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, namely1. 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 gi"en to finance the acti"ities 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. #efore allowing such credit to the exporter$s bank takes into consideration the credit worthiness, export performance of the exporters, together with all other necessary information re%uired for sanctioning the credit in accordance with the existing rules and regulations. Pre-shipment credit is gi"en for the following purpose a. &ash 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. (nspection fees f. )reight charges etc. *n exporter can obtain credit facilities against lien on the irre"ocable, confirmed unrestricted export letter of credit.

Page 1 of 22

Prepared b - !d" !osharra# $ossain, %&'P ( !anager, Is)amp*r Branch, Dhaka

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

Pre-shipment credit takes the #o))o+ing #orms: a. +xport &ash &redit ,-ypothecation!' b. +xport &ash &redit ,Pledge!' c. +xport &ash &redit against Trust .eceipt' d. Packing &redit' e. #ack to #ack letter of credit' f. &redit against anticipatory letter of credit ," Export Cash Credit -$ pothecation. /nder this arrangement a credit is sanctioned against hypothecation of the raw materials of finished goods for export intended for export. 0uch facility is allowed to the first class exporters. *s the #ank has no security in this case, except charge document and lien of export 12& contract, #ank normally insists on the exporter in furnishing collateral security. The letter of hypothecation creates c charge against the merchandise in fa"or of the bank but neither the ownership not the possession is passed to it. /" Export Cash Credit -P)edge.: 0uch credit facility is allowed against pledge of exportable goods or raw materials. (n 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 3 other pledge documents. The exporter surrenders the physical possession of the goods under #ank$s effecti"e control as security for payment of #ank dues. (n the e"ent of failure of the exporter to honour his commitment, the bank can sell the pledge merchandise for reco"ery of the ad"ances. 0" Export Cash Credit against Tr*st 1eceipt: (n this case, credit limit is sanctioned against Trust .eceipt ,T.!. (n this case also unlike pledge, the exportable goods remain in the custody of the exporter. -e is re%uired to execute a stamped export trust receipt in fa"our 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

Page 2 of 22

Prepared b - !d" !osharra# $ossain, %&'P ( !anager, Is)amp*r Branch, Dhaka

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

taken into bank$s custody. This facility is allowed only to the first class party and collateral security is generally obtained in this case. 2" Packing Credit Packing credit is essentially a short-term ad"ance granted by a bank to an exporter for assisting him to buy, process,pack and ship the goods. 0uch 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 ha"e access to large financial resources. The credit is gradually extended for payment of freight, handling charge, insurance and export duties. * packing credit ad"ance does not normally extended beyond 145 days and has to be li%uidated by the negotiation2purchase of the export bills co"ering the particular shipment for which the packing credit was granted. (n the textile sector against foreign export 1& up to 657 of the 1& "alue the including #ack to #ack 1& but not more than 187 of the 1& amount as P& are allowed as loan for the said 1&. Charge doc*ments #or ECC/PC: 1. 9P note 2. 1etter of arrangement :. 1etter of disbursement ;. 1etter of installment 8. 1etter of hypothecation of goods <. 1etter of guarantee =. 1etter of indemnity 3" Back to Back Letter o# Credit /nder this arrangement the bank finances export business by opening of a letter of credit on behalf of the exporter who has recei"ed a letter of credit from the o"erseas buyer but is not the actual manufacturer or producer of the exportable goods. The letter of credit is opened in fa"our of the actual producer or supplier within or outside the country. 0ince the second letter of credit is opened on the strength of and backed by another letter of credit it is called 4Back to Back
Prepared b - !d" !osharra# $ossain, %&'P ( !anager, Is)amp*r Branch, Dhaka

