Foreign Exchange for Beginners
Many newbies have repeatedly searched for study materials on this topic, Foreign Exchange for Beginners. They never found a complete guideline. This section of my blog aimed to help them in this regard. In addition, this write-up will guide you through learning operational procedures in banking and international business.
Let us start with some ABCs of Foreign Exchange & International Trade. We will discuss some terms used in this track and their definitions. You will know what documents are required for what purpose. You will also find samples, examples, and references.
It will help students, bankers, and those who are involved in Trade Finance. Then, this blog will try to continue with the readers' interest.
What is Foreign Exchange?
Before we reach a final definition, we must know the word Foreign Exchange. This word (Foreign Exchange) is used in different ways. For example, sometimes we say, Expatriate workers earn foreign exchange for us. In this example, foreign exchange means the currency of a foreign country.
Again, we sometimes say, My brother works in foreign exchange. In this example, foreign exchange means a workplace that exchanges foreign currencies.
Both of these ideas are correct. So,
Foreign Exchange means Foreign Currency.
As well as-
Foreign exchange is the process of converting the currency of one country into the currency of another country.
What is International Trade Or, What is Foreign Trade?
We will discuss each of the words 'International', 'Foreign' and 'Trade'. It will lead us to understand the term, International Trade or Foreign Trade.
The word 'International' means the involvement of more than one nation. Similarly, the word 'Foreign' means overseas, distant, or another country. So, we can say, both of these words indicate something between more than one nation or country.
The word ‘Trade’ means the activity of buying and selling goods and services.
Hence, we can say-
International Trade or Foreign Trade is buying and selling goods and services between two or more nations or countries.
Moreover, Buying from another country is called import, and selling to another country is export.
So you can also say-
International Trade or Foreign Trade means importing and exporting goods and services between two or more nations or countries.
What Are The Guiding Rules And Laws For Foreign Exchange Operation In Bangladesh?
Foreign Exchange operations in Bangladesh are guided by following rules and regulations.
Must-Follow:
1. Guidelines for Foreign Exchange Transactions (GFET Present version 2018, Vol. 1 & 2)
2. Import Policy and Export Policy in force published by Ministry of Commerce
3. Circulars from Bangladesh Bank, the Central Bank of Bangladesh
4. Public notice and Circulars issued by CCI&E
5. Money Laundering Prevention Act, 2012
6. Anti-Terrorism Act, 2009
7. The Contract Act 1872
8. UCPDC 600
9. URC522
10. URR725
11. INCOTERMS (Presently in force 2020)
12. ISBP745
13. URDG 2010
14. ISP 98
Others:
15. Negotiable Instrument Act 1881
16. Foreign Exchange Regulation Act (FERA) 1947
17. Importers Exporters and Indentors (Registration) Order 1981
18. Import and Export Control Act 1950
19. Bank Company Act 1991
20. Company Act 1994
Why is Foreign Exchange So Important?
Foreign Exchange has become very important nowadays. Whenever we need to buy or sell goods or services with another country, we need to exchange currencies. If you look at the purposes we have, you will find that they are mainly of two types.
1. Personal:
We need to exchange currencies for thousands of personal purposes. It includes both goods and services. For example- we may need foreign currencies for booking tickets, buying software, travel, etc. This travel can also be for many purposes like - a leisure trip, education, medical, official visit and more. On the other hand, we may need to settle payment against the purchase of goods for our own consumption.
2. Commercial:
We may exchange currencies to settle payment for commercial or trade transactions. Commercial transactions are also of two types. Those are -
i. Commercial remittance for import and export
ii. Commercial remittance other than for import and export.
So, if we look deep into the above types, we will find more and more purposes for foreign exchange. We cannot think even of a single day without foreign exchange transactions. Let us close this part with a typical real-life example.
Mr. Sam Ree, a person from China, works for GAP. He earns in US dollars. His home currency is RMB (Renminbi). Now, he is regularly taking his salary in USD and converting it into RMB for his day-to-day use. Mr. Sam also enrolls in an online - course in a UK educational institute. He pays in GBP (British Pound). He uses a USA-made iPhone. The importer in China had to pay in USD.
What is the Rate of Exchange?
The Rate of Exchange is the price of one currency for purchasing another currency. In other words, the Rate of Exchange is the rate at which you can buy or sell one currency with another currency.
Mentionable that the rate of exchange may differ for the same currency depending on the purpose of the transaction.
Read more on the Operational Exchange Rate of Banks.
What does Authorized Dealer mean?
Authorized Dealer means the bank branch that can deal in foreign exchange. The central bank of a country gives this authorization. Usually, some selective branches of a bank can deal in foreign exchange as per authorization from the central bank.
