for Importers and Non-exporting producers: Exporters' Retention Quota: Commercial Remittance: For the following commercial purposes, outward remittances are permitted: Opening of branches or subsidiary companies abroad: Remittance by shipping companies, Airlines & Courier Service: Remittance of Royalty and Technical Fees: Remittance on account of Training & Consultancy: Remittance of Profits of Foreign Firms/Branches: Remittance of Dividend: Subscriptions to Foreign Media Services: Costs/Fees for Reuters Monitors: Advertisement of Bangladeshi Products in mass media abroad: Bank Changes: INWARD REMITTANCE: The term inward remittance includes not only the purchase of foreign currencies y TT, MT, Draft etc., but also purchase of TC. Utmost care to be taken wile purchasing notes, TC, DD and similar instruments for protecting the Bank from probable loss as well as safety of the bank officials concerned. Remittance Services: Mercantile Bank Limited maintains a strong network with the Overseas Exchange Companies & Banks in different parts of the world ensuring better remittance services for its customers. The following are the list of Overseas Exchange companies/Banks having arrangement with mercantile Bank Limited. Name of the Exchange Company Rumana Money Services Wall Street Exchange Centre Al-Ahalia Money Exchange Bureau Naaz Exchange Limited Xpress Money Services Euro-Bangla Money Transfer Ltd National Exchange Company S.R.L
Presence UK UAE UAE Canada Global UK Italy
Al Moosa Exchange Company AN Express Ltd SN Money Exchange Limited Trust Exchange UK limited Economic Exchange Company Maniflo Money Exchange Inc Bangladeshi Money Exchange Ltd Global Exchange Italia Srl, Italy Rupali Exchange (Europe) Ltd Al-Zaman Exchange W.L.L ICICI Bank
Kuwait UK UK UK UAE USA Canada Italy UK Qatar Canada
Findings: Major findings of the study are: • •
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The MBL follows the traditional banking system. The entire banking procedure is not fully computerized. The working environment of MBL is very interactive, informal and attractive. People working here are cooperative to the highest possible extent. There is no hidden barrier or boundary while communicating between the superior and the subordinates. This is essential for boosting one’s performance. The Foreign Exchange Department is very much Strong. Clauses they use in dealing with the foreign Bank in term of L/C opening and amendment of L/C, are very much expedient to the foreign Bank. It is giving a competitive advantage to the MBL. For this, businessmen like to deal their business with the MBL. The operations of international trade are as per local and international laws, rules, customs and practices. The top executives and officers are very helpful to the clients. Some of our businessmen do not know the exact procedures of international trade. The officers of MBL help them to properly execute their business. Financing in the international trade is very crucial for the economy as well as it is risky. Sometimes the government imposes restriction to import and export some products. As a result the rate of opening L/C become reduces. MBL provide little assistance in relation with foreign exchange to the small entrepreneur comparing to large business houses. Small entrepreneur has to keep higher margin, sometimes 100%, regarding opening a L/C. The presence of modern data processing and communication equipments is inadequate in MBL. This cause a considerable degree of inefficiency in the bank’s performance, especially in the foreign exchange department. Internal Control System (ICS) of MBL is not up to the standard (as per BAS). Anti money laundering procedures of the bank is very effective. The marketing strategy adopted by the bank is effective but not efficient. The appearance of the bank in the printing media and electronic media has become a matter of fortune.
The specialization of the personnel on a particular task is not ensured. It has been found that executives are transferred from one department to another department frequently, from branch to another in every three years without ensuring that they are acquainted with the task. The expansion process of the bank has little match with the modern pace of globalization. Despite being stoned in 1999, the bank has only 41 branches now. Even it does not have branch in many commercially and industrially important places. Recommendation: After working here for this period, my recommendations for the bank are: • • • • • • • •
The Branch should move to the fully automated banking system. This will save a lot of time of personnel working here and will increase their and the Bank’s performance thereby. In case of importing goods the Bank should aware about over invoicing so that nobody can get chance to send money abroad illegally. In case of exporting goods the Bank should aware about under invoicing so that nobody can get chance to avoid Tax, Vat, and Duty. If the bankers can scrutinize the Commercial invoice it will decrease the Money Laundering. The Assistant Commissioners of Tax can contribute more. They must be more careful about invoicing and restricted products. Internal control system MBL to be further strengthened. The bankers must be careful in financing international trade So that, the bank does not fall in bad loss provision sated by BB. Bank should fixed-up specific types of client strategy according to the different character of client.
Commission income occupies the major part of the total earnings of a bank and bank’s profitability mainly depends on commission earning capacity, so research and development cell of the bank should put more effort for the purpose of introducing an efficient Foreign Exchange department. Human resource is another sector for the branch to be developed urgently. Human resources in the branch need to be equipped with adequate banking knowledge. They should have basic knowledge regarding money, banking, finance and accounting. Without proper knowledge in these subjects, efficiency cannot be optimized. Bank can arrange sufficient training program on these subjects. Many times, the branch’s photocopier remains out of order. Printers are of obsolete technology. ACs gets out of order frequently. Attention should be given on proper maintenance and replacement of phone, computer, printer fax, machine and photocopier. The management should impart more imphasis on the advertisement of the bank in different electronic and printing media. The Basic goal of the advertisement should be firstly to make people know and understand that the bank is universal one and permits anyone’s access. The spread out mechanism of the bank should be faster and progressive as well. Being established in 1999, the bank has established only 41 branches in ten (10)years. The mode of extension is much slower than other contemporary and equivalent banks. Branches should be opened in every industrial and commercial corner of the country.
More products of varied interests should be introduced for the diversified client group. Opportunity in retail banking lies in the fact that the countryâ€™s increased population is gradually learning to adopt consumer finance. The greater bulk of our population is of middle classed. Different types of retail lending products would create great appeal to this mammoth class. So a wide variety of retail lending products has a very large and easily pregnable market. Conclusion: Banking industry in Bangladesh is now on the right track. The banks are contributing much than the previous years for the growth and development of the country. Credit for such contribution by the industry goes to the Bangladesh Bank. Banking industry is much organized because of strong vigilance and supervision of Bangladesh Bank. In the industry, Mercantile Bank is one of the pioneers in many criteria. MBL is committed towards the excellence in the service with efficiency, accuracy and proficiency. Like of most of the commercial banks, foreign exchange department is one of the most important departments of MBL. Perhaps, it is the most important department of the Bank. This department is driving the bank from the front. Through the import, export and foreign remittance operations, this department is making a great contribution to the bank and the economy as a whole. If it is said that this department of the bank is running according to all of the ideal principles of modern foreign exchange business mentioned in the book, it will be exaggerated. Despite problems and weaknesses, it is driving the bank from the front. With an easy to understand operating guidelines, transparent operating procedure and a team of highly knowledgeable and proficient personnel, this department is expanding and excelling itself day by day. To the gateway to practical professional life an experience at MBL as an intern was a privilege for me. MBL does offer a real practical orientation to the new comers with typical corporate culture. Rather, it offers people like us an environment where the appetite for learning just gets intense. This three months internship orientation with MBL undoubtedly will help me a lot to understand and cope with any typical corporate culture. Bibliography: www.mblbd.com Bank Management and Financial Services, Peter S Rose & Sylviac Hudigins, 6th edition. Commercial Banking, Gup Kolari, 3rd edition. Annual Report of the Mercantile Bank Ltd., 2004-05, 2005-06, 2006-07 & 2007-08.
Mercantile Bank Limited was incorporated in Bangladesh as a Public Limited Company with limited liability under the Bank Companies Act, 1991...