Export Procedure:

Topic- Export Financing: Back to Back L/C, IFDBC, PC/ECC/EDF

Export Financing:

To enable the exporters to make shipment of goods to the foreign buyers, he needs finance in the following stages, namely-

1. Pre-shipment

2. Post-shipment

We may classify export finance into two categories:

a) Pre-shipment credit

b) Post-shipment credit

Pre-shipment credit:

Pre-shipment credit, as the name suggest, is given to finance the activities of an exporter prior to the actual shipment of goods for export. The purpose of such credit is to meet working capital needs starting from the point of purchasing of raw materials to transportation of goods for export to foreign country. Before allowing such credit to the exporters bank takes into consideration the credit worthiness, export performance of the exporters, together with all other necessary information required for sanctioning the credit in accordance with the existing rules and regulations. Pre-shipment credit is given for the following purpose:

a. Cash for local procurement and meeting related expenses;

b. Procuring and processing of goods for export;

c. Packing and transporting of goods for export;

d. Payment of insurance premium;

e. Inspection fees

f. Freight charges etc.

An exporter can obtain credit facilities against lien on the irrevocable, confirmed unrestricted export letter of credit.

Pre-shipment credit takes the following forms:

a. Export Cash Credit (Hypothecation);

b. Export Cash Credit (Pledge);

c. Export Cash Credit against Trust Receipt;

d. Packing Credit;

e. Back to Back letter of credit;

f. Credit against anticipatory letter of credit

1. Export Cash Credit (Hypothecation)

Under this arrangement a credit is sanctioned against hypothecation of the raw materials of finished goods for export intended for export. Such facility is allowed to the first class exporters. As the Bank has no security in this case, except charge document and lien of export L/C contract, Bank normally insists on the exporter in furnishing collateral security. The letter of hypothecation creates c charge against the merchandise in favor of the bank but neither the ownership not the possession is passed to it.

2. Export Cash Credit (Pledge):

Such credit facility is allowed against pledge of exportable goods or raw materials. In this case cash credit facilities are extended against pledge of goods to be stored in go-down under banks control by signing letter of pledge & other pledge documents. The exporter surrenders the physical possession of the goods under Banks effective control as security for payment of Bank dues. In the event of failure of the exporter to honour his commitment, the bank can sell the pledge merchandise for recovery of the advances.

3. Export Cash Credit against Trust Receipt:

In this case, credit limit is sanctioned against Trust Receipt (TR). In this case also unlike pledge, the exportable goods remain in the custody of the exporter. He is required to execute a stamped export trust receipt in favour of the bank, where in a declaration is made that goods purchased with financial assistance of bank are held by him in trust for the bank. This type of credit is granted when the exportable condition and when it seems those exportable goods can not be taken into banks custody. This facility is allowed only to the first class party and collateral security is generally obtained in this case.

4. Packing Credit

Packing credit is essentially a short-term advance granted by a bank to an exporter for assisting him to buy, process,pack and ship the goods. Such type of finance for working capital is also as important as post shipment credit, because often an exporter may lack the necessary facilities to execute the order. This type of credit is of significance, specially for small scale indigenous manufacturers of exporter who do not have access to large financial resources. The credit is gradually extended for payment of freight, handling charge, insurance and export duties. A packing credit advance does not normally extended beyond 180 days and has to be liquidated by the negotiation/purchase of the export bills covering the particular shipment for which the packing credit was granted. In the textile sector against foreign export LC up to 90% of the LC value the including Back to Back LC but not more than 15% of the LC amount as PC are allowed as loan for the said LC.

Charge documents for ECC/PC:

1. DP note

2. Letter of arrangement

3. Letter of disbursement

4. Letter of installment

5. Letter of hypothecation of goods

6. Letter of guarantee

7. Letter of indemnity

5. Back to Back Letter of Credit

Under this arrangement the bank finances export business by opening of a letter of credit on behalf of the exporter who has received a letter of credit from the overseas buyer but is not the actual manufacturer or producer of the exportable goods. The letter of credit is opened in favour 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 Letter of Credit. The need for a back to back credit arise because the beneficiary of the original (export) letter of credit may have to procure the goods from the actual producer who may not supply the goods unless its payment is guaranteed by the bank in the form of letter of credit collateral security before opening of letter of 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 submitted by that of the actual supplier;

2. The credit amount shall normally be lower than that of the original letter of credit, the difference being the amount of profit the exporter expects to earn from the deal;

3. The back to back letter of credit shall be made valid for shipment and negotiation prior to expiry of the corresponding date.

