Sadar Nurul Amin :
Domestic products and services of a country may not be sufficient to fulfill the demand of its citizen. The surplus product and skilled services of a country is soled to another country as per their demand. Due to globalization the demand of good product of a country spreads to the consumer worldwide through media. The product of one country reaches to another country in the process of buyer and seller agreement of two countries and this business is referred to an international trade. International trade is different from the domestic trade. In the domestic trade buyer and seller can directly do their business, involvement of bank or media is not necessary but international business can’t be performed without bank of both buyer and seller’s country as a standard foreign currency is involved for payment of the goods. In another name the international trade is called foreign exchange business.
The definition of foreign exchange is the exchange of one currency for another by governments, business and residents in two countries.
An example of foreign exchange business is a Bangladeshi company doing business with a company in USA and paying them in an easily covertible internationally
accepted currency, say US dollar.
We can also express foreign exchange as :
1) The transfer of credits to a foreign country to settle debts or accounts between residents of the home country and those of the foreign and,
2) Foreign bills, currencies etc. used to settle such accounts.
Foreign exchange business is in two form:
a) Import: buying goods and services from the seller of another country.
b) Export: selling goods and services to the buyer of another foreign country.
Before understanding export financing the following term is to be cleared
01. what is export: shipment of goods/merchandise in the buyer nominated vessel via custom authority of the exporter country to the buyer of another country against a firm sales contract or letter of credit under UCPDC with a payment guarantee that full value of the export has been/will be repatriated through exporter bank within the stipulated time specified by the central bank of the seller country. The seller must deliver the goods to the carrier nominated by the buyer at the agreed point, at the named place on the agreed date or within agreed period.
In the process of export the obligation of seller and buyer are:
i) seller’s obligation:-the seller must provide the goods and commercial invoice and other shipping documents in conformity with the LC/ contract of the sale and any other evidence of conformity that may be required by the contract /LC.
ii) Buyer’s obligation:-the buyer must pay the price of goods as provided in the contract of sale and the buyer must take delivery of the goods if seller delivers the goods as per terms of sale contract/letter of credit.
What is letter of credit:
A letter of credit is a payment undertaking given by a bank to the seller and is issued on behalf of the applicant .The buyer is the applicant and seller is the beneficiary. Technical term for letter of credit is “documentary credit”. The idea in an international trade transaction is to shift the risk from the actual buyer to a bank.
The Banks involved in the process of letter of credits are-Issuing Bank, Reimbursing Bank, Advising Bank, Confirming Bank and Negotiating Bank.
i) An issuing bank undertakes to reimburse a nominated bank that has honored or negotiated a complying presentation and forwarded the documents to the issuing bank. Issuing bank is the buyer’s bank.
ii) Advising bank advises the credit and any amendment to it’s beneficiary. An advising bank advises the credit and any amendment thereto without undertaking to honor or negotiate.
iii) Confirming bank undertakes to reimburse another bank that has honored or negotiated a complying presentation and forwarded documents to the confirming bank.
iv) Negotiating Bank: negotiate the documents on complying presentation as per L.C terms and pay LC value to the beneficiary and send the documents to confirming/issuing bank. Negotiating bank is the beneficiary’s bank .
v) Reimbursing bank: The Bank through which negotiating bank realize negotiated proceeds from Issuing Bank
a) what is exchange rate: the price of one currency in terms of another. It is usually expressed in terms of how many units of home currencies are needed to buy one unit of foreign currency. Two rates are usually given the buying and seller rate. The differences is the profit/commission or margin charged by the bank carrying out the exchange.
02: Export financing:
In foreign exchange business a product is sold and shipped overseas, therefore, it takes longer to get paid. All sellers want to get paid as quickly as possible, while buyers usually prefer to delay payment ,at least until they have received and resold the goods .This is true in domestic as well as international business.
Increasing globalization has created intense competition for export market. Importers and exporters are looking for any competitive advantage that would help them to increase their product.
Authorized dealer Bank provide financing to the exporter against lien of original export mother L.C/sales contract for procurements of raw materials, production of export goods and wages of the workers and to met up operating cost of the company in the form of:
1) Pre-shipment credit : to produce or purchase the material and labor necessary to fulfill the sales order; and
2) Post -shipment credit : to generate immediate cash while offering payment terms to buyers.
