Foreign Exchanges
Introduction :
4.0 Foreign Exchange
Foreign Exchange refers to the process or mechanism by which the currency of one country is converted into the currency of another country.
In accordance with banks, Foreign exchange refers to the general mechanism by which a bank converts currency of one country into that of another. Foreign trade gives rise to foreign exchange. Foreign trade is transacted either in the currency of the exporter’s country or that of the importer’s country or that of a third country acceptable to both the exporter and the importer.
Foreign Exchange department is divided into two parts. The first part is the export department and the second is the import department.
4.1. Fundamentals of Foreign Exchange
There are 3 fundamental aspects of the general mechanism of Foreign Exchange:
1. Every country has its own currency-legal tender/distinctive unit of account.
2. Banks by bookkeeping entry carried out in the two centers concerned effect the conversion of one currency into another.
3. These exchanges are affected by means of credit instruments viz. Draft, Mail Transfer, Telegraphic Transfer etc.
4.2. Exchange Control
Whenever a country faces a mounting pressure on its balance of payments position, it may impose various forms of restrictions or controls on payments and receipts in foreign exchange and also on the imports and exports of goods and services.
The objectives of exchange control are-
1. To ensure that the receipts from exports of goods and services from Bangladesh
2. To oversee use of foreign exchange resources in accordance with priorities determined by the government.
A . EXPORT
When any organization wants to export any product to other country than that particular organization usually opens an export L/C from this department.
4.3. Foreign exchange Operation :( Export financing)
Export means any person lawfully exporting goods from Bangladesh
Packing credit means any loan or advance grated or any other credit provided by an institution to the exporter for financing the purchase, processing or packaging or goods on the basis of L/C.
4.4. Duty Draw Back:
An export of manufactured products is entitled to draw back the value customer’s duties, sales tax etc. already paid on the importation of raw material in the production or manufacture of the products.
1. Export Credit Guarantee Scheme
2. Confessional Rate of Import Duty
3. Income Tax Rebate
4. Retention Quota
5. Traveling Facilities.
4.5 Export Formalities
There is certain formalities involved exporting such as maintaining the books register, L/C checking etc.
1) Procedure of Registration of Exporter.
2) Books and Register/ Ledger required for export
3) B.B.Bill checking/ Lodgments.
4) Export document checking and negotiation/ collection basis
5) Pre- shipment financing
6) Disposal of EXP forms
7) Export Incentives
8) Disputes and settlement of Export claim.
4.6 Procedure for obtaining Export Registration Certificate
(ERC)
For obtaining export registration certificate form CCI & E, the following documents are required.
1) Application form
2) Nationality Certificate
3) Partnership deed (registered)
4) Memorandum & Article of Association and Incorporation Certificate
5) Bank Certificate
6) Valid Trade License
7) Copy of rent of the business firm.
4.7. Preparation of Export Documents
1) Bill of Exchange or Draft
2) Commercial Invoice
3) Bill of Lading
4) Inspection Certificate
5) Packing list
6) Export License
7) Shipment Advice
8) Certificate of Origin
9) Weight Certificate
10) EXP form
11) DHL Courier Receipt
4.8 Export Documents Checking
General Verification:
a) L/C registers or not
b) Exporters submitted documents before expiry date of the credit
c) Shortage of documents etc.
4.9 Sanction of Pre- Shipment
The part is to apply the Bank. On receipt of the application Pre- shipment, section will start security of the application.
Type of pre-shipment: whether clean/pledge/ hypothecation of goods.
a. Whether the investment is within Bangladesh Bank credit restriction.
b. What is the purpose of the investment?
c. Whether the goods specified for finance is eligible for export under control rule.
d. How the PSI A/C will be adjusted.
f. Disbursement
g. Execution of documents
h. Lien mark on Master L/C
B. IMPORT:
When any organization wants to import any product other country than the particular organization usually opens an import L/C from this department.
4.10. Import of goods by letter of Credit
A letter of credit is a conditional Bank Undertaking of Payment. Credit is a letter form the importer Banker to the exporter that the bills if drawn as per terms and conditions are complied with will be honored on presentation.
Following papers are to be submitted by the importer before opening of the L/C
a) Trade license
b) Import Registration Certificate.
c) Income Tax Declaration with TIN
d) Membership Certificate
e) Memorandum of Article
f) Registered Deed
g) Resolution
h) Photographs
i) VAT Registration.