6.Advance against Anticipatory Letter of Credit (Red Clause Letter of Credit)

Under Red Clause letter of credit, the amount of credit, the opening bank authorizes the Advising bank/ Negotiating bank to bank advances to the beneficiary prior to the beneficiary to shipment to enable him to procure the exportable goods in anticipation of his effecting the shipment and submitting a bill under the L/C. As the clause containing such authority containing such authority printed/ type in red ink and in green ink on the top of the L/C is called Red Clause L/C.

The following documents/ papers are usually called for depending on the nature of the export credit facility to be provided at the Pre-shipment stage:

(a) Lien on confirmed/ irrevocable and unrestricted letter of credit from a firm class Bank;

(b) Letter of Hypothecation duly stamped;

(c) Letter of pledge duly stamped;

(d) Detailed stock statement duly verified by Bank Officials;

(e) Insurance coverage under Bank mortgage clause;

(f) Letter of disclaimer to be signed by the owner of the go-down in case of rented go-down;

(g) Documents of title to goods;

(h) Trust Receipt;

(i) Export Credit Guarantee Scheme;

(j) Export form duly signed by the exporter;

(k) EPC/ ERF duly certified by Bangladesh Bank;

(l) Change and other documents, if any.

Post Shipment Credit

This type of credit refers to the credit facilities to the exporters by commercial banks after shipment of the goods against export documents. Necessity for such credit arises as the exporter can not afford to wait for a long time for payment to local manufacturers/ suppliers. Before extending such credit, it is necessary to obtain report on creditworthiness the exporters and financial soundness of the buyers as well as other relevant documents connected with the rules and regulations in force. Banks in our country extended post-shipment credit to the exporters through:

a. Negotiation of documents under L/C;

b. Purchase of DP & DA bills;

c. Advance against Export Bills surrendered for collection.

a. Negotiation of Documents under L/C

Under this arrangement, after the goods are shipped, the exporter submits the concerned documents to the negotiating bank for negotiation, bank scrutinized these which are generally the expiry date, the amount available under the L/C, required documents mentioned in the L/C, etc. and if the bank satisfied they may pay the amount to exporter at bill buying rate and negotiate the bill for collection. The documents should be negotiated strictly in accordance with the terms and conditions and within the period mentioned in the letter of credit.

b. Purchase of DP & DA Bills

Sometimes goods are exported on contract basis without the coverage of L/C. In this case documents are sent to the buyer through the Authorized Dealers and their correspondents against payments/ acceptance. After purchase bank becomes the holder of the bill and as such the exchange rate risk shifted to the bank. This credit is allowed to the exporter after careful consideration of the terms and condition of the contract and the credit worthiness of the beneficiary. However, bank should obtain definite instruction from the exporter regarding:

Whether these are to be delivered against payment or acceptance.

Advised to be made by cable of air

Interest and handling charges are to be born by the overseas buyer of to be absorbed by the exporter

Name of a third party in case of failure by the overseas buyer

Protest clause, if dishonored by the buyer

If dishonored, how to cover clearance, storage and insurance on arrival of the goods

Which accounts to be credited or adjusted. Generally nostro account abroad is to be credited.

c. Advance against Bills for Collection

Banks generally accept export bills for collection of proceeds when they are not drawn under a L/C or when the documents, even though drawn against an L/C contain some discrepancies. Bills drawn under L/C, without any discrepancy in the documents are generally negotiated by the bank and the exporter gets the money from the bank immediately. However, if the bill is not eligible for negotiation, he may obtain advance from the banks against the security of export bills. Banks may give advance ranging from 50 to 80 percent of the documents value. In addition to the export bills, banks may ask for collateral security like a guarantee by a third party and equitable/ registered mortgage of property. In this case exchange rate risks remains with the customer because he remains the holder of the bill and the bank as the agent for collections.