Page : of 22

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

Letter o# Credit5. The need for a back to back credit arise because the beneficiary of the original ,export! letter of credit may ha"e 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. >ame 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' :. The back to back letter of credit shall be made "alid for shipment and negotiation prior to expiry of the corresponding date. 6" &d7ance against &nticipator Letter o# Credit -1ed C)a*se Letter o# Credit. /nder .ed &lause letter of credit, the amount of credit, the opening bank authori?es the *d"ising bank2 >egotiating bank to bank ad"ances 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 12&. *s the clause containing such authority containing such authority printed2 type in red ink and in green ink on the top of the 12& is called .ed &lause 12&. The following documents2 papers are usually called for depending on the nature of the export credit facility to be pro"ided at the Pre-shipment stage ,a! 1ien on confirmed2 irre"ocable and unrestricted letter of credit from a firm class #ank' ,b! 1etter of -ypothecation duly stamped' ,c! 1etter of pledge duly stamped' ,d! 9etailed stock statement duly "erified by #ank @fficials' ,e! (nsurance co"erage under #ank mortgage clause' ,f! 1etter of disclaimer to be signed by the owner of the go-down in case of rented go-down' ,g! 9ocuments of title to goods' ,h! Trust .eceipt' ,i! +xport &redit Auarantee 0cheme' ,B! +xport form duly signed by the exporter' ,k! +P&2 +.) duly certified by #angladesh #ank' ,l! &hange and other documents, if any.
Page ; of 22

Prepared b - !d" !osharra# $ossain, %&'P ( !anager, Is)amp*r Branch, Dhaka

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

Post %hipment Credit This type of credit refers to the credit facilities to the exporters by commercial banks after shipment of the goods against export documents. >ecessity for such credit arises as the exporter can not afford to wait for a long time for payment to local manufacturers2 suppliers. #efore extending such credit, it is necessary to obtain report on creditworthiness the exporters and financial soundness of the buyers as well as other rele"ant documents connected with the rules and regulations in force. #anks in our country extended post-shipment credit to the exporters through a. >egotiation of documents under 12&' b. Purchase of 9P 3 9* bills' c. *d"ance against +xport #ills surrendered for collection. a" 8egotiation o# Doc*ments *nder L/C /nder this arrangement, after the goods are shipped, the exporter submits the concerned documents to the negotiating bank for negotiation, bank scrutini?ed these which are generally the expiry date, the amount a"ailable under the 12&, re%uired documents mentioned in the 12&, 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" P*rchase o# DP ( D& Bi))s 0ometimes goods are exported on contract basis without the co"erage of 12&. (n this case documents are sent to the buyer through the C*uthori?ed 9ealers and their correspondentsD against payments2 acceptance. *fter 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. -owe"er, bank should obtain definite instruction from the exporter regarding

Whether these are to be deli"ered against payment or acceptance. *d"ised to be made by cable of air (nterest and handling charges are to be born by the o"erseas buyer of to be absorbed by the exporter >ame of a third party in case of failure by the o"erseas buyer
Prepared b - !d" !osharra# $ossain, %&'P ( !anager, Is)amp*r Branch, Dhaka

Page 8 of 22

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

Protest clause, if dishonored by the buyer (f dishonored, how to co"er clearance, storage and insurance on arri"al of the goods Which accounts to be credited or adBusted. Aenerally nostro account abroad is to be credited.

c" &d7ance against Bi))s #or Co))ection #anks generally accept export bills for collection of proceeds when they are not drawn under a 12& or when the documents, e"en though drawn against an 12& contain some discrepancies. #ills drawn under 12&, without any discrepancy in the documents are generally negotiated by the bank and the exporter gets the money from the bank immediately. -owe"er, if the bill is not eligible for negotiation, he may obtain ad"ance from the banks against the security of export bills. #anks may gi"e ad"ance ranging from 85 to 45 percent of the documents "alue. (n addition to the export bills, banks may ask for collateral security like a guarantee by a third party and e%uitable2 registered mortgage of property. (n 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 #o))o+ing 7o*chers are re9*ired to pass at the time o# p*rchasing the bi)): 9r. )#9P *2c ,@9 sight rate! &r. PartyEs *2c. The #o))o+ing 7o*chers are re9*ired to pass at the time o# rea)i:ation o# the bi)): 9r. >ostro *ccount &r. )9#P *2c. &r. P&2 +&& &r. )#P*. *2c. &r. )& *2c. &r. &ommission &r. +xchange +arning &r. 0ource (ncome Tax, etc.

