Types & Parties of L/C-Letter of Credit
Foreign Exchange Department is an important one in MTBL Dilkusha Branch that deals with import, export, and foreign remittance and post import financing. Through this is an ancillary service provided by the Bank, The Bank is purchasing primary security by giving loan in form of loan against imported merchandise (LIM), and loan against trust receipt (LTR). Bank branch should be ‘Authorized Dealer’ with the approval of Bangladesh Bank to run foreign exchange business. This department is playing an important role in enhancing export earning, which aids economic growth and, in turn, will be helpful for economic development. On the other hand, it also helps to meet those goods and services, which are more demandable and not adequate in our country.
THE MAJOR TASKS OF FOREIGN TRADE DEPARTMENT
The Functions of Foreign Trade dept. mainly covers the following areas:
L/C (Letter of Credit) is a very important issue of foreign exchange management because without L/C import and export cannot be possible. Importer and Exporter do not know each other. For this reason settlement of payment cannot be possible without the arrangement of Bank particularly in foreign trade. Therefore import/Export also cannot be possible if no L/C can be made through Bank. So L/C is a very important issue in foreign trade.
L/C (Letter of Credit)
L/C is a guarantee of a bank (Issuing Bank) on behalf of the importer in a trade in favor of the exporter to pay a certain sum of money under some specific terms and conditions.
So, an L/C is a negotiable instrument (A form of documentary credit) that carries a promise of payment with the fulfillment of certain conditions. An L/C can be used in foreign trade as well as for local payments.
We can divide L/Cs into two broad categories.
The terms and conditions of L/C can be changed at any time without the consent of or notice of the beneficiary. In case of seller (Beneficiary) revocable credit involves risk. A revocable credit may be amended or cancelled by the issuing bank prior notice to the beneficiary. On the other hand revocable credit gives the buyer maximum flexibility. This kind of L/C does not exist in our country.
The terms and conditions of L/C cannot be changed. This kind of L/C exists in Bangladesh. It is a definite undertaking of the issuing Bank, provided that the stipulated documents are presented to the nominated Bank. Once this commitment has been entered into, the bank cannot disown its responsibility without the agreement of the beneficiary. A unilateral amendment or cancellation, as in the case of a revocable credit is not possible in case irrevocable, unconfirmed credit. Since under the documentary credit a debt relationship exists only between the issuing bank and beneficiary, it is advisable to assess the issuing banks standing as well as the sovereign and transfer risk of the country involved.
Types of documentary credits according to payment methods
? Sight Credit
? Deferred payment credit
The payment is made as soon as documents shown to the issuing Bank and payment received from importer. Instruction is given to reimbursing bank to give payment.
The payment of this kind of L/C is made after 30, 60, 90, 120 or 180 days soon as documents shown to the issuing Bank. The credit with deferred payment differs only slightly in its effect on the beneficiary from the credit with time draft. It is also called USANCE L/C.
Special types of Documentary Letter of credit
A Revolving credit is one where under the terms and conditions thereof the amount of the credit is renewed or reinstated with out specific amendment to the credit being needed. It can revolve in relation to time or value. But credit the revolves In relation to value is not in common use.
Back to Back Credit
Another special type of L/C is issued in Bangladesh that is called Back-to-Back (B to B) L/C where the applicant opens an L/C against another export L/C. These B to B L/Cs are USANCE L/Cs.
In an L/C cycle, the following are the common parties
? Importer: The party that imports goods, also knows as applicant, buyer, consignee.
? Exporter: The party that sells or export goods, also known as seller, beneficiary.
? Issuing Bank: The Importer’s bank that issues the L/C. It is also called L/C opening Bank.
? Advising Bank: The responsibility of this Bank is –
o To authenticate the issuing Bank
o Verbally tells the exporter that the Advising Bank cannot authenticate the issuing Bank but the exporter is well known to the advising bank. Issuing bank must have a BKE (Bilateral Key Exchange) arrangement with the advising bank.
? Negotiating Bank: The bank that the Exporter after receiving the L/C negotiates it along with other documents for receiving the proceeds from the issuing bank.
? Add Confirming Bank: Being suspicious about the payment, sometimes the exporter may ask for confirmation of the payment from a bank of his own country – a bank giving such confirmation is called confirming bank that takes a confirmation charge from the issuing bank.
? Reimbursement Bank: This is the bank that the L/C issuing bank maintains its nostro account with. Upon instruction from the Issuing Bank, the reimbursement bank makes transfer of funds to the negotiating bank.
View all articles by Super Admin