The following vouchers are required to pass at the time of purchasing the bill:

Dr. FBDP A/c (OD sight rate)

Cr. Party's A/c.

The following vouchers are required to pass at the time of realization of the bill:

Dr. Nostro Account

Cr. FDBP A/c.

Cr. PC/ ECC

Cr. FBPAR A/c.

Cr. FC A/c.

Cr. Commission

Cr. Exchange Earning

Cr. Source Income Tax, etc.

Export Development Fund (EDF)

The main objective of creating an Export Development Fund (EDF) at the Bangladesh Bank is to assure a continued available of Foreign Exchange to meet the import requirements of non-traditional manufactured items. This facility is available to the non-traditional manufactured items. This facility is available to the non-traditional exporters, particularly newer exporters, exporter diversifying into higher value exports and exporters diversifying into new markets. An exporter identified above is eligible to avail of EDF facilities on the basis of the conditionally stated below:

He must be an exporter of non-traditional manufacturing items;

The value added of these products could be 20% except in the case of garments where it has to be 30% and above;

The loan should be utilized in the case of importing raw-material for manufacturing the exportable products;

The exporter must have an export L/C;

He must create a back to back L/C for importing raw-materials;

The period of loan is 180 days;

The exporter can borrow as many times as he likes in a year;

The interest rate pays is LIBOR+1%;

An exporter can borrow an amount not exceeding $5,00,000 in a single case but outstanding should not be over $2,000,000;

He has to have Export Credit insurance through E.C.G.S.

As for banker, the EDF allows a spread between 2.5% for the established exporters and 3.5% for the new exporters for every loan for the credit.

Export Credit Guarantee Scheme (ECGS)

At present the following finance guarantees and policies are issued by Export Credit Guarantee Department:

i. Export Finance (pre-shipment) Guarantee;

ii. Export Finance (post-shipment) Guarantee;

iii. Whole Turnover Pre-shipment Finance Guarantee;

iv. Export Payment Risks Policy.

Back to Back Letter of Credit

A back to back credit is essentially a secondary or ancillary credit opened by a bank on behalf of the original credit, in favour of supplier located inside or outside the original beneficiarys country. A back to back letter of credit is a new credit. It is different from the original credit based on which the bank undertakes the risk under the back to back credit. In this case the banks main surety/ security is the original credit. The original credit (selling credit) and the back to back credit (buying credit) are separate instruments independent of each other and in no way legally connected, although they both from part of the same business operation. The supplier (beneficiary of the back to back credit) ships goods to the importer or supplies goods to the exporter and presents the documents to the banks as is specified in the credit. It is intended that the exporter would substitute his own documents and ships the goods to the importer, if necessary, and present documents for negotiation under the original credit, his liability under the back to back credit would be adjusted out of these proceeds.

The ADs may open back to back import LCs against export LCs received by export oriented industrial units operating under the bonded warehouse system, subject to observance of domestic value addition requirement (stated in terms of permissible limit of value of import inputs as percentage of FOB export value of output) prescribed by the Ministry of Commerce from time to time.

The following points may be kept in mind by the bank while opening a back to back credit:-

1. The terms and conditions of back to back credit should be exactly as that of the original letter of credit except for curtailment in;

a. The amount of the credit: This would have margin of profit for the exporter.

b. The validity and the shipment dates: This would have sufficient time for the exporter to prepare & substitute his documents to importer if the goods are supplied by the supplier to him.

2. Though is not necessary only an intermediary bank under the original credit should open a back to back credit, it would be better than such credits are opened only where the bank is also a negotiating bank. This would avoid the risk of the documents substituted by the exporter being rejected by the negotiating bank as not fulfilling the conditions of the credit.

3. The original credit should be an irrevocable credit

A back to back credit has certain features in common with transferable credit. Under both, the benefit under this credit is transferred to a third party. The documents are substituted by the first beneficiary under both types of credit. The possibility of the importer knowing the real supplier or vice versa is avoided in both cases.

Opening of Back to Back Letter of Credit:

The following instruction should be complied with while opening of back to back import LCs:

1. Only recognized export oriented industrial units operating under bonded warehouse system will be allowed the back to back LC facility. The unit requesting for this facility should possess valid registration with the CCI&E and valid bonded warehouse license.

