Foreign Exchange-International Trade Payment Methods – Domestic and International regulations
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Foreign Exchange-International Trade Payment Methods – Domestic and International regulations
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International Trade Payment Methods – Domestic and International regulations
What is Letter of Credit (L/C)/ Documentary Credit?
What are Parties involved in L/C?
Core Parties
Other Parties involved in L/C
01. The applicant 02. Advising Bank 03. The Nominated bank 04. The reimbursing Bank 05. The presenter 06. The transferring Bank
1. Issuing Bank : Issuing Bank means the bank that issues a credit at the request of an applicant or on its own behalf.
2. Confirming Bank: Confirming Bank means the bank that adds its confirmation to a L/C upon the request of the issuing Bank. Confirmation means a definite undertaking of the confirming bank in addition to the issuing bank to honour or negotiate a compiling presentation.
3. Beneficiary: Beneficiary means the party in whose favor a L/C is issued.
4. Applicant: Applicant means the party on whose favor a L/C is issued.
5. Advising Bank: Advising Bank gives the proof of apparent authenticity of the L/C to the seller. Forwards the original L/C to the beneficiary
6. Nominated Bank: Nominated bank means the bank with which L/C is available
7. Reimbursing Bank: Reimbursing Bank means the bank, appointed by the issuing bank to reimburse the claims of payment of the claiming Bank.
8. Claiming Bank: Claiming bank means the nominated bank which claims the payment from the reimbursing bank.
9. Presenter: Presenter means a beneficiary or bank or other party that makes presentation of documents.
10. Transferring Bank: Transferring Bank means nominated bank that transfer the L/C which is authorized by issuing bank
Parties to the L/C:
1. Importer/Buyer: Importer/Buyer is the person who requests/instructs the opening bank to open a L/C. he is also called opener or applicant of the L/C.
2. Opening/Issuing Bank: Opening/issuing bank is the bank which opens/issues a L/C on behalf of the importer. It is also called the importer’s/buyer’s bank.
3. Exporter/Seller/Beneficiary: Exporter/Seller/Beneficiary is the party in whose favor the L/C is established.
4. Advising/Notifying Bank: Advising/Notifying Bank is that bank through which the L/C is advised to the exporter. It is a bank situated in the exporting country & it may be a Branch of the opening bank or a correspondent bank. It may also assumes the roles of confirming and/or negotiating bank depending upon the conditions of the credit.
5. Confirming Bank:Confirming bank is a bank which adds its confirmation to the credit and it is done at the request of the issuing bank. The confirming bank may or may not be the advising bank
6. Negotiating Bank: Negotiating bank is the bank which negotiates the bill and pays the amount to the beneficiary. It has to carefully scrutinize the documentary credit before negotiation in order to see whether the documents apparently in order or not.
7. Paying/Reimbursing Bank: Paying/Reimbursing Bank is the bank on whom the bill will be drawn. It is nominated in the credit to make payments against stipulated documents complying with the terms of the credit.
Type of L/C:
1. Revocable L/C: A revocable L/C can be modified or cancelled at any time, because it offers little security. These can be of four types- Payment Deferred Payment Acceptance Negotiation
2. Irrevocable L/C: The issuing bank commits itself irrevocably to honor its obligation under the credit, provided that the beneficiary complies with all condition. As like revocable L/C these can also be of- Payment Deferred Payment Acceptance Negotiation As per UCPDC-600, now all the L/Cs is irrevocable L/C.
LC are of different types those are described in the following:
1. Irrevocable LC: Irrevocable LC means that type of LC which can’t be cancelled or amended without the consent of the beneficiary, negotiating bank, confirming bank & applicant.
2. Confirmed LC: LC is the guarantee of the issuing bank for the payment of complying presentation. If the beneficiary of the LC can’t trust the guarantee of the issuing bank then they ask to add conformation of other bank. Adding conformation of third bank called confirmed LC.
3. Revolving LC: Revolving LC is that kinds of LC where LC can be used as much times as the will not exceeding the limit within the fixed tenure. The main characteristics of this LC is it can be used as much time without amendment within the fixed tenure.
