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Export LC Advising, Transferring , Checking and Back to Back LC (BB LC) Opening & Operation Procedures

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Discussion outlines

Introduction: # LC definition / concept. # Types / special Forms of LC. # Features / Characteristics of Back to Back LC # International / Inland Trade Payment Methods &

Purpose / uses / necessity of LC in Trading / Bai. # Concept of F. Ex. & F. Ex. works. # Works under Export section. LC Advising. LC Transferring.

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Discussion outlines (contd.) Back to Back (BB) LC Opening: # B. Bank / HO guidelines for BB LC opening. # Procedures of BB LC Opening: *Checking & Lien of Export LC. *Obtaining application,other required papers for

opening BB LC & Credit report of supplier &buyer. *Preparation of BB LC opening Appraisal Form. *SWIFT operation for Issuing LC& *Vouchering. Lodgement of BB LCs Bills. Payment of BB LCs Bills & Retirement of BB LC.

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Introduction: LC definition / concept

LC-Letter of Credit or Credit / Documentary Credit: LC means any arrangement, however named or described, that is Irrevocable & thereby constitutes a definite undertaking of the Issuing Bank to honor a complying presentation (Article-2).

# What is LC ? - A conditional payment undertaking. # Who gives undertaking?: Issuing Bank. #To whom the undertaking is given-To the Exporter. # Undertaking for what:To honor-payment undertaking # Conditional Undertaking?: Yes, if the presented

Bill is complied with LC, UCP-600 & ISBP terms.

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Introduction: LC definition / concept-continued

So,LC is a definite payment undertaking of the LC Issuing Bank to the exporter if the presented Bill is complied with the LC terms & Rules of UCP, ISBP.

i.e. the LC is a conditional payment undertaking of the LC Issuing Bank to the Exporter to honor a Complying Presentation.

What do you mean by Complying Presentation: If the submitted Bill against LC for getting payment is complied with the LC terms as well as with the rules of UCP-600 &ISBP-681, then the submission of LCs Bills is known as Complying Presentation.

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Type/forms of LC:All LC are Irrevocable but may have special name having special term Cash LC-Back to Back(BB) LC: Basis-Source of

payment of LC. If the payment of LC is aimed from the existing reserve of FC, the opened LC is known as Cash LC. It is opened basically by the Importer. If the payment of LC is aimed- not from the existing reserve of FC but from the export earnings / proceeds, the opened LC to import raw materials is known as BB LC. It is opened by the Exporter.

Export LC-which is received for export of goods. Import LC which is issued for import of goods.

Inland LC - Foreign LC: Basis -purchase of goods from Inland supplier or from foreign country/supplier.

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Type/forms of LC: Contnued

Sight LC -Deferred / Usance LC: Basis - payment time i.e. when the payment against LC is made at sight i.e.on demand Sight LC. when the payment against LC is made after certain period- usance LC.

Both the LCs (Cash LC or BB LC) may be Inland- Foreign, Sight-Usance LC containing related term.

Other special Forms of LC:Basis-containing special terms:Add Confirmed or Confirmed, Transferrable, Red/Green Clause,with/without recourse, Nego/Acp

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International/Inland trade payment methods &use/necessity of LC in Import-Export/Bai. Cash in Advance: Purchaser/Importer pays the

goods value advance to the seller/exporter & then seller ship/delivers the goods towards the purchaser. Here, purchaser / Importer feels risk / uncertainty regarding receipt of goods against his payment. B. Bank has restrictions for import by this method.

Open Account: Total a reverse situation of Cash in Advance.The seller at first ships /delivers the goods towards the purchaser & then the purchaser pays the goods value. Here, seller / exporter feels risk / uncertainty regarding receipt of payment of goods. B. Bank has restrictions for export by this method.

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International/Inland Trade Payment Methods &use/necessity of LC (contd).

Documentary Collection:In addition of open account ,after shipment of goods, the seller also prepare & send Bill towards the purchaser for getting payment Here, seller / exporter also feels risk / uncertainty regarding receipt of payment of goods against Bill.

# In above 3 Methods,the Bank may act as a media to send the price from the purchaser to the seller by TT/DD/PO/On Line & its no undertaking involved.

