MD.ABU ZAFAR SHAMSUDDIN TRUST BANK LIMITED GULSHAN CORPORATE BR.

OPENING & OPERATION OF LETTER OF CREDIT A letter of credit is a document issued mostly by a financial institution which usually provides an irrevocable payment undertaking (it can also be revocable, confirmed, unconfirmed, transferable or others e.g. back to back: revolving but is most commonly irrevocable/confirmed) to a beneficiary against complying documents as stated in the Letter of Credit. Letter of Credit is abbreviated as an LC or L/C, and often is referred to as a documentary credit, abbreviated as DC or D/C, documentary letter of credit, or simply as credit (as in the UCP 600). Once the beneficiary or a presenting bank acting on its behalf, makes a presentation to the issuing bank or confirming bank, if any, within the expiry date of the LC, comprising documents complying with the terms and conditions of the LC, the applicable UCP and international standard banking practice, the issuing bank or confirming bank, if any, is obliged to honour irrespective of any instructions from the applicant to the contrary. In other words, the obligation to honour (usually payment) is shifted from the applicant to the issuing bank or confirming bank, if any. Non-banks can also issue letters of credit however parties must balance potential risks.

Parties of LC:
Applicant (Importer) Beneficiary (Exporter) Issuing Bank/ Issuing Entity Nominated Bank a) Advising Bank b) Confirming Bank c) Negotiating Bank d) Accepting Bank e) Paying Bank f) Reimbursing bank

Procedure of Opening LC
MAKING CONTRACT: Making contract between Buyer & Seller regarding price quality, quantity, specification, mode of payment, date of shipment, mode of shipment, validity of Proforma Invoice, port of destination etc. importer obtain Proforma invoice or indent as written instrument of contract. APPLIES FOR OPENING L/C After getting Proforma Invoice/indent the importer applied for establishing L/C along with following papers a) Formal request letter b) Proforma Invoice/indent along with Bangladesh Bank permission in case of indent.

c) d) e) f) g)

L/C application (Printed) Insurance Policy/Cover note Undertaking regarding fluctuation of exchange rate IMP form (Full set) Permission letter from Concern authority

Before opening L/C Bankers have to ensure submission of following papers : a) b) c) d) e) f) g) h) i) j) Valid IRC/IP etc Valid Trade License TIN/VAT Certificate Regular Account with sufficient Balance for recoverable commission charges and Margin Obtaining required approval form Head Office Determining Source of Foreign Currency Obtaining clearance from local Banks Consideration of import Policy & Bangladesh Bank Guideline In absence of original IRC the client must submit a certificate regarding overdue bill of entry from existing bank Obtaining credit report

ISSUANCE OF L/C After scrutiny relative documents and permission of concern authority, Bank establishes L/C, and sends for advising, through our foreign correspondence and recover necessary charges i.e., L/C Commission, Postage/ Telex/ SWIFT Charge. Then copy of L/C must send to CCI&E along with LCAF. Also issuing bank have to send PSI Company L/C copy along with photocopy of Insurance Cover note Proforma Invoice, VAT and TIN Certificate and formal request letter as per PSI policy for pro-shipment purpose. ACCOUNTING PRCEDURE FOR OPENING L/C. Customers Liability---------------- Dr. Bankers Liability------------------- Cr. Clients A/C --------------------------------Dr. Income A/C Commission on L/c-------- Cr. Incomer A/C Postage Charge --------Cr. S/D VAT-------------------------------- Cr. S/D Margin on L/C --------------------Cr.

OPERATIONAL MECHANISM After issuing LC the issuing Bank send L/C copy to advising Bank for advice the same. After receiving L/C from issuing Bank the advising Bank ensure whether it is operative or not. As per Articles XI of UCPDC 600 that

a. An authenticated teletransmission of a credit or amendment will be deemed to be the operative credit or amendment, and any subsequent mail confirmation shall be disregarded. If a teletransmission states "full details to follow" (or words of similar effect), or states that the mail confirmation is to be the operative credit or amendment, then the teletransmission will not be deemed to be the operative credit or amendment. The issuing bank must then issue the operative credit or amendment without delay in terms not inconsistent with the teletransmission. b. A preliminary advice of the issuance of a credit or amendment ("pre-advice") shall only be sent if the issuing bank is prepared to issue the operative credit or amendment. An issuing bank that sends a preadvice is irrevocably committed to issue the operative credit or amendment, without delay, in terms not inconsistent with the pre-advice.