4. Back to Back LC: When any LC is issued against keeping Master LC as security called back to back LC. Here import LC is issued against Export LC. These types of LC are issued for importing raw material of export LC.
5. Anticipatory LC: When there is a clause for advance payment of part of LC called anticipatory LC.
6. Red Clause LC: When the amount of advance payment is written in red color in the top of the LC called red clause LC.
7. Green Clause LC: When there is permission for payment of extra amount in addition of red clause the extra amount clause called green clause LC.
8. Standby LC: This type of LC is like bank guarantee. If the supplier/contractor/exporter failed as per contract then importer/buyer can claim lose against standby LC.
9. Clean Clauses LC: The LC without the conformation of third bank called clean clause LC.
10. Restricted LC: If document negotiation and payment of LC is restricted within a specific bank called restricted LC.
11. Transferable LC: If the document negotiation and payment of LC is not restricted with any specific bank called transferable LC.
12. Clean Credit: where the exporter need not to submit extra document for the payment of LC without the Bill of exchange called Clean Credit.
13. Documentary Credit: where the exporter needed to submit commercial invoice, packing list, bill of lading/airway bill/TR/RR, Certificate of origin in addition to bill of exchange called documentary credit.
On the basis of source of fund LC are of flowing types:
1. Cash LC: Those LC which can be paid by debiting Nostro A/C of issuing bank called cash LC.
2. Back to Back LC: When LC payment is settled from the fund of master LC called back to ack LC.
3. LC Under Aid, Loan & Grant: when LC is opened against aid, loan & grant called LC under aid, loan & grant.
4. Barter LC: Those LC which is issued for exchange of goods between two countries called barter LC.
Issuance of LC: The procedures of issuing LC are described in the flowing:
1. Application: The importer will apply for opening LC to his bank where he maintains his business account. If the bank branch is a AD branch then they directly open LC otherwise they will forward to the concerned AD branch. Before opening LC the bank will consider that the importer take IRC from CCI&E, the goods are importable or not, probable landed cost is lower than the market price, the nature of business support the nature of the goods, the importer have a permanent and business address in Bangladesh, the importer is not a defaulter one & the importer have no overdue bill of entry in the bank. If all the consideration is positive then bank will go to the next steps
2. Obtaining Required Document and Securities: Bank will collect up to date CIB of the customer, If the value of the indent >= 5.00 lac or the value of pro-forma invoice >= 10.00 lac then bank will collect credit report of the supplier through Dunn & Bradstreet, Seyds or the foreign correspondent of the bank, bank will lien/mortgage collateral security for margin funds, if the customer is known one and provide cheque as collateral security then Memorandum of Deposit of Cheque should be obtained, Bank will provide prescribed LC application form, LCAF & IMP-form and customer will fill the form in presence of the bank officials and bank official will verify the signature with pencil. Bank will ensure that the insurance coverage is taken for 10% higher than the value of the imported goods, bank will also confirmed that HS Code and incoterm are properly described and there are no ambiguity in the documents, If the bank found all the document are in order then bank will issue a LC through SWIFT to the advising bank.
What are the Documents required for opening L/C?
Documents required for opening L/C are
Valid Import registration certificate (Commercial industrial)
Tax identification number certificate.
VAT Registration certificate.
Membership Certificate of a recognized Trade Association as per IPO.
A declaration, that importer has paid income tax or submitted income tax return for the preceding year.
Pro-forma invoice or Indent duly accepted by the importer.
Insurance cover note with money paid receipt covering value of goods to be imported plus 10 (Ten) percent above.
L/C Application form duly signed by the importer.
Letter of credit Authorization Form (LCAF) commercial/ industrial.
IMP Form duly signed by importer.
Import Registration Certificate (IRC):
Before opening L/C each and every importer should have Import Registration Certificate (IRC). IRC is issued by the office of the Chief controller of Import and Export, a department under Ministry of Commerce, Bangladesh government. Importer have to apply for registration in a prescribed Form along with Bank Certificate regarding maintaining a Bank account in a schedule bank, valid trade license , office rental agreement, word commissioner’s certificate, treasury Challan of registration fees, etc.
