In the export section, two types of L/Cs are opened-
Back to Back L/C:
A back to back mechanism involves two separate L/Cs. One is master export L/C and another is back to back L/C. on the strength of Master export L/C Bank issues Back to Back L/C.
Back to Back L/C is commonly known as Buying L/C. On the contrary, Master Export L/C is known as Selling.
Features of Back to Back L/C:
Checklist to open Back to Back L/C:.
Steps to issue back to back L/C:
Precautionary measures:-
The flow chart on back to back L/C Mechanism:-
Back to Back L/C is essentially a self liquldating transaction. Usually a Bank issuing Back issuing back to back L/C has no collateral or comfort to rely upon except the master L/C. therefore Bank officials concerned, should be fully aware of the inherent risk involved in this type of businesses and are advised to issue back to back L/C only for the well known customer of the Bank and of undoubted integrity.
Accounting Treatment for back to back L/C:
When the document is arrived, the following vouchers are passed---
Customer’s A/c. ............................... Debit.
Commission on acceptance ............. Credit.
In case of payment, if the fund is at hand, the accounting entries are sunDebity deposit Margin on Acceptance .......................... Debit.
Customer’s A/C. ..................................Credit.
If the party is paid in foreign currency, B.C. rate is applied in this regard. International Department takes the T.T. O.D rate. If the payment is made to ID in local currency in notional rate, ID follows T.T Clean rate. When the party is to be paid, OD sight rate is followed.
If the fund is not available to make the payment, the following vouchers are to be passed..
PAD .......... Debit.
Customer’s A/C. ..................................Credit.
Reporting to Central Bank:
At the end of every month, the reporting regarding the following information is mandatory,-
a) Filling of E-2/P-2 schedule of S-1 category; which covers the entire month amount of import, category of goods, currency, country etc.
b) Filling of E—3/P-3 schedule for all charges, commission with T/M form.
c) Disposal of IMP form, which includes,
i) Original IMP is forwarded to Central Bank with invoice and Indent.
ii) Duplicate IMP is kept with the Bank alongwith the bill of entry/certified invoice.
iii) Triplicate IMP is kept with the Bank for office record.
iv) QuanDebituplicate is kept for submission to Central Bank in case of imports where documents are retired.
Export L/C:
The other type of L/C facility offered by Export-Import Bank Limited is Export L/C. Bangladesh exports a large quantity of goods and services to foreign households. Readymade textile garments (both kinitted and woven), jute, jute-made products, frozen shrimps, tea are the main goods that Bangladesh exporters exports to foreign countries. Garments sector is the largest sector that exports the lion share of the country’s export. Bangladesh export most of its readymade garments products to U.S.A and European Community (EC) countries. Bangladesh export about 40% of its readymade garments products to U.S.A. Most of the exporters who export through Export-Import Bank are readymade garment exporters. They open export L/Cs here to export their goods, which they open against the import L/Cs opened by their foreign importers.
Formalities for Export L/C:
The export trade of the country is regulated by the Imports and Exports (control) Act, 1950. There are a number of formalities, which an exporter has to fulfil before and after shipment of goods. These formalities or procedures are enumerated as follows,
01) ERC: The export from Bangladesh are subject to export trade control exercise by the Ministry of Commerce through Chief Controller of Imports and Exports (CCI & E). No exporter is allowed to export any commodity permissible for export from Bangladesh unless he is registered with CCI & E and holds valid Export Registration Certificate (ERC). The ERC is required to be renewed every year. The ERC number is to be incorporated on EXP forms and other documents connected with exports.
02) Obtaining EXP: After having the registration, the exporter applies to Export-Import Bank Ltd. with the trade License, ERC and the Certificate from the concerned Government Organization to get EXP. If the bank is satisfied, an EXP is issued to the exporter, An EXP-Form contains the following particulars,-
01) Name and adDebitess of Authorized Dealer
02) Particulars of the commodity to be exported with Code
03) Country of destination
04) Port of destination
05) Quantity
06) L/C value in Foreign Currency
07) Terms of Sale
08) Name and adDebitess of Importer/Consignee
09) Bill of Landing/Railway Receipt/Airway Bill/Truck Receipt/Post
Parcel Receipt No. and date
10) Port of Shipment/Post Office of Dispatch
11) Land Custom post
12) Shipment date
13) Name of the Exporter with adDebitess
14) CCI & E’s Registration number and date of the Exporter
15) Sector (Public or Private) under which the Exporter falls.