ADVISING L/C After receiving L/C from Issuing Bank the Advising Bank advise the L/C to Beneficiary duly authenticated by them.. If he unable to advice the same he must inform it to issuing Bank without delay. Responsibility of Advising Bank as per Articles 9 of UCPDC 600 is:

a. A credit and any amendment may be advised to a beneficiary through an advising bank. An advising bank that is not a confirming bank advises the credit and any amendment without any undertaking to honour or negotiate. b. By advising the credit or amendment, the advising bank signifies that it has satisfied itself as to the apparent authenticity of the credit or amendment and that the advice accurately reflects the terms and conditions of the credit or amendment received. c. An advising bank may utilize the services of another bank ("second advising bank") to advise the credit and any amendment to the beneficiary. By advising the credit or amendment, the second advising bank signifies that it has satisfied itself as to the apparent authenticity of the advice it has received and that the advice accurately reflects the terms and conditions of the credit or amendment received. d. A bank utilizing the services of an advising bank or second advising bank to advise a credit must use the same bank to advise any amendment thereto. e. If a bank is requested to advise a credit or amendment but elects not to do so, it must so inform, without delay, the bank from which the credit, amendment or advice has been received. f. If a bank is requested to advise a credit or amendment but cannot satisfy itself as to the apparent authenticity of the credit, the amendment or the advice, it must so inform, without delay, the bank from

which the instructions appear to have been received. If the advising bank or second advising bank elects nonetheless to advise the credit or amendment, it must inform the beneficiary or second advising bank that it has not been able to satisfy itself as to the apparent authenticity of the credit, the amendment or the advice.

PROCUREMENT AND SHIPMENT OF GOODS After receiving L/C from Advising Bank the Beneficiary go through the terms & conditions of L/Cs and if he satisfied he procure/produce goods as per specification and arrange to shipped the same. SUBMISSION OF DOCUMENTS 1. After making shipment of goods in favor of the importer the exporter submits shipping documents to the negotiating bank for negotiation. He also send non negotiable copy documents to importer directly. 2. Negotiating Bank, if he authorized to negotiate the documents, carefully scrutinize the documents with L/C term. If he found all documents in conform with L/C term he negotiate the documents and forward it to issuing bank 3. After getting approval from issuing bank the negotiating Bank negotiate the documents and sent to the L/C issuing Bank for payment. LODGMENT OF DOCUMENTS The process of settle of import bill by creating PAD (Interim arrangement for making payment of negotiated Import bill) on complying presentation are known as Lodgment of documents.

After receiving documents form negotiating Bank, the issuing Bank examines the documents carefully. IF issuing Bank found any discrepancies he must inform this to negotiating Bank within 5 (Five) working days and must inform the m the status of documents. He must inform the opener and have to mentioned discrepancies. PAYMENT OF IMPORT BILL

If the issuing bank found all documents fu bitted in conform with L/C term he will make payment. If it is at sight basis, or he must convey acceptance if L/C is deferred payment. Accounting procedure for payment sight bill PAD -------------------------------------- Dr. TBL/NOSTRO/USD/EURO/GBP A/C---- Cr For Reversing Existing Contingent Liability Bankers Liability------------- Dr. Customer Liability----------- Cr. In case of usance bill: IFDBR------------------Dr. IFDBC-------- ---------Cr. Clients A/C----------------- Dr. S/D Margin on L/C --------Cr. For reversing existing liability: Bakers Liability-------------- Dr. Customers Liability--------- Cr.

PROCURE BILL OF ENTRY After release documents as well as goods form port bill of entry must obtain form importer and matched it accordingly

REPORTING After settlement of payment bank has to submit relative information to Bangladesh Bank prescribed format and preserve all documents or audit purpose.

Provision regarding Amendment of LC as Articles 10of UCPDC 600 is:

a. Except as otherwise provided by article 38, a credit can neither be amended nor cancelled without the agreement of the issuing bank, the confirming bank, if any, and the beneficiary. b. An issuing bank is irrevocably bound by an amendment as of the time it issues the amendment. A confirming bank may extend its confirmation to an amendment and will be irrevocably bound as of the time it advises the amendment. A confirming bank may, however, choose to advise an amendment without extending its confirmation and, if so, it must inform the issuing bank without delay and inform the beneficiary in its advice. c. The terms and conditions of the original credit (or a credit incorporating previously accepted amendments) will remain in force for the beneficiary until the beneficiary communicates its acceptance of the amendment to the bank that advised such amendment. The beneficiary should give notification of acceptance or rejection of an amendment. If the beneficiary fails to give such notification, a presentation that complies with the credit and to any not yet accepted amendment will be deemed to be notification of acceptance by the beneficiary of such amendment. As of that moment the credit will be amended. d. A bank that advises an amendment should inform the bank from which it received the amendment of any notification of acceptance or rejection. e. Partial acceptance of an amendment is not allowed and will be deemed to be notification of rejection of the amendment. f. A provision in an amendment to the effect that the amendment shall enter into force unless rejected by the beneficiary within a certain time shall be disregarded.