2. 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.

3. The back to back LC value shall not exceeded 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.

4. The back to back import LCs shall be opened on usance basis for a period not exceeding 180 days. Interest for the usance period shall not exceed LIBOR of the equivalent interest rate of the currency of settlement. Back to Back LCs opened against (a) Export Development Fund (EDF) administered by Bangladesh Bank and/ or against (b) balance of Non-Resident Foreign Currency Deposit (NFCD) Accounts may be on sight basis subject to immediately be replenished on realization of respective export proceeds.

5. All amendments of the master LC should be noted down carefully to rule out chances of excess obligation under the back to back import LC.

6. Back to Back import LC should not be opened against LCs received for export under Barter/ STA, without prior permission of Bangladesh Bank.

7. Inland Back to Back LCs denominated in foreign exchange may be opened in favour of local manufacturer-cum-suppliers of input, against master export LCs received by export oriented manufacturing units operating under the bonded warehouse system, up to value limits applicable as per prescribed value addition requirement/ utilization permit. However, EXP/ IMP from will not be applicable in such cases unless EPZ units is associated. Back to Back LC may in turn be opened for import of necessary inputs, against inland back to back LC in favour of a local manufacturer-cum-supplier operating under the bonded warehouse system, in accordance with the instructions.

8. Payment abroad in settlement of usance bill against the back to back import LCs shall made at maturity, out of proceeds of the relative export repatriated in foreign exchange; the required foreign exchange; the required foreign exchange will be set aside, out of the export proceeds, in a separate foreign currency account in the subsidiary ledger of the AD. Before making remittance against the back to back import bill, the AD should see that the authenticated copy of bill of entry for bond in evidence of actual arrival of the relative import has been submitted. Usance bills against back to back import LCs should be settled at maturity even where for some reason export has not taken place, or where the export proceeds have not been realized, or where the realized export proceeds net of value addition requirement is not adequate to cover the back to back import payment. In such cases post facto approval of Bangladesh Bank (Foreign Exchange Operation Department) will have to be sought for, explaining fully the circumstances of export failure or non-realization/ short realization of export proceeds, with relevant supporting documents. Cases of failure of export against the relative master LCs should also be reported to the National Board of Revenue (NBR) and the concerned Commissioner of Customs so that they may monitor closely the level of stock of the relative goods in the bonded warehouse. A copy of the letter to NBR reporting the export failure should be submitted to the Bangladesh Bank along with the application for post facto approval of remittance towards back to back import payment. Also, all application for post facto approval/ non-realization of export proceeds should be accompanied by the authenticated copy of the relative bill of entry evidencing actual receipt of the back to back imports. The AD should maintain effective watch on the stock of inputs procured under the back to back arrangement and of finished products made therewith; any indication of illegal disposal of stocks from the bond coming to the knowledge of the AD should immediately be reported to eh concern commissioner of customs and NBR.

9. On encashment of export proceeds equivalent to the portion of value addition, residual portion of export proceeds against different export bills of the same export unit operating under bonded warehouse system may be maintained in foreign currency in a single pool by the ADs. Funds from this pool may be used for different back to back import payments of the same exporting unit on maturity basis to keep minimum involvement of ADs own fund under the exchange position as well as to keep exporter free from debt burden.

Steps for handling Back to Back Letter of Credit

1. Master Export LC received by the beneficiary

2. LC issuing bank will open the import LC (local or foreign as the case may be) against the Master Export LC (Called Back to Back Letter of Credit);

3. Receive the Back to Back LC by the advising bank;

4. Advise the LC to the beneficiary;

5. Advise the subsequent amendment if any, to the beneficiary;

6. Submit the documents by the beneficiary after export of goods;

7. Scrutiny the documents by the negotiating bank;

8. Forward the documents to the LC issuing bank;

9. LC issuing bank will inform the applicant about the documents and arrange to take the acceptance of the documents;

10. Receive the acceptance with maturity from the Issuing bank;

11. If required the negotiating bank negotiate the documents and giving the admissible amount (i.e maximum 90% of the LC value) to the beneficiary;

12. On maturity the LC issuing bank will remit the export proceeds to the negotiating bank after receiving the original export proceeds;

13. Negotiating bank will adjust the liability of the beneficiary and rest of the amount will credit the exporters account.