03. Securing the order: Upon registration, the exporter may proceed to secure the export order. This can be done by contracting the buyers directly through correspondence.
04. Signing of the contract: While making a contract, the following points are to be mentioned,
05. The following points are to be looked for,-
I. The terms of the L/C are in conformity with those of the contract.
II. The L/C is an Irrevocable one, preferably confirmed by the advising bank.
III. The L/C allows sufficient time for shipment and a reasonable time for registration.
IV. If the exporter wants the L/C to be transferable, divisible and advisable, he should ensure those stipulations are specially mentioned in the L/C.
06. 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.
07. Registration of sale: This is needed when the items proposed to be exported are raw jute and jute goods.
08. Shipment of goods: The following are the documents normally involved at the stage of shipment,-
i) EXP Form
ii) Photocopy of registration certificate
iii) Photocopy of the contract
iv) Photocopy of the L/C
v) Customs copy of ERF Form for shipment of jute goods and EPC Form for raw jute.
vi) Freight certificate from the bank in case of payment of the freight at the port of landing is involved.
vii) Railway receipt, Berg Receipt or Truck Receipt.
viii) Shipping instructions
ix) Insurance policy
After those, exporter submits all these documents alongwith a letter of indemnity to Export-Import Bank for negotiation. An officer sCreditutinizes all the documents. If the documents is a clean one, Export-Import Bank purchases the documents on the basis of banker-customer relationship. This is known as Foreign Documentary Bill purchase (FDBP).
Procedure for FDBP:
After purchasing the documents, Export-Import Bank gives the following entries,-
FDBP A/C -------- Debit.
Customer A/c. Credit.
(before realization of proceeds)
Head Office, ID A/c.--- Debit.
FDBP A/C. ------- Credit.
( Adjustment after realization of proceeds)
A FDBP Register is maintained for recording all the particulars. The salient contents of a FDBP register are as follows,-
i) Date
ii) Ref. No. (FDBP)
iii) Name of the Party (Debitawer)
iv) Debitawee
v) Name of collection Bank
vi) Conversion Rate
vii) Bill Amount
viii) Amount in currency
ix) EXP Form No.
x) Export L/C No.
Foreign Documentary Bills For Collection:
Export-Import Bank forwards the documents for collection due to the following reasons,-
i) If the documents have disCreditepancies.
ii) If the exporter is new client.
iii) The banker is in doubt.
Foreign documentary bills for collection signfies that the exporter will receive payment only when the issuing bank gives payment. The exporter submits duplicate EXP Form and Commercial Invoice. Subsequently, The of the bill is calculated and the following accounting entries are gi ven,-
Head Office A/C. Debit. @ T.T Clean
Client’s A/C. Credit. @ O.D Sight
Government Tax A/c. Credit. 0.25% of Invoice value
Postage A/C. Credit.
Income A/C. profit on Exchange Credit.
After passing the above vouchers, an Inter Branch Exchange Trading Debit Advice is sent for debiting the NOSTRO account. Export-Import Bank has NOSTRO accounts with its reimbursing bank. An FDBC Register is maintained, where first entry is given when the documents are forwarded to the issuing bank for collection and the second one is done after realization of the proceeds.
Export Bill SCreditutiny Sheet:
The Export Bill SCreditutiny Sheet contains the following particulars,-
01) Exporter’s name
02) Presentation date of documents
03) L/C No.
04) Expiry date
05) L/C amount available
06) The date within which the documents to be presented
07) BL/AWB/FCREDIT dated
08) Shipment date in the L/C
09) Debitaft date
10) Invoice number and date
11) Export L/C No. Date, Issued by
12) Documents required in the L/C contract
13) Liability position
14) DisCreditepancies
15) Calculation of Bill amount (Exporter’s Retention Quote, Commission, and Margin).