In Bangladesh, Bangladesh Bank authorizes its certain schedule banks to deal in foreign exchange in accordance with the Foreign Exchange Regulation Act – 1947. Selected branches of such schedule banks are ‘Authorized Dealers’. In short, they are also called AD.
What Are the Typical Functions of an Authorized Dealer Bank?
Authorized Dealer or Authorized Dealer Banks usually facilitates their customers with different foreign exchange and international trade services. The number of service products may vary from AD to AD. However, we have listed below some typical service products or functions of an AD or AD Bank in Bangladesh.
Foreign Exchange and Trade Finance-related activities are commonly termed as Foreign Exchange.
Foreign Exchange Activities:
A. Remittance:
i. Inward Remittance: Personal and Commercial (Not Export related)
ii. Outward Remittance: Personal and Commercial (Not Import related)
iii. Endorsement, Certification, and Others
B. Trade Finance:
i. Export:
a. Pre-shipment (Back to Back L/C, Bid Bond & Performance Guarantee, Export Overdraft, Packing Credit)
b. Post-shipment (Negotiation, Purchase, Advance against bills under collection, SOD-cash incentive)
ii. Import:
a. Pre-shipment (Guarantee, L/C)
b. Post-shipment (Shipping Guarantee, PAD, LTR/LIM)
Remittance Service Provided by Banks:
i. Inward Remittance: Personal and Commercial (Not Export related)
What is Inward Remittance?
Inward remittance means the remittance received from abroad.
Remittances can be of different types based on their purposes. People send money for various purposes. So the kinds of remittances and their guiding rules, regulations also differ accordingly.
Banks usually provide their services both to their account holders and walk-in customers. Rules and procedures may not be the same for both of these types.
Forms of Inward Remittance:
Inward remittance can come in various modes. The forms of inward remittance other than export can be as follows.
1. Telegraphic Transfer (T.T.)
2. Mail Transfer (M.T.)
3. Drafts
4. Purchases of bills
5. Purchases of drafts under Travelers’ Letters of Credit
6. Purchases of Travelers’ Cheques
7. Remittance through Exchange Houses
Processing of Inward Remittance Requests:
If you go through the guidelines (GFET-2018, Vol.1), you will see inward remittance has no restriction. In most countries, it is similar. However, in practice, bankers have to report all the inward remittances to their central bank.
Moreover, you must observe due diligence in light of AML (Anti-money laundering) and CFT (Combating the Financing of Terrorism). For newer, our suggestion is, use your judgment. Make sure that the transaction purpose is authentic. The purpose of the transaction does not indicate any unlawful activity.
Documentation for Inward Remittance:
In Bangladesh, you should collect and verify the following documents (where applicable).
1. Customer Application/e-mail request (detailing the purpose of the transaction)
2. Form-C (Appendix 5/10) or Form-C (ICT, Appendix 5/11) if the remittance is more than USD10,000 or equivalent. It should be duly filled in & signed by the receiver.
3. A copy of Invoice/Contract or Other documents (as specified in the remittance/forwarding)
If you receive the remittance through Exchange Houses, documentation will entirely depend on the arrangement of banks with them. It does not require Form-C. In most cases, they demand –
1. A filled in Prescribed Form signed by the receiver
2. A copy of ID obtained on the spot as per specification on the remittance. Usual IDs are National ID, Passport, Mobile number, etc.
So, people may argue against giving you documents. You will need to convince them that all the transaction procedures are not the same. The rules and regulations are different. You are taking the papers for a reasonable ground.
Accounting Procedure for Inward Remittance:
Debit : Nostro Account @ Treasury Buy Rate (where remittance is credited by the sender bank)
Credit : Customer Account @ TT Clean rate (for clean personal remittance)
Credit : Exchange Gain/Earning Account of the AD (with spread, if any).
Inward Remittance Received Through FDD:
If you receive FDD drawn on Bangladesh Bank, you will have to clear it from Bangladesh Bank. It is a clearing process like clearing of Cheques. If you receive FDD drawn on a local branch of a foreign bank. Send it to them endorsing on it and ask them to send your bank an FDD drawn on Bangladesh Bank for clearing process.
After clearing the FDD from Bangladesh Bank, accounting procedure will be the same as it is for Inward Remittance through T.T., M.T., or SWIFT. It involves a collection charge and courier charge.
Inward Remittance Received Through Cheques of Foreign Bank:
Inward Remittance through Cheques of Foreign Bank is discouraged. Because it involves a high amount of courier charge. The risk of fraud is also high. Most of the times you will not be able to verify the signature of the issuer.