Page < of 22

Prepared b - !d" !osharra# $ossain, %&'P ( !anager, Is)amp*r Branch, Dhaka

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

Export De7e)opment F*nd -EDF. The main obBecti"e of creating an +xport 9e"elopment )und ,+9)! at the #angladesh #ank is to assure a continued a"ailable of )oreign +xchange to meet the import re%uirements of nontraditional manufactured items. This facility is a"ailable to the non-traditional manufactured items. This facility is a"ailable to the non-traditional exporters, particularly newer exporters, exporter di"ersifying into higher "alue exports and exporters di"ersifying into new markets. *n exporter identified abo"e is eligible to a"ail of +9) facilities on the basis of the conditionally stated below -e must be an exporter of non-traditional manufacturing items' The "alue added of these products could be 257 except in the case of garments where it has to be :57 and abo"e' The loan should be utili?ed in the case of importing raw-material for manufacturing the exportable products' The exporter must ha"e an export 12&' -e must create a back to back 12& for importing raw-materials' The period of loan is 145 days' The exporter can borrow as many times as he likes in a year' The interest rate pays is 1(#@.F17' *n exporter can borrow an amount not exceeding G8,55,555 in a single case but outstanding should not be o"er G2,555,555' -e has to ha"e +xport &redit insurance through +.&.A.0.

*s for banker, the +9) allows a spread between 2.87 for the established exporters and :.87 for the new exporters for e"ery loan for the credit. Export Credit ;*arantee %cheme -EC;%. *t present the following finance guarantees and policies are issued by +xport &redit Auarantee 9epartment i. ii. iii. +xport )inance ,pre-shipment! Auarantee' +xport )inance ,post-shipment! Auarantee' Whole Turno"er Pre-shipment )inance Auarantee'
Prepared b - !d" !osharra# $ossain, %&'P ( !anager, Is)amp*r Branch, Dhaka

Page = of 22

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

i". +xport Payment .isks Policy.

Back to Back Letter o# Credit * back to back credit is essentially a secondary or ancillary credit opened by a bank on behalf of the original credit, in fa"our of supplier located inside or outside the original beneficiary$s country. * back to back letter of credit is a new credit. (t is different from the original credit based on which the bank undertakes the risk under the back to back credit. (n this case the bank$s main surety2 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. (t 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 adBusted out of these proceeds. The &Ds ma open back to back import LCs against export LCs recei7ed b export oriented ind*stria) *nits operating *nder the bonded +areho*se s stem, s*b<ect to obser7ance o# domestic 7a)*e addition re9*irement -stated in terms o# permissib)e )imit o# 7a)*e o# import inp*ts as percentage o# F=B export 7a)*e o# o*tp*t. prescribed b the !inistr o# Commerce #rom 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 ha"e margin of profit for the exporter. b. The "alidity and the shipment dates This would ha"e sufficient time for the exporter to prepare 3 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 a"oid the risk of the documents substituted by the