Settlement of Local Bill:
The settlement of local bills is done in the following ways,-
01) The customer submits the L/C to Export-Import Bank alongwith the documents to negotiate
02) Export-Import Bank official sCreditutinizes hte documents to ensure the conformity with the terms and conditions.
03) The documents are then forward to the L/C opening bank.
04) The L/C issuing bank gives the acceptance and forward an acceptance letter.
05) Payment is given to the customer on either by collection basis or by purchasing the document.
Mode of Payment of Export under L/C:
The most common methods of payment under a L/C are as follows:-
Sight payment Creditedit:
In a sight payment Creditedit, the bank pays the stipulated sum immediately against the exporter’s presentation of the documents.
Negotiation Creditedit:
In Negotiation Creditedit, the exporter has to present a bill of exchange payable to himself in addition to other documents, that the bank negotiates.
Deferred payment Creditedit:
In deferred payment, the bank agrees to pay on a specified future date or event, after presentation of the export documents. No bill of exchage is involved. In Export-Import Bank, payment is given to the party at the rate of DA 60-90-120-180 as the case may be. But the Head office is paid at T.T clean rate. The difference between the two rates is the exchange trading for the branch.
Acceptance Creditedit:
In acceptance Creditedit, the exporter presents a bill of exchange payable to himself and Debitawn at the agreed tenor (i.e. on a specified future date or event) on the bank that is to accept it. The bank signs its acceptance on the bill and returns it to the exporter.
The exporter can then represent it for payment on maturity. Alternatively he can discount it in order to obtain immediate payment.
Advising L/C:
Advising a L/C through a bank is a proof of apparent authenticity of the Creditedit to the seller/beneficiary. The advising process of a L/C consists of forwarding the original Creditedit to the beneficiary to whom it is adDebitessed. Before forwanding the advising bank has to verify the signatures of hte officers of hte L/C opening bank (Export-Import Bank), and at the same time ensure that the terms and conditions of the L/C are not in violation of the existing Exchange Control Regulations. In such act of advising, the advising bank does not undertake any liability.
Adding Confirmation:
Add confirmation is given by the confirming bank. An Add confirmation letter contains the followings:-
01) L/C No.
02) L/C amount
03) Items to be imported
04) Name and adDebitess of the Applicant
05) Name and adDebitess of the Beneficiary
06) Tenor
07) Date of shipment
08) Date of Expiry
09) Port of Loading
10) Port of Discharge
11) Charges on (which party)
12) Name of the advising bank
13) Name of the Reimbursing Bank
14) Name of Confirming Bank
Test Key Arrangement :-
Test key arrangement is a seCreditet code maintained by the banks for the authentication for their telex messages. It is a systematic procedure by which a test number is given and the person to whom this number is given can easily authenticate the same test number by maintaining that same procedure . Export-Import Bank has test key arrangements with so many banks for the authentication of L/C message and for the transfer of funds.
Inland Letter of Creditedit (ILC):
ILC means L/C within the same country. This type of L/Cs are opened when the seller does not believe the buyer though they are of the same country and also in the cases where the sales contract is of a big amount.
- Back to Back L/C
- Export L/C
Back to Back L/C:
A back to back mechanism involves two separate L/Cs. One is master export L/C and another is back to back L/C. on the strength of Master export L/C Bank issues Back to Back L/C.
Back to Back L/C is commonly known as Buying L/C. On the contrary, Master Export L/C is known as Selling.
Features of Back to Back L/C:
- Is an import L/C to procedure goods/raw materials for further processing.
- Is opened basedon Export L/C.?
- Is a kind of Export Finance?
- Export L/C is at sight but Back to Back L/C is at Usance.
- No margin is required to open Back to Back L/C
Checklist to open Back to Back L/C:.
- Application is registered with CCI & E and has bonded warehouse license.
- The Master L/C has adequate validity period and has no defective clause.