H.S. Code:
The elaboration of H.S. Code is Harmonized System Code. H.S. Code is a harmonized commodity description & coding system. Every goods & commodities under international trade has its unique code for which they can be identified universally and on the basis of that code, custom duty, supplementary duty, VAT, AIT & other government levy is impose.
Seller’s Credit Report:
Bank should obtain credit report of exporter in all cases where the amount of L/C exceeds BDT Lac for Pro-forma Invoice(P/I) & BDT 10.00 Lac against Indent. Seller’s credit report to be obtained from international credit rating agency namely- Syeds Dunn & Bradstreet
Transmission of L/C:
After opening L/C, it should be transmitted for next proceedings. L/C is transmitted to the buyer by SWIFT message. SWIFT means Society for Worldwide Inter-Bank Financial Telecommunications. Every AD Branch has its own SWIFT Code through which transmitted message can be identified. SWIFT Code of our Head Office is MBLBBDDH020.
Shipping Documents
Bill of exchange,
Commercial invoice,
Packing list,
Transport documents,
Certificate of origin,
PSI &
others.
Trans Documents:
1. Bill of Lading: Goods represented by the instruments can be transferred by endorsement and such transferee can take delivery of the goods in his own right. Bill of Lading, Railway receipts, delivery Orders etc. are the examples of documents of title to goods. Bill of Lading has three important functions. They are-
It is an evidence of receipts of goods by the shipping company
It is a contract of carriage
It is a document of title & property in goods Bill of Lading is usually issued in Triplicate-First original, second original, & third original. The goods may be delivered on presentation of any one of the three copies. The bank while creating PAD should get hold of all the copies of the set. The B/L marked “Shipping bill of lading”, which means that the goods stated therein are received on board of a named ship & being carried to the place of destination should be only considered for PAD loan. It should be ensured that the goods represented by bill of lading have been insured & policy should be assigned in favor of bank.
2. Charter Party BL (CPBL): A contract agreement signed between the owner of a ship & the charterer incorporating certain terms & conditions whereby the vessel is hired to or placed at the disposal of the charterer for specific voyage or for a certain time for carrying goods. When charter party bill of lading is issued subject to the terms & conditions of the charter party than it is called charter party BL.
3. Freight Forwarder Cargo Receipts: They act as an agent of carrier (Shipping Line/Airline) for shipment of goods. They get license from NBR (Dhaka Custom/Chittagong Customs) to act as freight forwarder & Multi-modal Transport Operator. But they have to obtain permission from Bangladesh Bank to act as agent for each foreign principal. This application must be forwarded to Bangladesh Bank through an AD Branch.
4. C & F Agents: They act as an agent nominated by an importer to clear the imported goods from the Port. They complete assessments of goods as per duty structure of customs and make payment of duties, tax, vat and other applicable charges. The get C & F Agent license from National Board of Revenue (customs wing) which to be renewed every year.
Landed Costs include:
Value of L/C
Custom Duty(CD)
Regulatory Duty(RD)
A.I.T.
VAT/Sales Tax / Tariff
IDSC / Other Duty
License Fee
Insurance
Clearing & Forwarding / Handling / Transport etc.
Others
The summation of the above cost is known as Total Tax Incidence (TTI).
Qualification & Selection of Importer & Importable:
1. The branch officials 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.
2. The financial standing and credibility of the customers should be assessed with a new to satisfactory arrangement for retirement of documents:
3. Customers CIB report to be obtained.
4. The credit report of the exporter in all cases where the amount of the L/C exceeds Tk.2,00,000/- against P/I and Tk.5,00,000/- against indents must be collected.
5. e) Bank Shall verify price so as to ascertain competitiveness and also marketability of the commodities to be imported.
6. Branch shall verify signature of the importer on L/C Application forms, LCAF and IMP Forms.
7. Branches shall not open L/C through some land ports unless importers pay 100% margin or obtaining prior approval from Head office.
8. After issuance of LCAF, L/C must be opened within 150 days and shipment validity shall not exceed 17 months for capital machinery and 9 months for other items as per IPO
9. Approval from the competent authority must be obtained for opening L/C.