Bank will supply the following papers/documents before opening of the L/C:
a) L/C application
b) LCAF
c) IMP
d) TM Form
e) Charge Documents
f) Guarantee Form
The above papers /documents must be completed dully filled and signed by the party and to be verified the signature.
4.11. Checking of Documents
Before lodgment, documents must be checked with L/C file. Check-up as under.
a) Invoice
b) Bill of lading
c) Draft
d) Bank forwarding date
4.12 Lodgment of the Document
Documents must be lodged within 7 days and examine the same whether document in order or not.
The exporters of Bangladesh
a) Commercial Invoice
b) Packing list
c) Bill of Leading
d) Certificate of original goods
e) Weight and measurement list
f) Other paper that the importer asked.
4.13 Letter of Credit (L/C)
L/C is the most important thing for doing any sort of foreign business. There is no guaranteed relation between importer and exporter. As a result they use a media to secure their goods and currency. So, exporter and importers use their respective banks as a media and L/C is a legal obligation between the exporter and importer. It is necessary to fill up following forms.
a) LCF form
b) Application and agreement for confirmed irrevocable without resource to drawer’s letter of credit
c) Letter of credit authorization form
d) Form of IMP (importer) and EXP (exporter)
4.13.1. Classification of L/C
1. Revocable L/C
2. Irrevocable L/C
3. Transferable L/C
4. Confirmed and Unconfirmed L/C
5. Non-revolving L/C
6. Revolving L/C
1. Revocable L/C
This type of credit can be revoked or cancel at any time without the consent of, or notice of the beneficiary. A revocable credit may be amended or cancelled by the issuing bank at any moment and without prior notice to the Beneficiary.
2. Irrevocable L/C
The Irrevocable credit is a commonly used type of documentary credit. The credits which can not be revoked varied or change/amended without the consent of all parties- buyer (applicant), seller (Beneficiary) Issuing Bank and confirming Bank (in case of confirmed LC).
3. Transferable L/C
The Original beneficiary when request the banker in writing to effect transfer the L/C to the secondary beneficiary, the signature of the original beneficiary on the letter of request must be verified by his banker. The L/C can be transferred only the terms and conditions specified in the original credit.
4. Confirmed and Unconfirmed L/C
A confirmed credit is one that has been confirmed by the advising bank. The bank issuing the credit sends the credit through his branch or correspondent bank located in the beneficiary’s country with a request to add its confirmation to the credit. If the advising bank adds its confirmation to the credit, it becomes a confirming bank and the credit is a confirmed credit. Confirmation constitutes a definite and legal undertaking on the part of the confirming bank that it will duly honor the payment or acceptance, as the case may be, on presentation of the stipulated documents provided the terms and conditions of the credit are satisfied.
5. Non-revolving L/C
A Non-revolving Credit is one in which the limit is reduced permanently to the extent of bills drawn under the credit. In this case, both the amount and the period of availability are fixed, and when either the time is expired or the amount is exhausted the facility comes to an end.
6. Revolving L/C
Banks to fulfill the special requirements of the importers who require regular and continuous payments to their suppliers issue Revolving Credits.
4.13.2 Back-to-Back Letter of Credit
Under this arrangement the bank finances export business by opening a letter of credit on behalf of the exporter who has received a letter of credit form the overseas buyer but is not the actual manufacturer of producer of the exportable goods. The letter of credit opened in favor of the actual producer or supplier within or outside the country. Since the second letter of credit is opened on the strength of and backed by another letter of credit it is called “Back to Back” credit. The back-to-back letter of credit must conform to the terms and conditions of the original letter of credit with the following exceptions:
1. Name of the original beneficiary shall be substituted by that of the actual supplier.
2. The credit amount shall normally be lower than that of the original letter of credit.
3. The back to back letter of credit shall be made valid for shipment and negotiation prior to expiry of the corresponding date.
4.13.3. Processing and opening of BTB L/C
An exporter desired to have an import L/C limit under Back to Back arrangement. In that case the following papers & documents are required:
a) Full particulars of bank account.
b) Balance Sheet
c) Statement of Assets & liability.
d) Trade License.
e) Valid Bonded Warehouse License
f) Membership Certificate
g) Income Tax Declaration
h) Memorandum of Article
i) Partnership Deed.
j) Resolution
k) Photographs of all Directors.
On receipt of above documents and papers the Bank to Back L/C opening section will prepare a credit report. Branch must obtain sanction from Head office for opening Back-to-Back L/C.