- L/C value shall not exceed the admissible percentage of net FOB value of relative Master L/C.
- Usance period will be up to 180 days.
- Papers required opening back to back L/C
- Import Registration certificate & Export Registration certificate.
- L/C Application & LCA form.
- Proforma Invoice/Indent.
- Insurance Policy.
- IMP form.
- In addition to above following papers are required for readymade garments industry
- Bonded warehouse license.
- Quota allocation letter from EPB (where applicable)
- Letter of disclaimer from landlord if rented premises.
Steps to issue back to back L/C:
- Obtain all required papers.
- Check the Creditedit limit
- Prepare offering sheet if regular Creditedit line is not available.
- Mark lien on the master L/C
- Issue the L/C.
- Payment at maturity out of exports proceeds.
- In case of export failure or non-realization /short realization of export proceeds, forced loan i.e. PAD has to be Crediteated in order settle the back to back L/C payment.
Precautionary measures:-
- Inclusion the clause for pre-shipment inspection certificate
- shipping guarantee under no circumstances
- disCreditepant documents shall not be accepted
- Proper care regarding amendments of Master L/C.
The flow chart on back to back L/C Mechanism:-
Back to Back L/C is essentially a self liquldating transaction. Usually a Bank issuing Back issuing back to back L/C has no collateral or comfort to rely upon except the master L/C. therefore Bank officials concerned, should be fully aware of the inherent risk involved in this type of businesses and are advised to issue back to back L/C only for the well known customer of the Bank and of undoubted integrity.
Accounting Treatment for back to back L/C:
When the document is arrived, the following vouchers are passed---
Customer’s A/c. ............................... Debit.
Commission on acceptance ............. Credit.
In case of payment, if the fund is at hand, the accounting entries are sunDebity deposit Margin on Acceptance .......................... Debit.
Customer’s A/C. ..................................Credit.
If the party is paid in foreign currency, B.C. rate is applied in this regard. International Department takes the T.T. O.D rate. If the payment is made to ID in local currency in notional rate, ID follows T.T Clean rate. When the party is to be paid, OD sight rate is followed.
If the fund is not available to make the payment, the following vouchers are to be passed..
PAD .......... Debit.
Customer’s A/C. ..................................Credit.
Reporting to Central Bank:
At the end of every month, the reporting regarding the following information is mandatory,-
a) Filling of E-2/P-2 schedule of S-1 category; which covers the entire month amount of import, category of goods, currency, country etc.
b) Filling of E—3/P-3 schedule for all charges, commission with T/M form.
c) Disposal of IMP form, which includes,
i) Original IMP is forwarded to Central Bank with invoice and Indent.
ii) Duplicate IMP is kept with the Bank alongwith the bill of entry/certified invoice.
iii) Triplicate IMP is kept with the Bank for office record.
iv) QuanDebituplicate is kept for submission to Central Bank in case of imports where documents are retired.
Export L/C:
The other type of L/C facility offered by Export-Import Bank Limited is Export L/C. Bangladesh exports a large quantity of goods and services to foreign households. Readymade textile garments (both kinitted and woven), jute, jute-made products, frozen shrimps, tea are the main goods that Bangladesh exporters exports to foreign countries. Garments sector is the largest sector that exports the lion share of the country’s export. Bangladesh export most of its readymade garments products to U.S.A and European Community (EC) countries. Bangladesh export about 40% of its readymade garments products to U.S.A. Most of the exporters who export through Export-Import Bank are readymade garment exporters. They open export L/Cs here to export their goods, which they open against the import L/Cs opened by their foreign importers.
Formalities for Export L/C:
The export trade of the country is regulated by the Imports and Exports (control) Act, 1950. There are a number of formalities, which an exporter has to fulfil before and after shipment of goods. These formalities or procedures are enumerated as follows,
01) ERC: The export from Bangladesh are subject to export trade control exercise by the Ministry of Commerce through Chief Controller of Imports and Exports (CCI & E). No exporter is allowed to export any commodity permissible for export from Bangladesh unless he is registered with CCI & E and holds valid Export Registration Certificate (ERC). The ERC is required to be renewed every year. The ERC number is to be incorporated on EXP forms and other documents connected with exports.