However, if you receive such a Cheque, you will need to send it to the related bank endorsing on it. You will have to ask them to send your bank remittance through SWIFT. After receiving the SWIFT and the cover payment in your Nostro Account you can follow the rest of the process like a remittance received through M.T. or T.T.
Accounting procedure will be the same as it is for Inward Remittance through T.T., M.T., or SWIFT. Of course, you must not forget to deduct collection and courier charge.
If you need further detail, do not hesitate to e-mail me.
Compliance Requirement for Inward Remittance:
You will need to ensure compliance with:
· AML-CFT Standards
· Concerned regulations of other competent authorities and
· Deduction of tax/vat, etc.
FAQ about Inward Remittance:
1. Why should I give an Application when the remittance mentioned my name as the Beneficiary?
Answer: The Application reflects that the customer knows everything about the remittance. He/she is willing to receive the amount in his/her account.
Taking Application is a protection for the banker under AML/CFT ground. If anything proves wrong in the future, the receiver will not be able to say that he/she did not know anything.
2. Do I need to submit this Application again and again whenever I receive any remittance?
Answer: The answer is Yes and No at the same time. If the transaction is in redundant nature under a single valid contract, the answer is, No. If the transaction takes place for a different purpose, the answer is, Yes.
A banker may not ask for the Customer Application again and again when the transactions are under the same contract until the contract is valid. However, you should ask for a Customer Application if the transactions take place for different purposes.
3. Why should I fill in and Sign the Form-C?
Answer: Form-C is a declaration of the receiver for USD10,000 or more or equivalent amount remittance received. It is a regulatory requirement in such cases. It is a prescribed form for reporting to the central bank (Bangladesh Bank). The receiver knows the details well, so he/she should fill in and sign the form.
4. Why do not you fill in Form-C and give it to me to sign?
Answer: The banker should ask the remittance receiver to fill in the Form-C and sign. It will help to avoid conflict in the future like the customer saying, I had to sign because the banker has filled in the form and asked me to sign,
Never say to the client this way. The thing will go wrong. Rather, you should tell your customer politely that you (customer) know the better about the remittance, so you better fill it in. Or, you may follow other better tricky ways to convince the customer.
5. Why should I give you the Application when I have signed the Form-C?
Answer: There are conflicting views on this issue. Some say that a remittance receiver should submit an Application with the Form-C. At the same time, others say that Form-C is enough.
In my opinion, you should ask for the Application saying that - the Application is addressed to the Manager for Bank use, and the Form-C is for the regulatory requirement. The truth is when the central bank makes any inquiry regarding an inward remittance; they are not satisfied until you submit both of them.
6. Why should I give you the Invoice/Contract (or other documents)?
Answer: If the remittance bears an Invoice/Contract/reference to any specific documents, it means remittance should be released against the presentation of that document. Otherwise, why should the remittance bear that information?
The central bank may inquire about the remittance and ask you to produce this specific document. So, you should not merely collect them; verify them in any way you can.
Finally, never go into any conflict with your customer. Rather convince them in a very calm and polite manner. Give them an impression that you are working for him/her.
Make them understand that excess documentation will create a burden for you. This is because you need to keep documents for more than five years as per the requirement of the Money Laundering Prevention Act 2012.
[NOTE: Follow Chapter 5, Section-ii, GFET-2018, Vol.1, and get training on AML and CFT as early as possible.]
ii. Outward Remittance: Personal and Commercial (Not Import related)
What is Outward Remittance?
Outward Remittance means the remittance which we send abroad. When we send funds (money) to other countries, this process of sending money outside the country is also known as outward remittance.
According to 1. (II) of Section-I, Chapter 5, GFET-2018, "all remittances from Bangladesh to a foreign country or local currency credited to non-resident Taka accounts of foreign banks or convertible Taka account constitute outward remittances of foreign exchange."
Considering the definition given in GFET-2018, outward remittance means all the remittance and transactions relating to crediting NRTA of foreign banks or Convertible Taka account.
Forms of Outward Remittance:
Outward remittance can be in various modes. For example, the forms of outward remittance other than Import from Bangladesh can be as follows.
1. Telegraphic Transfer (T.T.)
2. Mail Transfer (M.T.)
3. Foreign Demand Draft (FDD)
4. Travelers' Cheques
5. Local currency credited to non-resident Taka accounts of foreign bank
6. Local currency credited to Convertible Taka accounts.
Processing of Outward Remittance Requests:
As per Guidelines for Foreign Exchange Transaction 2018, Vol.1, most outward remittances are allowed without prior approval of the central bank, Bangladesh Bank. However, there are certain purposes for which the central bank has set some restrictions and limits. Therefore, ADs must be careful enough to ensure that the purpose of the transaction is correct and bonafide.