Page 4 of 22

Prepared b - !d" !osharra# $ossain, %&'P ( !anager, Is)amp*r Branch, Dhaka

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

exporter being reBected by the negotiating bank as not fulfilling the conditions of the credit. :. The original credit should be an irre"ocable credit * back to back credit has certain features in common with transferable credit. /nder 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 "ice "ersa is a"oided in both cases. =pening o# Back to Back Letter o# Credit: The following instruction should be complied with while opening of back to back import 1&s 1. @nly recogni?ed export oriented industrial units operating under bonded warehouse system will be allowed the back to back 1& facility. The unit re%uesting for this facility should possess "alid registration with the &&(3+ and "alid bonded warehouse license. 2. The master export 1& ,against which opening of back to back 1& is re%uested! should ha"e "alidity period ade%uate to co"er the time needed for importation of inputs, manufacture of merchandise and shipment to consignee. :. The back to back 1& "alue shall not exceeded the admissible percentage of net )@# "alue of the relati"e master export 1& ,as per prescribed "alue addition re%uirement! and the price of goods to be imported must be competiti"e. )or computation of net )@# "alue of a master export 1&, the freight charge, insurance cost and commission if payable by the exporter shall be deducted from the 1& "alue. (f the freight element is not shown separately, a certificate from the shipping company or the shipping agent should be asked for. ;. The back to back import 1&s shall be opened on usance basis for a period not exceeding 145 days. (nterest for the usance period shall not exceed 1(#@. of the e%ui"alent interest rate of the currency of settlement. #ack to #ack 1&s opened against ,a! +xport 9e"elopment )und ,+9)! administered by #angladesh #ank and2 or against ,b! balance of >on-.esident )oreign &urrency 9eposit ,>)&9! *ccounts may be on sight basis subBect to immediately be replenished on reali?ation of respecti"e export proceeds.

Page 6 of 22

Prepared b - !d" !osharra# $ossain, %&'P ( !anager, Is)amp*r Branch, Dhaka

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

8. *ll amendments of the master 1& should be noted down carefully to rule out chances of excess obligation under the back to back import 1&. <. #ack to #ack import 1& should not be opened against 1&s recei"ed for export under #arter2 0T*, without prior permission of #angladesh #ank. =. (nland #ack to #ack 1&s denominated in foreign exchange may be opened in fa"our of local manufacturer-cum-suppliers of input, against master export 1&s recei"ed by export oriented manufacturing units operating under the bonded warehouse system, up to "alue limits applicable as per prescribed "alue addition re%uirement2 utili?ation permit. -owe"er, +HP2 (IP from will not be applicable in such cases unless +PJ units is associated. #ack to #ack 1& may in turn be opened for import of necessary inputs, against inland back to back 1& in fa"our of a local manufacturer-cum-supplier operating under the bonded warehouse system, in accordance with the instructions. 4. Payment abroad in settlement of usance bill against the back to back import 1&s shall made at maturity, out of proceeds of the relati"e export repatriated in foreign exchange' the re%uired foreign exchange' the re%uired foreign exchange will be set aside, out of the export proceeds, in a separate foreign currency account in the subsidiary ledger of the *9. #efore making remittance against the back to back import bill, the *9 should see that the authenticated copy of bill of entry for bond in e"idence of actual arri"al of the relati"e import has been submitted. /sance bills against back to back import 1&s should be settled at maturity e"en where for some reason export has not taken place, or where the export proceeds ha"e not been reali?ed, or where the reali?ed export proceeds net of "alue addition re%uirement is not ade%uate to co"er the back to back import payment. (n such cases post facto appro"al of #angladesh #ank ,)oreign +xchange @peration 9epartment! will ha"e to be sought for, explaining fully the circumstances of export failure or non-reali?ation2 short reali?ation of export proceeds, with rele"ant supporting documents. &ases of failure of export against the relati"e master 1&s should also be reported to the >ational #oard of .e"enue ,>#.! and the concerned &ommissioner of &ustoms so that they may monitor closely the le"el of stock of the relati"e goods in the bonded warehouse. * copy of the letter to >#. reporting the export failure should be submitted to the #angladesh #ank along with the application for post facto appro"al of remittance towards back to back import payment. *lso, all application for post facto
Prepared b - !d" !osharra# $ossain, %&'P ( !anager, Is)amp*r Branch, Dhaka