02) Obtaining EXP: After having the registration, the exporter applies to Export-Import Bank Ltd. with the trade License, ERC and the Certificate from the concerned Government Organization to get EXP. If the bank is satisfied, an EXP is issued to the exporter, An EXP-Form contains the following particulars,-
01) Name and adDebitess of Authorized Dealer
02) Particulars of the commodity to be exported with Code
03) Country of destination
04) Port of destination
05) Quantity
06) L/C value in Foreign Currency
07) Terms of Sale
08) Name and adDebitess of Importer/Consignee
09) Bill of Landing/Railway Receipt/Airway Bill/Truck Receipt/Post
Parcel Receipt No. and date
10) Port of Shipment/Post Office of Dispatch
11) Land Custom post
12) Shipment date
13) Name of the Exporter with adDebitess
14) CCI & E’s Registration number and date of the Exporter
15) Sector (Public or Private) under which the Exporter falls.
03. Securing the order: Upon registration, the exporter may proceed to secure the export order. This can be done by contracting the buyers directly through correspondence.
04. Signing of the contract: While making a contract, the following points are to be mentioned,
- DesCreditiption of the goods
- Quantity of the commodity
- Price of the Commodity
- Shipment
- Insurance and marks
- Inspection
- Arbitration
05. The following points are to be looked for,-
I. The terms of the L/C are in conformity with those of the contract.
II. The L/C is an Irrevocable one, preferably confirmed by the advising bank.
III. The L/C allows sufficient time for shipment and a reasonable time for registration.
IV. If the exporter wants the L/C to be transferable, divisible and advisable, he should ensure those stipulations are specially mentioned in the L/C.
06. 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.
07. Registration of sale: This is needed when the items proposed to be exported are raw jute and jute goods.
08. Shipment of goods: The following are the documents normally involved at the stage of shipment,-
i) EXP Form
ii) Photocopy of registration certificate
iii) Photocopy of the contract
iv) Photocopy of the L/C
v) Customs copy of ERF Form for shipment of jute goods and EPC Form for raw jute.
vi) Freight certificate from the bank in case of payment of the freight at the port of landing is involved.
vii) Railway receipt, Berg Receipt or Truck Receipt.
viii) Shipping instructions
ix) Insurance policy
After those, exporter submits all these documents alongwith a letter of indemnity to Export-Import Bank for negotiation. An officer sCreditutinizes all the documents. If the documents is a clean one, Export-Import Bank purchases the documents on the basis of banker-customer relationship. This is known as Foreign Documentary Bill purchase (FDBP).
Procedure for FDBP:
After purchasing the documents, Export-Import Bank gives the following entries,-
FDBP A/C -------- Debit.
Customer A/c. Credit.
(before realization of proceeds)
Head Office, ID A/c.--- Debit.
FDBP A/C. ------- Credit.
( Adjustment after realization of proceeds)
A FDBP Register is maintained for recording all the particulars. The salient contents of a FDBP register are as follows,-
i) Date
ii) Ref. No. (FDBP)
iii) Name of the Party (Debitawer)
iv) Debitawee
v) Name of collection Bank
vi) Conversion Rate
vii) Bill Amount
viii) Amount in currency
ix) EXP Form No.
x) Export L/C No.
Foreign Documentary Bills For Collection:
Export-Import Bank forwards the documents for collection due to the following reasons,-
i) If the documents have disCreditepancies.
ii) If the exporter is new client.
iii) The banker is in doubt.
Foreign documentary bills for collection signfies that the exporter will receive payment only when the issuing bank gives payment. The exporter submits duplicate EXP Form and Commercial Invoice. Subsequently, The of the bill is calculated and the following accounting entries are gi ven,-
Head Office A/C. Debit. @ T.T Clean
Client’s A/C. Credit. @ O.D Sight
Government Tax A/c. Credit. 0.25% of Invoice value
Postage A/C. Credit.
Income A/C. profit on Exchange Credit.