Whatever the media is, the procedures are almost the same. The accounting process consists of the basic idea that AD will collect the fund from the sender's account. Then, AD will place this fund in the Intermediary Bank's account (Nostro) for onward crediting to the receiver banks account.
Then, the sender bank will issue an instrument like Foreign Demand Draft favouring the receiver drawn on the account where they have placed the fund. Or, the sender bank may send a SWIFT message (FIN 103) to the receiver's bank giving the transaction details.
Then, the receiver's bank will collect the instrument or become sure that the intermediary bank has credited the fund to their Nostro account. Then, they will credit the receiver's account.
When local currency credited to non-resident Taka accounts of foreign banks maintained with an AD or to Convertible Taka accounts with the AD, it will also constitute an outward remittance as per GFET. The process is as simple as a transfer of funds in local currency from one account to another.
Reporting & Record Keeping:
Bankers have to use form TM for outward remittance other than Import. Bankers will report these transactions through the online platform of the central bank of Bangladesh. They must keep a record of transactions for future inspection.
Moreover, you must observe due diligence in light of AML (Anti-money laundering) and CFT (Combating the Financing of Terrorism). For newer, our suggestion is, use your judgment. Make sure that the transaction purpose is authentic. The purpose of the transaction does not indicate any unlawful activity.
Documentation for Outward Remittance:
The documentation for outward remittance will merely differ. A banker will process an outward remittance request upon receiving the customer's request. A remittance request to a bank must accompany the following documents.
1. Customer's Approach Letter
2. Copy of Invoice (where applicable)
3. Completed and signed form TM
4. Valid passport (for personal remittance)
It is mentionable that the customer's approach letter should detail the receiver, purpose and amount of the outward remittance. Ideally, this letter should also bear the authority to debit the customer's account. The AD will debit it for the remittance amount and the applicable charges.
Invoice reflects the details of services or performance and its cost or price. Applicant must fill in the TM form and sign.
Accounting Procedure for Outward Remittance:
The accounting procedures for outward remittance usually have three or four debit credits. Therefore, the accounting of those transactions will be as follows.
Debit: Remitter/Applicant's Account (Remittance amount, Intermediary Bank Charge & Remitting Bank's Remittance Charges in local currency @ BC Selling Rate)
Credit: Intermediary Bank's Account (Remittance amount & Intermediary Bank Charges in FC @ Treasury Selling Rate)
Credit: Remitting Bank's Income Account (Remittance Charges as per schedule of Charges in Local currency)
Credit: Remitting Bank's Exchange Gain Account in Local Currency @ (BC selling rate – Treasury Selling rate)]
Intermediary Bank charges may vary from bank to bank. On the other hand, remitting bank's charges depends on its schedule of charges. AD will debit the applicant's account for outward remittance at BC selling rate. They will credit the Intermediary Bank's Account with FC at Treasury Selling Rate. AD will credit their Exchange Gain Account in Local Currency, BDT with Remittance charges and exchange gain @ (BC Selling Rate – Treasury Buy Rate).
FAQ about Outward Remittance:
1. Who sets the limit for outward remittance?
Answer: You may want to know who sets the limit for outward remittance. Bangladesh Bank sets the limit for outward remittances. However, they may change those limits time-to-time by circulars.
These circulars may have a connection with the circulars and circular letters from different government authorities. For example, those authorities may be NBR, BIDA, Customs and various Ministries and departments.
2. What is the present limit for travel abroad or Travel Quota?
Answer: In Bangladesh, the present limit (01.07.2021) for outward remittance under Travel Quota is USD12,000 or equivalent. This limit is for a calendar year. The interesting fact is that a traveller from Bangladesh can carry USD10,000 in cash form during their travel abroad.
It is mentionable that an AD will require a valid visa for more than USD200 or equivalent to releasing FC in cash form.
3. What is the present limit for medical purposes or Medical Quota?
Answer: The present limit (01.07.2021) of outward remittance for medical purposes (Medical Quota) in Bangladesh is a maximum of USD10,000 (ten thousand) or equivalent. This amount may be in the form of Cash or Outward remittance.
However, an AD in Bangladesh will require the following documents.
i. Customer Application
ii. Valid passport
iii. Recommendation of the medical board from Health Directorate or, appropriate medical specialist
iv. Cost estimate or invoice of the foreign medical institution.