LC/DC:Issuing Bank undertake to arrange payment against submitted complied Bill of seller/exporter by LC. So that, LC system minimizes the risk & is worldwide popular for international / inland trading.

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Foreign Exchange and works of F.Ex Dept & Export section

F. Ex: Means Foreign Currency(FC) or Int. Trade. FC means-Cash FC or Financial Instruments in FC- FDD,Bill of Exchange,Promissory Note,Cheque etc.

Functions/works at F.Ex:Export,Import,F.remittance Main works under Export section: # Export LC Advising & Transferring. # BB LC Opening(non funded/off balance sheet item). # BB LCs Bills handling: Lodgement # Bai Salam Inv. # Bill Negotiation:Bai us Sarf/MDB Inv#FBC/IBC,FBCA # BB LCs Bills Payment&Retirement:(i) By Export

Proceeds(ii)By creating Baim-FC Bills# Q-SCA etc.

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Characteristics of Back to Back LC:

It is an LC to purchase / import raw materials for manuf. finished goods under an Export LC/Contract

It is opened against lien / support / back of an Export LC / Export Order / Export Contract / Sale Contract-known also as Master/Mother LC,Contract

It may be Inland,Foreign,non cash LC&duty free LC It is by nature, an Ussance LC(but sight BB LC

may be opened under certain extra conditions). Its payment is normally made by the export

proceed earned after exporting the finished goods under the export LC otherwise by Inv-Baim FC Bills

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Export LC Advising (Article-9) LC Advising: Sending of export LC to the exporter

by the Advising Bank is known as LC Advising. Advising Bank: At request of Issuing Bank, the Bank -

not a confirming Bank, advises / sends the LC & any amendment to the exporter without any undertaking to honor or negotiate, is known as Advising Bank.

Advising Guidelines:Apparent authenticity,No change, without risk & responsibility,inform to Issuing Bank, Adv. Authority, message type-700,707;Amendment etc

Advising Procedures: # Authentication of LC:SWIFT- auto authenticated #Entry in Adv.Register # Affixing seal-signature on advised copy&commission recov.

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Export LC Transferring (Article 38) Transferrable LC-contains a clause - Transferrable. General principles for transferring an LC: # Transferrable clause must present in LC/Amendment. # Transferable for whole or part value-partial shipment # Transferrable may be to one or more than one exporter

part by part at the request of the 1st exporter but 2nd exporter can not transfer to 3rd one.The 1st exporter will not be treated as 3rd exporter.

#The transferring Bank is nominated by Issuing Bank. #Transferred LC must reflect original terms except:LC

value/unit price,shipment/expiry date-may reduced.

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Back to Back LC Opening: BB Guidelines

B.Bank guidelines(CH-7,P-38)-For Import BB LC: # 100%export oriented G.Ind.having Bond License. # Admissible value addition must as per Import Policy. # Total finance up to 90% of net FOB value of ELC. # No BB LC for Barter / STA without BB permission. # For import raw materials only to manufacture the

finished goods for export #ERC must #Lead time to be sufficient-time to ready the goods before export shipment date#May on ussance basis for maximum 180 days. Usance interest not exceed LIBOR #May sight basis againstEDF&/or balance of NFCD-ERQ

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BB LC Opening (contd.)-BB Guidelines # Inland BB LC may open in Tk or in FC to purchase

raw materials against Export LC. In case of Inland BB LC in FC, admissible value addition be followed but IMP/EXP form is not applicable unless EPZ unit

# Import (F.) BB LC may also open to import required goods from abroad by the local manufacturer cum supplier having bond license against Inland BB LC.

Procedures of BB LC Opening: Checking of Export LC: Whether the Export LC is - # Authenticated, properly coded/advised/transferred. # Operative-Inoperative:absence of it-treat operative.

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BB LC Opening(contd.) - Checking of ELC # Subj. to UCP-600#Name/address:Issuing-Adv.Bank # Transferrable, transferrable allowing /not prohibiting

part shipment # Lead Time # Irrevocable or not. # Delivery Terms: FOB/CFR(if CFR-freight certificate

required # Name & address-Importer & Exporter. # % of Local/Buying Agent/house com-upto 5% is ok,

Opening Bank Charges if any. # Readable / Garble. # Shipment date, expiry&place of expiry(to be B. desh) # Negotiation clause-Freely negotiable required. # Specific/clear payment clause: Available or not. # Description of goods (unit price, permissible or not).