After passing the above vouchers, an Inter Branch Exchange Trading Debit Advice is sent for debiting the NOSTRO account. Export-Import Bank has NOSTRO accounts with its reimbursing bank. An FDBC Register is maintained, where first entry is given when the documents are forwarded to the issuing bank for collection and the second one is done after realization of the proceeds.
Export Bill SCreditutiny Sheet:
The Export Bill SCreditutiny Sheet contains the following particulars,-
01) Exporter’s name
02) Presentation date of documents
03) L/C No.
04) Expiry date
05) L/C amount available
06) The date within which the documents to be presented
07) BL/AWB/FCREDIT dated
08) Shipment date in the L/C
09) Debitaft date
10) Invoice number and date
11) Export L/C No. Date, Issued by
12) Documents required in the L/C contract
13) Liability position
14) DisCreditepancies
15) Calculation of Bill amount (Exporter’s Retention Quote, Commission, and Margin).
Settlement of Local Bill:
The settlement of local bills is done in the following ways,-
01) The customer submits the L/C to Export-Import Bank alongwith the documents to negotiate
02) Export-Import Bank official sCreditutinizes hte documents to ensure the conformity with the terms and conditions.
03) The documents are then forward to the L/C opening bank.
04) The L/C issuing bank gives the acceptance and forward an acceptance letter.
05) Payment is given to the customer on either by collection basis or by purchasing the document.
Mode of Payment of Export under L/C:
The most common methods of payment under a L/C are as follows:-
Sight payment Creditedit:
In a sight payment Creditedit, the bank pays the stipulated sum immediately against the exporter’s presentation of the documents.
Negotiation Creditedit:
In Negotiation Creditedit, the exporter has to present a bill of exchange payable to himself in addition to other documents, that the bank negotiates.
Deferred payment Creditedit:
In deferred payment, the bank agrees to pay on a specified future date or event, after presentation of the export documents. No bill of exchage is involved. In Export-Import Bank, payment is given to the party at the rate of DA 60-90-120-180 as the case may be. But the Head office is paid at T.T clean rate. The difference between the two rates is the exchange trading for the branch.
Acceptance Creditedit:
In acceptance Creditedit, the exporter presents a bill of exchange payable to himself and Debitawn at the agreed tenor (i.e. on a specified future date or event) on the bank that is to accept it. The bank signs its acceptance on the bill and returns it to the exporter.
The exporter can then represent it for payment on maturity. Alternatively he can discount it in order to obtain immediate payment.
Advising L/C:
Advising a L/C through a bank is a proof of apparent authenticity of the Creditedit to the seller/beneficiary. The advising process of a L/C consists of forwarding the original Creditedit to the beneficiary to whom it is adDebitessed. Before forwanding the advising bank has to verify the signatures of hte officers of hte L/C opening bank (Export-Import Bank), and at the same time ensure that the terms and conditions of the L/C are not in violation of the existing Exchange Control Regulations. In such act of advising, the advising bank does not undertake any liability.
Adding Confirmation:
Add confirmation is given by the confirming bank. An Add confirmation letter contains the followings:-
01) L/C No.
02) L/C amount
03) Items to be imported
04) Name and adDebitess of the Applicant
05) Name and adDebitess of the Beneficiary
06) Tenor
07) Date of shipment
08) Date of Expiry
09) Port of Loading
10) Port of Discharge
11) Charges on (which party)
12) Name of the advising bank
13) Name of the Reimbursing Bank
14) Name of Confirming Bank
Test Key Arrangement :-
Test key arrangement is a seCreditet code maintained by the banks for the authentication for their telex messages. It is a systematic procedure by which a test number is given and the person to whom this number is given can easily authenticate the same test number by maintaining that same procedure . Export-Import Bank has test key arrangements with so many banks for the authentication of L/C message and for the transfer of funds.
Inland Letter of Creditedit (ILC):
ILC means L/C within the same country. This type of L/Cs are opened when the seller does not believe the buyer though they are of the same country and also in the cases where the sales contract is of a big amount.
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