1) Pre-shipment credit:-
Financing made available before goods are shipped (usually against a confirmed order) to help an exporter to perform an export order.
Pre-shipment credit is extended in the form of:
a) Back to back letter of credit
b) packing cash credit/packing credit.
Back to back letter of credit;
The ADs may open BTB import L.C against export LCs received by export oriented industrial units under bonded warehouse system subject to observance of domestic value addition requirement prescribed by ministry of finance from time to time.
Definition:
Back to back letter of credit is an arrangement in which an irrevocable Export letter of credit serves as the collateral for another Import L.C; the advising bank of the first letter of credit becomes the issuing bank of the second letter credit ( back to back letter of credit) .
It is non-funded assistance to the exporter.
Guide lines:
AD establishes L/C on back to back basis without prior permission of central bank under following guidelines:-
a) Only the recognized unit of ready made garments industries, specialized textile industries under bonded ware house system will be extended back to back L/C facilities
b) Irrevocable L/C opened by the buyer’s bank confirms to the UCPDe.
c) The LC shall be valid for a reasonable period to cover shipment of the merchandise (lid time) after completion of the manufacturing process.
d) The import LC will be opened of 75% of the FOB value of the export LC and the price must be competitive. For computation of FOB value, freight charges, insurance and commission involved in shipment of the merchandise under the LC must be deduced if the freight element is not shown separately, a certificate from the shipping company or the shipping agent should be asked for.
e) The import LC will be opened on the usance basis covering usance of not more than 120 days however, incase of specialized textiles usance may be up to 180 days.
f) Interest for usance period, shall not exceed LIBR.
g) All amendments of the export LC should be noted down carefully to route out chances of excess LC obligation under export LC.
h) opening of import LC against export LC received under barter STA will not be allowed.
i) Export L/C must be retained with the branch duly marked lien on the L/C.
j) The L/C opening bank will asses the capacity of the factory and will physically verify and confirm about the efficiency of labor.
k) for estimate of BTB limit the branch should consider-the working capacity of the industries, three months working requirement and L/Cs in hand past performance, securities available with the branch & present liabilities with the branch and latest inspection report of the goods/stocks imported under BTB credit, if any.
I) Despite above AD bank also open BTB against lien of another import LC. This facility is extended to the private importer against supply of food item, fertilizer etc for the Govt. Authority. For example TCB imports various food item through the local/international suppliers under open tender .In this case TCB open a local LC in favor of the supplier. The supplier submit that LC to their bank and then supplier’s bank in turn open another import LC in favor of the foreign supplier against lien of the local LC/master LC.
02) Control and supervision of imported raw materials:
On issuance of BTB LC Exporter’s Bank constitutes a definite undertaking of payment to the beneficiary of the LC. as per article 7 of UCPDC 600.But until the export documents are received from exporter after completion of shipment as per terms of the mother LC the risk of realization of the value of the BTB from the exporter is involved.
To ensure production and shipment in time the BTB L.C issuing bank has the obligation of closely supervising on the imported raw materials and production process of the export as under:
i) The master export LC (against which opening of back to back LC is requested) should have validity period adequate to cover the time needed for importation of inputs, manufacture of merchandise and shipment to consignee.
ii) The back to back LC value shall not exceed the admissible percentage of net FOB value of the relative master export LC (as per prescribed value addition requirement) and the price of goods to be imported must be competitive. For computation of net FOB value of a master export LC, the freight charge, insurance cost and commission if payable by the exporter shall be deducted from the LC value. If the freight element is not shown separately, a certificate from the shipping company or the shipping agent should be asked for.
iii) All amendments of the master export LC should be noted down carefully to rule out chances of excess obligation under the back to back import LC.
iv) Branch will arrange clearance of the imported consignment by deputing a suitable Bank officials to escort consignment on arrival in importer’s ware house under bank’s lock and key.
v) During the course of manufacture the branch will exercise close supervision and control over the consignment by deputing inspector of advances/godown staff /experienced officers.
(To be continued)