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BB LC Opening (contd.): Checking of ELC # BL Clause: To be the order of Negotiating Bank (to

the order of exporter BL, Blank backed BL, Blank endorsed BL, endorsed favoring exporter BL is not acceptable) # Port of shipment/destination # Tenor.

# Shipping Document: Types/NOs, Issuing Authority, Easy to obtain / procure or not, PSI clause etc.

# Currency: Free convertible currency is acceptable. Documents required for BB LC Opening:Application,

ERC,Bond License,ELC/Contrac,LCAF,IMP,PI/Indent, Insurance Cover Note,TL,TIN&VAT Certificate, Original Export LC, Charge & Security documents etc.

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BB LC Opening (contd.) Credit Report: In case of Proforma Invoice, for LC

value above $10000 & in case of Indent, for LC value above $20000, Credit Report to be obtained.

Preparation of Pre Audit Memo (BB LC Appraisal report F-217):#Limit particulars # Export LC- BB LC particulars # Audit observation-lapses/ irregularities # Recommendation/Br approval for BB LC opening.

SWIFT:Formatting, numbering of LC& transmission Vouchering / Accounting:# DR:Asset as per contra-

BB LC/ILC, CR: Liability as per contra-BB LC / ILC. DR-Current A/c, CR-Bank Com/Charges, VAT etc.

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BB LCs Bill Lodgement

Lodgement means recording/entry the Import Bill in the Import Bill Register which includes following works related to Import Bill: # Information to the Importer regarding receipt of Bill # Checking of the Import Bill /documents complying with the LC terms #If the document is found OK,entry of the Bill in the Bill register fixing the Bill no# In case of usance Bill, Acceptance of Bill of Exchange from the Importer& issuance of maturity / payment date to exporters Bank #Reversal of LC liability & passing of Bill liability# If the Bill is discrepant,raising discrepancy to Issuing Bank # Endorsement of Bill-to clear the goods from the port.

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Endorsement of BB LC Bills/ Import Document-Transport document(BL,AWB,TR To clear the imported goods from the port under

Bank Inv,a set of Import document to be sent to the port customs authority by the Bank.The set include- #Invoice-value certified by the Bank # Endorsed BL /TD- Please deliver to the order of... Branch,IBBL / C&F Agent or the Importer-when no Bank finance. # Copy of LCAF (marking Bill value at its back) # Copy of Insurance Cover Note etc with a forwarding # In case of copy document- Banks NOC against Letter of Indemnity from the Importer is required.

Imported goods may clear against Original doc as well as by Copy doc-no right to raise discrepancy.

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Payment & Retirement of BB LC / Bills

Payment of BB LCs Bills: # By Export Proceeds-after realization of export value # By creating Inv: Baimuajjal FC Bills- if no export/no realization, short realization of proceeds / distress cargo etc. In these cases, Customs Authority &B. Bank to be informed. # By the balance of exporters FCAD A/c in case of Sight BB LC # Before payment of Usance Import BB LCs Bills, Bill of Entry for bond to be submitted in evidence of actual arrival of imported goods. #Payment must before maturity of BB LCs Bills.

Retirement of BB LC: # Issuance of Payment Instruction # Reversal of BB LC Bill Liability.

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HO (IBW) limit Sanction Procedures Processing & Appraisal: Application, CIB,

Appraisal Form-167A & 167-B, Ratio Analysis, IRG & Recommendation.

Approval & sanction: Branch, ZO, HO(IBW) -Division, Wing, MD, MC, EC, Board.

Documentation: Charge document, Security document & other document.

Opening & Operation of BB LC- Lodgement, Payment & Retirement.

Payment: By export proceeds & By Inv-Bamuajjal FC Bills.

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Referrances

Bangladesh Bank Guidelines for Foreign Exchange Transactions.

ICC Publication:UCP 600 (UCP/UCPDC: Uniform Customs and Practice for Documentary Credit).

Foreign Exchange & Anterjatic Banojje Orthaon Sayed Ash raf Ali.

A Text Book on Foreign Exchange- LR Chowdhury. Import Policy Order 2012-2015.

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Any Questions?

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