Page 15 of 22

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

appro"al2 non-reali?ation of export proceeds should be accompanied by the authenticated copy of the relati"e bill of entry e"idencing actual receipt of the back to back imports. The *9 should maintain effecti"e 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 *9 should immediately be reported to eh concern commissioner of customs and >#.. 6. @n encashment of export proceeds e%ui"alent to the portion of "alue 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 *9s. )unds from this pool may be used for different back to back import payments of the same exporting unit on maturity basis to keep minimum in"ol"ement of *9s own fund under the exchange position as well as to keep exporter free from debt burden. %teps #or hand)ing Back to Back Letter o# Credit 1. Iaster +xport 1& recei"ed by the beneficiary 2. 1& issuing bank will open the import 1& ,local or foreign as the case may be! against the Iaster +xport 1& ,&alled #ack to #ack 1etter of &redit!' :. .ecei"e the #ack to #ack 1& by the ad"ising bank' ;. *d"ise the 1& to the beneficiary' 8. *d"ise the subse%uent amendment if any, to the beneficiary' <. 0ubmit the documents by the beneficiary after export of goods' =. 0crutiny the documents by the negotiating bank' 4. )orward the documents to the 1& issuing bank' 6. 1& issuing bank will inform the applicant about the documents and arrange to take the acceptance of the documents' 15. .ecei"e the acceptance with maturity from the (ssuing bank' 11. (f re%uired the negotiating bank negotiate the documents and gi"ing the admissible amount ,i.e maximum 657 of the 1& "alue! to the beneficiary' 12. @n maturity the 1& issuing bank will remit the export proceeds to the negotiating bank after recei"ing the original export proceeds'
Prepared b - !d" !osharra# $ossain, %&'P ( !anager, Is)amp*r Branch, Dhaka

Page 11 of 22

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

1:. >egotiating bank will adBust the liability of the beneficiary and rest of the amount will credit the exporters account. De#ecti7e points/ C)a*se in !aster L/C: 1. (ssuing bank is not a reputed one 2. *d"ising bank ad"ised the credit without authentication :. Kuantity of merchandise not mentioned ;. Port of destination is absent 8. (nspection clause ,>ominated person of the firm is not a"ailable in #angladesh! <. Iention the of specific shipping line2 *ir line =. >omination of "essel by subse%uent amendments 4. #21 to blank endorsed to endorse to :rd bank to be endorsed to buyer or :rd party. 6. &redibility of the buyer is not satisfactory 15. >o specific reimbursement clause 11. /&P clause not mentioned 12. 0hipping period is insufficient 1:. Presentation period is insufficient 1;. &omplected docs.2certificate re%uired 18. Prohibition of partial shipment 1<. @riginal docs. ,#21! to be sent to buyer or nominated agent. 1=. -*W# consigned to applicant or buyer 14. 12& is usance or deferred payment 12& with discount charges on beneficiaryEs accountingD0hipment 1oad and count is not acceptableD clause 16. 12& shall expire in the country of the issuing bank 25. C0hipment load and count is not acceptableD clause

%ett)ement o# Back to Back LC

Tenor o# the dra#t *nder Back to Back LC:
Aenerally, a back to back letter of credit is often a deferred 1& ,9*! ranging the usance period from :5 days to 145 days depending on the sales contract between the supplier2 exporter ,beneficiary of the back to back 1&! and importer2 buyer ,beneficiary of the original credit!. -owe"er, needless to say that a back to back 1& is depending upon the circumstance! may be a
Page 12 of 22

Prepared b - !d" !osharra# $ossain, %&'P ( !anager, Is)amp*r Branch, Dhaka

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

sight 1& ,9P!. Tenor of the draft under back to back 1& determined accordingly. (n case of deferred back to back 1&, there must a usnace period following a maturity date to be notified by the 1& 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. (t needs to mentioned here that there should ha"e an act of acceptance of the import documents by the applicant of the 1& before notifying the maturity date to the remitting bank of negotiating bank. =pening o# the BB LC: *t the re%uest of the applicant establishes2 opens an 1& for 125 days sight from the date of negotiating for /0985,5552- in fa"our of the supplier for shipment of 28,555 yards denim fabric from -ong Long and forward the same to the 0&#, -ong Long ,*d"ising #ank!. The issuing bank records this transaction i.e. the e"ent of 1& opening in the respecti"e 1& opening register and passes the following "ouchers at the time of opening ## 1& 9r. &r. &r. &r. *pplicant *ccount for margin, commission, 0W()T charge, etc. (ncome account for commission 0W()T charge Iargin *2c.