4. What is the present limit for education?
Answer: Currently, there no specific limit for education purpose outward remittance. Of course, you will need prior approval from Bangladesh Bank for school level education abroad. However, the limit for outward remittance is the amount mentioned in the invoice or such documents from the designated educational institute.
We will discuss remittance for education purposes in our Student File related post.
5. What is the present limit for outward remittance for service related to business?
Answer: There is no specific limit set for all types of services related to business. However, industrial enterprises in Bangladesh can remit a maximum of 1 (one) per cent of their previous year’s sales which they have shown in their income tax return for foreign training and consultancy services.
6. What is the limit for technical fees?
Answer: AD can make outward remittances for royalty, fees for technical assistance and franchise fees. Bangladesh Bank did not set any limit for this type of service. However, AD may follow the permission from BIDA.
Follow our post related to remittance for royalty, franchise fees, technical fees to learn the detailed procedures.
7. What to do when the transaction amount exceeds the limit?
Answer: When the transaction amount exceeds the generally approved limit from Bangladesh Bank, you must seek special approval from Bangladesh Bank.
8. What to do when the transaction type is new for personal remittance or does not have any general approval?
Answer: An AD must seek special approval when the transaction type is new for personal remittance or without the general permission.
9. What to do when an outward remittance is cancelled or returned?
Answer: In some cases an outward remittance may be cancelled by the sender. On the other hand, this outward remittance may also be returned by the receiving banks for various reasons. In this case, you will have to debit the related Nostro Account. Then credit back the sending customer’s account.
It is mentionable that you will have to report this transaction through online inward remittance monitoring system of Bangladesh Bank. In this event, the applicant will submit a complete Form-C.
You should input the outward remittance ID number in online portal during reporting. Do not forget to write down the outward remittance ID on the Form-C besides the system generated inward remittance ID.
[NOTE: Follow Chapter 5, Section-i, GFET-2018, Vol.1, and get training on AML and CFT as early as possible.]
iii. Endorsement, Certification, and Others
What is Endorsement?
Endorsement means approval. Endorsement on a Passport means approving to carry and spend foreign currencies abroad. Every AD has a general authority from Bangladesh Bank to endorse and sell Foreign Currency to a traveler.
However, AD does not need to endorse the passport of the Diplomats or Privileged persons or UN personnel or Govt. officials traveling on official duties for selling foreign exchange to them.
When a resident needs foreign currency to spend abroad, they need this approval. The amount allowable for endorsement depends on the purposes. Usually, under the travel quota, a resident passport holder can spend annually (Jan-Dec) USD12,000/- or equivalent abroad. Endorsement against sell of cash FC for Travel purposes will not exceed USD5,000/- against private travel quota or business travel quota or travel for treatment abroad or study abroad etc.
Of course, AD can endorse the rest of the annual entitlement, USD7,000/-, in other freely convertible currencies or against instruments like international cards for each adult passport holder.
This limit is per person per trip or an adult within the annual entitlement. The entitlement is half in the case of the passport holder with age below 12 years.
Mentionable that for Medical Purpose, residents may take more amounts but with approval from the appropriate authority or medical board. Please refer to the latest circulars or GFET for limits under other Quotas.
How to Endorse On the Passport for an Outgoing Traveler:
After receiving a customer request for endorsement, you may endorse the passport and ticket (where applicable). This endorsement can be of two types – (a) endorsement against releasing Foreign Currency in cash form or (b) endorsement against international credit or debit cards. So, we will discuss both the processes here.
(a) Process of Endorsement for releasing Foreign Exchange:
When a traveler wants to buy foreign currency (FC) from an AD, they will submit the following documents to your end. You will have to check and process the request as an AD.
1. Customer application
2. Passport
3. Air Ticket
4. Form TM completed and signed by the applicant
Things you should confirm before you endorse a passport for releasing Foreign Exchange:
Now we will discuss what things you should check before selling foreign exchange and endorsing a passport. Though there are some exceptions, an AD has regulatory obligations to check the following few things carefully.
1. The traveler is your customer
2. Or, the traveler is well known to you
3. He/she has a valid passport (at least six months validity)
4. The passport has a valid visa (not required for on arrival visa or selling FC less than USD200)
5. The visa must match with the validity of the passport
6. The traveler has a confirmed air ticket and flight date not later than two weeks (to release FC)
7. Total endorsed amount does not exceed their respective entitlement for the calendar year.
If everything is alright, you have only a few steps to take.
Step 1: Verify the signature of the customer
Step 2: Check for completeness of the Form TM including the applicant’s signature.