Defective points/ Clause in Master L/C:

1. Issuing bank is not a reputed one

2. Advising bank advised the credit without authentication

3. Quantity of merchandise not mentioned

4. Port of destination is absent

5. Inspection clause (Nominated person of the firm is not available in Bangladesh)

6. Mention the of specific shipping line/ Air line

7. Nomination of vessel by subsequent amendments

8. B/L to blank endorsed to endorse to 3rd bank to be endorsed to buyer or 3rd party.

9. Credibility of the buyer is not satisfactory

10. No specific reimbursement clause

11. UCP clause not mentioned

12. Shipping period is insufficient

13. Presentation period is insufficient

14. Complected docs./certificate required

15. Prohibition of partial shipment

16. Original docs. (B/L) to be sent to buyer or nominated agent.

17. HAWB consigned to applicant or buyer

18. L/C is usance or deferred payment L/C with discount charges on beneficiary's accountingShipment Load and count is not acceptable clause

19. L/C shall expire in the country of the issuing bank

20. Shipment load and count is not acceptable clause

Settlement of Back to Back LC

Tenor of the draft under Back to Back LC:

Generally, a back to back letter of credit is often a deferred LC (DA) ranging the usance period from 30 days to 180 days depending on the sales contract between the supplier/ exporter (beneficiary of the back to back LC) and importer/ buyer (beneficiary of the original credit). However, needless to say that a back to back LC is depending upon the circumstance) may be a sight LC (DP). Tenor of the draft under back to back LC determined accordingly. In case of deferred back to back LC, there must a usnace period following a maturity date to be notified by the LC issuing bank to remitting bank or negotiating bank and the maturity date is determined from the date of negotiation or from the date of bill of lading based on the sales contract executed between the supplier and the importer. It needs to mentioned here that there should have an act of acceptance of the import documents by the applicant of the LC before notifying the maturity date to the remitting bank of negotiating bank.

Opening of the BB LC:

At the request of the applicant establishes/ opens an LC for 120 days sight from the date of negotiating for USD50,000/- in favour of the supplier for shipment of 25,000 yards denim fabric from Hong Kong and forward the same to the SCB, Hong Kong (Advising Bank). The issuing bank records this transaction i.e. the event of LC opening in the respective LC opening register and passes the following vouchers at the time of opening BB LC:

Dr.Applicant Account for margin, commission, SWIFT charge, etc.

Cr. Income account for commission

Cr. SWIFT charge

Cr. Margin A/c.

Dr. Customer's liability a/c for total amount of the LC

Cr. Bankers liability a/c for total amount of the LC

Presentation of the documents to negotiating bank by the beneficiary:

The beneficiary takes the delivery of receive the LC from advising bank and agrees to the terms and conditions as laid down in the LC. He ships out goods and prepare documents as per LC and presents the same to the negotiating bank to remitting bank. Negotiating bank scrutiny the submitted documents and find the documents are in order. The bank negotiates the documents, known as negotiating bank, sends the documents to the LC issuing bank of the bank just sends the documents, known as remitting bank.

Lodgment of documents by the LC issuing bank:

Upon receipt of the documents either from negotiating bank or remitting bank, the LC issuing bank examines the documents to see if the documents are drawn in compliance with the credit terms. If documents are found in order, the LC issuing bank lodges the document of IFDBC after duly accepted by the applicant and passes the following contra vouchers and records the transaction in the register:

Dr.IFDBL (Inward Foreign Documentary Bill Lodged) for the LC amount

Cr.IFDBC (Inward Foreign Documentary Bill Collection) for the LC amount

Dr.Banker liabilities on LC for the LC amount

Cr.Customers liabilities on LC for the LC amount

Once the documents are lodged to IFDBC, the LC issuing bank notify the acceptance of the documents and maturity date to the negotiating bank or remitting bank through SWIFT in our case and in case of inland back to back LC a mail notification serves the purpose. On maturity, it is LC issuing bank's obligation to settle the payment or make payment of the bill to the negotiating bank as per their instruction.