4.14. Opening of Letter of Credit
Opening of Letter of Credit means, at the request of the applicant (importer) issuance of an L/C in favor of the beneficiary (exporter) by a bank. The bank, which open or issue L/C is called L/C opening bank or issuing bank.
4.15. Before Opening an L/C, the issuing Bank must check the following:
1. L/C application properly stamped, signature verified and margin approved and properly retained.
2. Indent/ Proforma Invoice signed by the Importer and Indentor/Supplier.
3. Ensure that the relevant particulars of L/C application correspond with those stipulated in Indent / Proforma Invoice.
4. Validity of LCA entitlement of goods, amount etc. conforms to the L/C application.
5Conversion and rate of exchange correctly applied.
6. Charges like commission, F.C.C.Postage, telex charge, if any recovered.
7. Insurance Cover Note – in the name of issuing Bank-A/C importer covering required Risk and voyage route.
8. Incorporation of instructions for negotiating bank as per bank’s existing arrangement.
9. Reimbursement instructions for Reimbursing Bank.
10. If add confirmation is required on account of the applicant- charge should be Recovered form the applicant.
11. In case of usence L/C, mention rate of interest clearly in the Letter of credit.
4.16. Parties to a Letter of Credit
Letter of Credit signifies a commitment on behalf of the buyer (importer) given by the buyer’s bank to effect payment to the seller (exporter) subject to fulfillment of certain conditions by the seller specified in the credit. The importer, the exporter and the issuing bank are, thus, obviously parties to a letter of credit. A number of other parties are also involved in a Letter of Credit and the rights and obligations of the different parties involved in the deal will also differ from each other. Usually the following parties are involved in the Letter of Credit.
a. Applicant or Buyer (Importer)
b. Beneficiary or Seller (Exporter)
c. Issuing Bank (Opening Bank)
d. Nominated Bank (intermediary bank) which may be:
e. Advising bank/Notifying bank
f. Confirming bank
g. Negotiating bank
h. Accepting bank
i. Paying bank
j. Reimbursing bank
4.17. Papers to Be Submitted By the Importer before L/C Opening
The importer must submit the following papers along with the L/C application before opening the letter of credit:
Import License/Authorization form or Import Registration Certificate as the case may be.
a. TIN Certificate
b. VAT Registration Certificate
c. Indent/Performa Invoice
d. Insurance cover note
e. IMP forms and other documents/papers etc.
4.18. Procedure of opening L/C
|
|
|
|
|
|
|
4.19. Shipment of Consignment and Lodgment of Documents
There are two types of exporter
a). Merchant/Trade Exporter
b). Manufacturer Exporter
If the supplier is a merchant exporter, he will immediately start packing and shipping the goods. If he is a manufacturer exporter, he will start manufacturing the item. In either case, he will ship the goods when ready and obtain full set of Bill of Lading etc. from the carrier company and submit the same to the negotiating bank along with other documents that are called for in the credit. The shipping documents usually obtained are:
a. Bill of Lading or Air Consignment Note or Post Parcel Receipt or Truck Receipt.
b. Bill of Exchange
c. Commercial Invoice
d. Certificate of Origin
e. Packing List
f. Weight Certificate
g. Consular Invoice, where necessary
h. A copy of declaration of shipment made to the Insurance Company (to be submitted with original shipping documents)
i. Pre-shipment inspection certificate from internationally reputed surveyor.
j. Analysis certificate where specification of commodity is given.
If the credit is unrestricted, then the beneficiary can go to any bank for the purpose of negotiating his documents. Usually they go to their own bankers. If the credit is restricted, then the beneficiary gets his documents collected through his banker who forwards documents to that banker to whom negotiations are restricted.
4.20. Discrepancies in Shipping Documents
The usual discrepancies found are:
1. L/C expired;
2. Late shipment;
3. Amount drawn in excess of the letter of credit;
4. Bill of Exchange not properly drawn;
5. Description of goods differ;
6. Interest clause is missing in Bill of Exchange, where stipulated;
7. Bill of Exchange is not drawn/signed by the beneficiary of the credit;
8. Bill of Lading or Airway Bill stale;
9. Bill of Lading “Clause”; Full set of B/L not submitted, Or
10. B/L not properly signed and submitted;
11. Bill of Lading is not manually signed by the master or an authorized agent of the shipping company;
12. Bill of Lading indicates that goods are carried on deck;
13. Bill of Lading is issued under a charter party.