9r. &ustomerEs liability a2c for total amount of the 1& &r. #ankers liability a2c for total amount of the 1& Presentation o# the doc*ments to negotiating bank b the bene#iciar : The beneficiary takes the deli"ery of recei"e the 1& from ad"ising bank and agrees to the terms and conditions as laid down in the 1&. -e ships out goods and prepare documents as per 1& and presents the same to the negotiating bank to remitting bank. >egotiating 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 1& issuing bank of the bank Bust sends the documents, known as remitting bank.

Page 1: of 22

Prepared b - !d" !osharra# $ossain, %&'P ( !anager, Is)amp*r Branch, Dhaka

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

Page 1; of 22

Prepared b - !d" !osharra# $ossain, %&'P ( !anager, Is)amp*r Branch, Dhaka

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

Lodgment o# doc*ments b the LC iss*ing bank: /pon receipt of the documents either from negotiating bank or remitting bank, the 1& issuing bank examines the documents to see if the documents are drawn in compliance with the credit terms. (f documents are found in order, the 1& issuing bank lodges the document of ()9#& after duly accepted by the applicant and passes the following contra "ouchers and records the transaction in the register 9r. &r. 9r. &r. ()9#1 ,(nward )oreign 9ocumentary #ill 1odged! for the 1& amount ()9#& ,(nward )oreign 9ocumentary #ill &ollection! for the 1& amount #anker liabilities on 1& for the 1& amount &ustomers liabilities on 1& for the 1& amount

@nce the documents are lodged to ()9#&, the 1& issuing bank notify the acceptance of the documents and maturity date to the negotiating bank or remitting bank through 0W()T in our case and in case of inland back to back 1& a mail notification ser"es the purpose. @n maturity, it is 1& issuing bankEs obligation to settle the payment or make payment of the bill to the negotiating bank as per their instruction. >here to get #*nd to sett)e or make pa ment o# the IFDBC: *s told earlier, the back to back liabilities will be adBusted out of the export proceeds. The applicant upon receipt of the fabric from the supplier of -ong Long and ships the goods to the importer and presents documents to his own bank ,ad"ising 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 1&. The negotiating bank passes the following "ouchers at the time of negotiation 9r. &r. )9#P *2c. *pplicants *2c.

Page 18 of 22

Prepared b - !d" !osharra# $ossain, %&'P ( !anager, Is)amp*r Branch, Dhaka

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

The issuing bank of the original credit or nominated bank recei"es the documents from the negotiating bank. /pon receipt of the documents, they examine the documents and find the documents are in order. 0ince 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 con"eyed through 0W()T. The negotiating bank waits for the confirmation from the bank with which our -@ maintains and account. /pon receipt of the confirmation from the bank, negotiating bank reali?e the export proceeds as credited to >ostro *ccount by passes the following accounting entries 9r. &r. &r. &r. >ostro *2c. )#P*. *2c. )9#P *2c. @ther charges

(t is e"ident from the abo"e that the back to back letter of credit issuing bank has fund in )#P*. *2c to settle or make payment of the accepted bill or ()9#&. @n maturity of the ()9#& or which the fund a"ailable in )#P*. *2c whiche"er is earlier, makes payment of the ()9#& and records the date of payment of the ()9#& in the register. The bank passes the following accounting entries to effect the payment of the ()9#& 9r. &r. &r. 9r. &r. )#P*. *2c >ostor *2c 0W()T charges ()9#& *2c for the 1& amount ,&ontra entries! ()9#1 *2c for the 1& amount ,&ontra entries!

Page 1< of 22

Prepared b - !d" !osharra# $ossain, %&'P ( !anager, Is)amp*r Branch, Dhaka

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

Back to Back LC sight Basis -EDF.