Where to get fund to settle or make payment of the IFDBC:

As told earlier, the back to back liabilities will be adjusted out of the export proceeds. The applicant upon receipt of the fabric from the supplier of Hong Kong and ships the goods to the importer and presents documents to his own bank (advising bank may be his bank) for negotiation under the original credit. The bank negotiates the documents as they find the documents in order and send the documents to the issuing bank of the original credit or nominated bank as per LC. The negotiating bank passes the following vouchers at the time of negotiation:

Dr.FDBP A/c.

Cr.Applicants A/c.

The issuing bank of the original credit or nominated bank receives the documents from the negotiating bank. Upon receipt of the documents, they examine the documents and find the documents are in order. Since the tenor of the draft is sight the bank makes payment of the (import bill) to the bank as instructed by the negotiating bank and notification of the payment conveyed through SWIFT. The negotiating bank waits for the confirmation from the bank with which our HO maintains and account. Upon receipt of the confirmation from the bank, negotiating bank realize the export proceeds as credited to Nostro Account by passes the following accounting entries:

Dr.Nostro A/c.

Cr.FBPAR A/c.

Cr.FDBP A/c.

Cr.Other charges

It is evident from the above that the back to back letter of credit issuing bank has fund in FBPAR A/c to settle or make payment of the accepted bill or IFDBC.

On maturity of the IFDBC or which the fund available in FBPAR A/c whichever is earlier, makes payment of the IFDBC and records the date of payment of the IFDBC in the register. The bank passes the following accounting entries to effect the payment of the IFDBC:

Dr.FBPAR A/c

Cr.Nostor A/c

Cr.SWIFT charges

Dr.IFDBC A/c for the LC amount (Contra entries)

Cr.IFDBLA/c for the LC amount (Contra entries)

Back to Back LC sight Basis (EDF)

So far we discussed, it was usance BB LC, because we are to meet up our import liabilities out of realized export proceeds. That is why the master LC are to be chosen at sight basis and corresponding BB L/C s are to be opened at usance basis. But BB L/Cs may also be opened at sight basis. In that case the source of fund is to be borrowed from Central Bank under Export development Fund (EDF) scheme.

EDF facility is one of the export incentive as declared by the Government to the exporters and this facility is extended to boost up export of our country. Under this facility, an exporter may import raw materials from abroad by borrowing fund from the Central Bank. The importer will have to refund the money within 180 days (on request 270 days) from the date of borrowing with usance interest one percent higher the LIBOR. No individual branch is allowed to borrow fund EDF from Bangladesh Bank, rather fund to be borrowed through through Head Office. When BB L/Cs are opened under EDF facilities, the price of the importable goods must be competetive. For this reason at least 3 (three) indents or invoices are to be asked for and L/C to be opened for the lowest price.

After opening of L/C under EDF a statement in the prescribed form is to be sent to Head Office for their onward submission to Central Bank which is treated as requisition of fund. After receipt of import bills payment to be made by debiting Head Office A/c in the following manner:

A) At the time of opening the LC following vouchers are to be passed:

Dr. Customers Liability on LC (Contra voucher)

Cr. Bankers Liability on LC (Contra voucher)

Commission and other charges voucher:

Dr. Part A/c.

Cr. I/A. Commission on LC (at prevailing rate) & other charges

B) After receiving import documents from the suppliers Bank following vouchers to be passed.

DR. Bankers Liability on LC (Contra voucher)

CR.Customers Liability (Contra voucher)

DR.PAD A/c. (OD sight rate)

CR.Nostro A/c. (OD sight rate)

C)For adjustment of PAD after receiving of EDF from Bangladesh Bank following vouchers are required to be passed;

DR.Customers EDF loan A/c. (OD sight rate)

DR.Party's A/c. (for PAD interest at prevailing export rate i.e. 7% +1% service charge)

CR.PAD A/c.

CR. I/A

D)At the time of adjustment of EDF loan from export proceeds of the related party following vouchers are to be passed:

DR.Party's A/c (FBPAR A/c.) with interest

CR.Customer's EDF loan A/c.