Step 3: Realize the charges and amount in BDT for releasing FC at Cash selling rate
Step 4: Use the endorsement seal on the passport and air ticket (if required).
Step 5: Then, write down the amount endorsed and the endorsement period on the specific area of the endorsement seal with permanent ink.
Step 6: Keep photocopies of the following documents along with the customer application and the Form TM to preserve with the AD.
1. The first six pages of the passport or the first two pages of a machine-readable passport
2. Pages bearing visa on the passport (if available)
3. The page recording endorsement of foreign exchange (for the calendar year)
4. The pages of the ticket showing name of the passenger, route, date of journey, and endorsement.
Step 7: Report the endorsement through the 'Online Foreign Exchange Transaction Monitoring System' of Bangladesh Bank and the usual monthly returns to Bangladesh Bank.
(b) Process of Endorsement against International Cards:
The process of endorsement on a passport against an International Card is more straightforward. When a customer wants to endorse his/her passport against an international card, he/she will submit the following things.
1. Customer application
2. Passport
3. International Credit/Debit card.
In this case, there is no doubt that the card-holder is your customer. What you need to do is -
Step 1: Check and verify the customer’s signature
Step 2: Make sure that passport is valid (minimum for six months)
Step 3: Check the limit of the customer in his/her card
Step 4: Put the endorsement seal on the passport’s endorsement area
Step 5: Write down the amount and year and sign
Step 6: Keep the record in the core banking system against the card
Step 7: Keep the photocopy of the first six pages of the passport or first two pages of the machine-readable passport, pages bearing visa on the passport (if available), and the page recording endorsement of foreign exchange (for the calendar year)
Usually, you do not need to report the endorsement immediately to the Bangladesh Bank. Card division of the AD bank reports to Bangladesh Bank when any transaction in the card takes place. They also submit the monthly return.
Certification and Other Services
As a customer service desk officer of the foreign exchange department, you will need to issue various certificates and statements both for internal and external uses.
In most cases, your customer will need a bank statement and a bank solvency certificate for their visa and other purposes. So, you will have to provide them the certificate as per each bank’s prescribed format for that certificate. This certificate must reflect the information as per the Bank’s core banking system and account information.
It would be best if you took the utmost care to issue all the certificates and statements reflecting the actual data. Any deviation from the accurate information may lead to show cause, punitive actions, and fines.
If you have more inquiries, please feel free to ask in the comment or contact us.
Trade Finance by Banks
i. Export Finance:
Export plays a pivotal role in the economy of a country. No country is self-sufficient in producing goods and services they need. So, many countries in the world need to buy goods and services from other countries. So, selling goods or services to those countries is the most important source of income for a country. Usually, the larger team in a foreign exchange department of an AD is Export Department or Export Unit.
For producing goods and services to export, exporters need to buy ingredients from abroad or from the backward linkage in their own country. Manufacturers of components or raw materials within the country sell goods or services to the final exporters. In this way, export also counts for the inland export.
In this way, the export department or unit of an AD has to handle both the import and export. Thus the department attains more importance than other departments and becomes more significant.
What is Export?
Export means selling goods or services to other countries or nations. Selling goods or services or both within the country is sometimes also called export. You can take a look at the Sample Process Flow of Export (Click Here) for a more precise understanding regarding export.
What Are The Main Types Of Export?
Export can be divided into two main types. Those are – Final Export and Local Export.
· Final Export means selling goods and/or services to other countries or nations.
· Local Export means selling goods and/or services to the final exporter or within the country.
What Is Export Finance?
Banks facilitate export by financing to exporters. On the other hand, Export finance is one of the primary sources of income for commercial banks. Export finance means financing exporters by banks. This financing usually takes two forms those are – funded and non-funded.
Funded finance is financing through extending loans and advances. On the other hand, non-funded financing by banks takes the form of a Letter of Credit (or L/C) and Guarantees.
Moreover, this financing can take two forms, those are –
a. Pre-shipment Export Finance and,
b. Post Shipment Export Finance.
a. Pre-shipment Export Finance:
Pre-shipment finance means the facilities that a bank provides to its exporter customers before shipment goods and/or services. These facilities help the exporter customer win a job or order and procure and produce items to export. Pre-shipment Finance can be both non-funded and funded.
Non-funded Pre-shipment Export Finance includes – Back to Back L/C, Bid Bond & Performance Guarantee.
Funded Pre-shipment Export Finance includes – Export Cash Credit or Export Overdraft and Packing Credit.
What Is A Back to Back L/C?