0o far we discussed, it was usance ## 1&, because we are to meet up our import liabilities out of reali?ed export proceeds. That is why the master 1& are to be chosen at sight basis and corresponding ## 12& s are to be opened at usance basis. #ut ## 12&s may also be opened at sight basis. (n that case the source of fund is to be borrowed from &entral #ank under +xport de"elopment )und ,+9)! scheme. +9) facility is one of the export incenti"e as declared by the Ao"ernment to the exporters and this facility is extended to boost up export of our country. /nder this facility, an exporter may import raw materials from abroad by borrowing fund from the &entral #ank. The importer will ha"e to refund the money within 145 days ,on re%uest 2=5 days! from the date of borrowing with usance interest one percent higher the 1(#@.. >o indi"idual branch is allowed to borrow fund +9) from #angladesh #ank, rather fund to be borrowed through through -ead @ffice. When ## 12&s are opened under +9) facilities, the price of the importable goods must be competeti"e. )or this reason at least : ,three! indents or in"oices are to be asked for and 12& to be opened for the lowest price. *fter opening of 12& under +9) a statement in the prescribed form is to be sent to -ead @ffice for their onward submission to &entral #ank which is treated as re%uisition of fund. *fter receipt of import bills payment to be made by debiting -ead @ffice *2c in the following manner &. 9r. &r. &t the time o# opening the LC #o))o+ing 7o*chers are to be passed: &ustomers 1iability on 1& ,&ontra "oucher! #ankers 1iability on 1& ,&ontra "oucher!

Commission and other charges 7o*cher: 9r. &r. B. Part *2c. (2*. &ommission on 1& ,at pre"ailing rate! 3 other charges &#ter recei7ing import doc*ments #rom the s*pp)iers Bank #o))o+ing 7o*chers to be passed"
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Prepared b - !d" !osharra# $ossain, %&'P ( !anager, Is)amp*r Branch, Dhaka

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

9.. &.. 9.. &.. C. 9.. 9.. &.. &.. D. 9.. &.. &.. #ankers 1iability on 1& ,&ontra "oucher! &ustomers 1iability ,&ontra "oucher! P*9 *2c. ,@9 sight rate! >ostro *2c. ,@9 sight rate! For ad<*stment o# P&D a#ter recei7ing o# EDF #rom Bang)adesh Bank #o))o+ing 7o*chers are re9*ired to be passed? &ustomers +9) loan *2c. ,@9 sight rate! PartyEs *2c. ,for P*9 interest at pre"ailing export rate i.e. =7 F17 ser"ice charge! P*9 *2c. (2* &t the time o# ad<*stment o# EDF )oan #rom export proceeds o# the re)ated part #o))o+ing 7o*chers are to be passed: PartyEs *2c ,)#P*. *2c.! with interest &ustomerEs +9) loan *2c. >ostro *2c. ,1(#@.F17 from the date of sanction to adBustment F : days transit period!

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Prepared b - !d" !osharra# $ossain, %&'P ( !anager, Is)amp*r Branch, Dhaka