CR.Nostro A/c. (LIBOR+1% from the date of sanction to adjustment + 3 days transit period)

IFDBC : IFDBC means Inward Foreign Documentary Bills for Collection. It is nothing but creating the contra liabilities against the acceptance of the bill which sent for collection. When documents of the Back to Back LC come to the issuing bank for giving the acceptance then the issuing bank arrange give acceptance against the documents to the negotiating bank by taking the prior acceptance from the applicant of the LC. We are aware that when LC is issued by the issuing bank we have to pass the accounting entries for creating contra liability and accordingly when the documents come to the issuing bank for making payment then as per the LC term they give the acceptance for deferred payment and reverse the previous liabilities and create the new liabilities in the name of IFDBC ant at maturity the payment given to the beneficiary and contra liabilities against the LC i.e. IFDBC reversed.

The following shipping documents are generally lodged in IFDBC register:

Bill of exchange drawn on usnace basis (DP/DA): Generally documents against back to back LC are drawn on usance basis. The usance period may be 30, 45, 60, 90, 120 (as the case may be) days after the date of acceptance such documents are lodged in IFDBC register.

Discrepant shipping documents: Even the sight credit already been negotiated by remitting bank but documents are not acceptable to the issuing bank, then such documents are lodged in IFDBC. The issuing bank must notify the discrepancies to the negotiating bank within 5 (five) banking days and to refund the bill amount with good value.

Documents received on collection basis: Due to any reason the foreign bank may forward the documents on collection basis. Such documents are lodged on IFDBC and payment is to be made subject to acceptance of the importer and on being confirmed of quality and quantity of imported merchandise with invoice after actual clearance and on matching of customers bill of entry.

Deferred payment bill: The bill may be for 180/360 days usance. Such bill is to be presented to the drawee for their inspection and acceptance. After getting acceptance the maturity date should be conveyed to the presenting bank and on the maturity date payment will be made after realizing the full bill amount from the importer. The maturity date is to be noted in IFDBC register/ due date dairy. The acceptance of the drawee is obtained on the overleaf of the bill of exchange as under:

Acceptance for payment

or

Acceptance for payment on date ....................

signed by the drawee

To minimize the risk the following issues should be taken care of:

BB LC

: Delayed in opening of BB LC

Margin of BB LC

: Adequate margin should be taken in case

Insurance

: Insurance should be taken covering all possible risk

Exchange Rate

: Exchange rate fluctuation in case of purchase of export bills

Documentation

: Lack of proper documentation of credit

Supervision

: Proper supervising in case of ECC/PC/BB LC

Loan Amount

: ECC/PC may be allowed maximum 15% of the LC amount but

total loan not more than 90% of the LC value including BB LC

Tenor

: Item wise tenor must be followed and calculation tenor should be

taken care of, maximum usance period BB LC is 180 days, usnace

period should be counted from the date of acceptance of the draft

Scrutiny of LC

: Export LC should be scrutiny properly to avoid discrepant

document

Export proceeds

: Proper monitoring should be taken regarding repatriation export

proceeds

Limit of the Bond License : Yearly limit of the band license should be check.

Validity of ERC & IRC: Validity of the IRC & ERC should be check

Quota

: Quota allocation letter should be check in case of quota items

Acceptance

: Authenticated acceptance letter should be taken in case of

payment against acceptance

NOC

: NOC for bill of entry and overdue liability from previous banker

Amendment

: Amendment of the export LC should be follow carefully

CIB

: CIB report should be collected as per required interval

Lien mark

: Export LC should be marked under lien after opening BB LC

Rate of Interest

:Rate of interest should be LIBOR but in case of payment of

import bills before maturity date interest shall be paid

proportionately and such case must incorporated in the LC.

Know the exporters capacity : Before financing against export we should know the capacity of

the exporter.

Knowing the buyer abroad:Creditworthiness of the buyer abroad should be taken through

credit referencing agencies like D&B, Standard & Poor, etc.

Duplicate GSP

: GSP certificate should checked with due care.

Expiry of the export LC: Shipment is difficult in case of expired export LC.

Perishable goods

: In case of perishable items goods may be damaged

Late Shipment

: If goods are shipped late then the buyer may not except the goods

Bankruptcy's

: Importer banks may in bankruptcy's

Country risk

: Importers country may in the civil war

Thank You

Page 21 of 21

Prepared by- Md. Mosharraf Hossain, SAVP & Manager, Islampur Branch, Dhaka