Let us start with the Letter of Credit or L/C. It is a clear-cut undertaking of the issuing bank to the seller to pay a specific amount of money on behalf of the buyer to fulfill some conditions. Now we’ll discuss the Back to Back L/C.
A Back to Back L/C is an import L/C opened against an Export L/C by the beneficiary of that export L/C to procure goods for export or the raw materials for producing or processing the goods and services to export. This L/C helps exporters to buy raw materials or goods without paying from their source; instead, they pay a commission to the Bank for the L/C.
According to GFET, a Back to Back L/C is an import L/C opened against an Export L/C received by export-oriented industrial units operating under bonded warehouse systems – subject to observance of domestic value addition requirement prescribed by the Ministry of Commerce from time to time.
What is a Bid Bond?
A bid bond guarantees that the party (on whose favor it is issued) is financially capable and has the necessary capacity to perform the job.
Banks provide a bid bond to their export customer for participating in the international tenders for import. Banks earn a commission for the guarantee. Typically, these types of international tenders also involve a Performance Guarantee and Payment Guarantee.
What is a Performance Guarantee?
A Performance Guarantee is a bank’s undertaking on behalf of its customer about performance as per contract. Banks earn a commission for issuing such a guarantee.
A bank issues a performance guarantee to the buyer, government, or the Corporation on behalf of the exporter or contractors. It undertakes to make payment of a penalty in the event of non-fulfillment of the performance or supplying goods as per contract.
What is Export Cash Credit or Export Overdraft?
Export Cash Credit or ECC is a funded short-term credit facility for exporters. It has a fixed expiry date. Banks extend this type of credit facility to an exporter for procuring and processing of goods.
Usually, the limit of ECC for the exporter of traditional items like Leather, Jute, and Tea is a maximum of 90% (ninety percent) of the value of export L/C or contract.
However, this ECC limit for the garments industry is maximum 10% to 15% based on their category. This ECC limit for Garments exporters is lower because they procure most of their raw materials through Back to Back L/C.
What is Packing Credit?
Packing credit is essentially a short-term advance of credit facility to exporters. It has a fixed repayment date. Banks extend this credit for the preparation of the goods for export. It covers expenses of packing, transportation to the port for shipment warehousing, insurance, etc.
Exporters can enjoy such facilities when they have a foreign buyer’s order. Banks adjust the packing credit out of the proceeds of bills drawn on the foreign buyer.
b. Post-shipment Export Finance:
What is Negotiation?
Negotiation is short-term post-shipment export finance. In this case, an exporter submits the document to the negotiating bank after shipment. The negotiating bank purchases the export document if it complies with the terms and conditions of the LC.
A documentary credit must mention that the credit is available by Negotiation. It also must mention the name of negotiating bank or must be available with any bank.
Find below the definition from UCPDC600 for your ready reference:
“Negotiation means the purchase by the nominated bank of drafts (drawn on a bank other than the nominated bank) and/or documents under a complying presentation, by advancing or agreeing to advance funds to the beneficiary on or before the banking day on which reimbursement is due to the nominated bank.”
What is Export Bill Purchase?
Banks also purchase the export bills drawn under an LC which is not available by negotiation or drawn on a Usance basis. They may also buy export documents drawn under an export contract both of DP (Documents against payment) or DA (Documents against Acceptance) type. It depends on the own policy of a bank. However, banks usually extend this facility to their most trusted exporter customer who has given security against their facilities.
Purchase is a short-term credit facility. Exporter submits export documents to their Bank for Purchase. Exporter’s bank checks those documents for compliance against the terms and conditions of the export LC or Contract. If they find those documents compliant, they purchase those documents, usually on a recourse basis.
While doing so, banks offer the exchange rate determined by the bank's management. They keep some spread at a competitive exchange rate. Notably, the banks should scrutinize all the export documents to determine strict compliance.
Banks must obtain clear instructions from the exporter or drawer about export bill purchase.
What is Advance against bills under collection?
Banks generally accept export bills for collecting proceeds irrespective of whether they are drawn against an LC or Contract, compliant or discrepant. Banks finance against the export bills in three main ways. The third one is Advance against Bills under Collection.
We’ve already discussed and said that banks negotiate bills drawn under LC without any discrepancy, and the exporter immediately gets the money from the bank. On the other hand, banks purchase export documents to finance the exporter against their export documents where negotiation is impossible. What if the export bill is not eligible for Negotiation or Purchase by banks?
Banks can still provide credit facilities to the exporter customers. This type of finance is Advance against Bills under Collection. Banks offer credit facilities to their credit-worthy customers taking export bills as security. This credit is a revocable facility. So, banks depend heavily on the additional collateral security arrangement with the exporter customer. Banks may extend fifty to eighty percent of the export bill value as credit.