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

IFDBC : ()9#& means (nward )oreign 9ocumentary #ills for &ollection. (t is nothing but creating the contra liabilities against the acceptance of the bill which sent for collection. When documents of the #ack to #ack 1& come to the issuing bank for gi"ing the acceptance then the issuing bank arrange gi"e acceptance against the documents to the negotiating bank by taking the prior acceptance from the applicant of the 1&. We are aware that when 1& is issued by the issuing bank we ha"e 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 1& term they gi"e the acceptance for deferred payment and re"erse the pre"ious liabilities and create the new liabilities in the name of ()9#& ant at maturity the payment gi"en to the beneficiary and contra liabilities against the 1& i.e. ()9#& re"ersed. The following shipping documents are generally lodged in ()9#& register Bi)) o# exchange dra+n on *snace basis -DP/D&.: Aenerally documents against back to back 1& are drawn on usance basis. The usance period may be :5, ;8, <5, 65, 125 ,as the case may be! days after the date of acceptance such documents are lodged in ()9#& register. Discrepant shipping doc*ments: +"en the sight credit already been negotiated by remitting bank but documents are not acceptable to the issuing bank, then such documents are lodged in ()9#&. The issuing bank must notify the discrepancies to the negotiating bank within 8 ,fi"e! banking days and to refund the bill amount with good "alue. Doc*ments recei7ed on co))ection basis: 9ue to any reason the foreign bank may forward the documents on collection basis. 0uch documents are lodged on ()9#& and payment is to be made subBect to acceptance of the importer and on being confirmed of %uality and %uantity of imported merchandise with in"oice after actual clearance and on matching of customers bill of entry. De#erred pa ment bi)): The bill may be for 1452:<5 days usance. 0uch bill is to be presented to the drawee for their inspection and acceptance. *fter getting acceptance the maturity date should be con"eyed to the presenting bank and on the maturity date payment will be made after reali?ing the full bill amount from the importer. The maturity

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Prepared b - !d" !osharra# $ossain, %&'P ( !anager, Is)amp*r Branch, Dhaka

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

date is to be noted in ()9#& register2 due date dairy. The acceptance of the drawee is obtained on the o"erleaf of the bill of exchange as under *cceptance for payment or *cceptance for payment on date .................... signed by the drawee

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Prepared b - !d" !osharra# $ossain, %&'P ( !anager, Is)amp*r Branch, Dhaka

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

To minimi:e the risk the #o))o+ing iss*es sho*)d be taken care o#:
BB LC !argin o# BB LC Ins*rance Exchange 1ate Doc*mentation %*per7ision Loan &mo*nt Tenor : 9elayed in opening of ## 1& : *de%uate margin should be taken in case : (nsurance should be taken co"ering all possible risk : +xchange rate fluctuation in case of purchase of export bills : 1ack of proper documentation of credit : Proper super"ising in case of +&&2P&2## 1& : +&&2P& may be allowed maximum 187 of the 1& amount but total loan not more than 657 of the 1& "alue including ## 1& : (tem wise tenor must be followed and calculation tenor should be taken care of, maximum usance period ## 1& is 145 days, usnace period should be counted from the date of acceptance of the draft : +xport 1& should be scrutiny properly to a"oid discrepant document : Proper monitoring should be taken regarding repatriation export proceeds

%cr*tin o# LC Export proceeds

Limit o# the Bond License : Mearly limit of the band license should be check. 'a)idit o# E1C ( I1C @*ota &cceptance 8=C &mendment CIB Lien mark : Nalidity of the (.& 3 +.& should be check : Kuota allocation letter should be check in case of %uota items : *uthenticated acceptance letter should be taken in case of payment against acceptance : >@& for bill of entry and o"erdue liability from pre"ious banker : *mendment of the export 1& should be follow carefully : &(# report should be collected as per re%uired inter"al : +xport 1& should be marked under lien after opening ## 1&

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Prepared b - !d" !osharra# $ossain, %&'P ( !anager, Is)amp*r Branch, Dhaka

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

1ate o# Interest :.ate of interest should be 1(#@. but in case of payment of import bills before maturity date interest shall be paid proportionately and such case must incorporated in the 1&.

Ano+ the exporters capacit : #efore financing against export we should know the capacity of the exporter. Ano+ing the b* er abroad :&reditworthiness of the buyer abroad should be taken through credit referencing agencies like 93#, 0tandard 3 Poor, etc. D*p)icate ;%P Expir o# the export LC Perishab)e goods Late %hipment Bankr*ptc Bs Co*ntr risk : A0P certificate should checked with due care. : 0hipment is difficult in case of expired export 1&. : (n case of perishable items goods may be damaged : (f goods are shipped late then the buyer may not except the goods : (mporter banks may in bankruptcyEs : (mporters country may in the ci"il war

Thank Co*

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Prepared b - !d" !osharra# $ossain, %&'P ( !anager, Is)amp*r Branch, Dhaka