What is a SOD-cash incentive?
SOD-cash incentive is a short-term credit facility against export cash incentive claims from the exporter. Banks extend overdraft credit facilities to their exporter customer up to 70% against the non-audited cash incentive claim files as per their credit policy.
It is mentionable that as per FE Circular 15, September 8, 2009, banks can disburse 70% after primary examination of claim files. However, this circular also states that if the final audit report finds any error and non-eligibility, related banks may face penalties and refund requests along with interest for the period. So, banks like to extend credit facilities instead of disbursing before the final audit by the independent audit firms approved by the Bangladesh Bank (the central bank of Bangladesh).
ii. Import:
a. Pre-shipment Import Finance:
What is a Guarantee?
A Guarantee is a bank’s undertaking on behalf of its customer about payment against a contract. The guarantee issuing bank pays the beneficiary if the customer fails in their contractual obligation.
In the case of import contracts, banks provide a guarantee on behalf of their customer, which is usually a demand guarantee and comes into effect when the importer does not pay as per contract. Banks earn a commission for such a guarantee.
What is an LC (Letter of Credit)?
A Letter of Credit or LC is a conditional undertaking of the issuing bank. The issuing bank of LC undertakes to pay the seller on behalf of a buyer a certain sum of money for fulfillment of some agreed conditions.
Letter of Credit is a medium of financing trade (import-export). All commercial letters of credits are documentary credits. Seller submits documents as proof of fulfillment of agreed conditions of the L/C. So, letter of credits are called Documentary Credit (DC).
L/C or DC facilitates both importer (buyer) and exporter (seller). It assures importers of receiving their goods or services as per agreed conditions. At the same time, it assures exporters of their receiving payments.
As per UCPDC600, “Credit means any arrangement, however, named or described, that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honor a complying presentation”.
b. Post-shipment Import Finance:
What is a Shipping Guarantee?
It is a guarantee and indemnity issued by the bank in favour of the shipping company. Shipping documents against LC are not received by the bank, but the ship carrying the goods arrives at the destination. The shipping line is not willing to release the goods without the relative shipping documents.
Still, the importer may like to take delivery of the goods to avoid warehousing cost and demurrage charge against an agreement indemnifying the shipping company for any loss it may sustain for delivery of goods without the relative bill of lading.
Shipping Guarantee is given by bank to shipping companies for release of goods in the absence of Original Shipping Documents when goods arrive before receipt of the documents.
What is a PAD?
When a Bank receives an import bill under a Letter of Credit, it is the duty of opening bank to examine the documents drawn in accordance with the terms of L/C. If the documents are in order, the bank lodges the documents in their book that is PAD. The banks inform the importer asking him to retire the documents immediately.
PAD lodgement within 48 hours. PAD retires by the importer within 30 days i.e. PAD validity 30 days. If not otherwise mentioned, payment of import bill should be made within 21 days.
The exporter is required to repatriate the export proceeds within 120 days or 4 months from the date of shipment. Otherwise penalty is imposed upon them.
At sight L/C, payment settlement must be done within 07 working days from the date of receipt of documents.
In case of any discrepancies in L/C documents, the issuing bank must protest the Advising Bank within 05 (five) working days (working days mean respective countries working days).
If the documents are not complying, the bank should immediately advise the importer to seek his acceptance of the documents despite the discrepancy. If the importer does not accept the documents, the bank should advise the negotiating bank for instruction regarding disposal of the goods and the documents. If no reply is received regarding disposal of dishonoured documents, the same should be returned to the concerned bank with the instruction to reverse the entry if the issuing bank is debited with the value of the goods.
Lodgement and Retirement Vouchers of PAD :
Debit : Payment Against Documents (PAD) or Bill of Exchange
Credit : Balance with other bank (responding the debit entry originated by foreign negotiating bank)
Credit : Exchange Account
What is an LTR?
LTR or Loan against Trust Receipt is a short term loan facility. When an importer fails to retire the documents and request the bank for funds to release the document, the bank converts liabilities under PAD to a loan account which is called a LTR A/C. In some cases it is also termed as LATR. Usual tenor for this loan is 90 days.
Accounting Procedure:
Debit : LTR account (in the name of importer)
Credit : PAD or bill of exchange
Credit : Interest/Commission etc. (if any)..
What is a LIM?
Whether the importer fails to retirement of documents on payment and request the bank for clearance of goods, the liabilities under PAD are converted to LIM A/c.
Accounting Procedure:
Debit : LIM or LAM account (in the name of importer)
To be continued.....
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