Bangladesh Bank is the Central Bank of Bangladesh. Mr. Mohammad Arafat Ali, Joint Director at the Bangladesh Bank, offers a useful guide on trade financing in the Bangladesh context outlined below.
- Foreign Exchange Regulations Act, 1947
- Guidelines for Foreign Exchange Transactions (GFET-2018)
- Concerned FE Circulars/Circular letters
- Import and Export Control Act, 1950
- Importers, Exporters and Inventors (Registration) Order, 1981
- Negotiable Instrument Act-1881
- Uniform Customs and Practice for Documentary Credit (UCDPC)
Four Methods of Payment
- Cash in Advance
- Open Account
- Documentary Collection
- Documentary Credit
- Export cash credit (Hypothecation/Pledge/against trust receipt)
- Packing credit
- Back-to-Back letter of credit
- Purchase/Negotiation/Discount of documents
- Advance against bill for collection
- Financing against Open account transaction (Factoring and others)
Export cash credit
- Sanctioned against hypothecation/pledge/trust receipt of raw materials or finished goods.
- In case of pledge Physical possession of the goods may remain to the bank’s effective control as a security of payment or bank dues. On the other hand Neither the possession nor the ownership passes to the Bank in case of hypothecation and trust receipt.
- Allowed to only good exporter.
- Bank insist for collateral security.
- Lien of export LC or Contract.
- PC is given to the exporters for financing to meet the expenses of utility bills, salary to the workers. Generally 15% of the export value is disbursed as PC.
- BRPD Circular no 1/2004 states to disburse PC at the rate of 7%.
- Due to covid-19 disruption Bangladesh Bank has made a supporting measure by forming a refinance scheme worth Tk. 5000 cr. to exporters for financing PC (BRPD Circular no 09/2020). Bank can apply Bangladesh Bank for refinance against their financing to the exporters for PC. Some of the feature of the scheme are :
- Bank are required to take customer’s default risk.
- Borrower Is charged at 6%, while bank will be charged at 3% by BB
- Tenor of the revolving fund is 3 years. A single borrower can avail loan from this fund maximum for one year in different time.
- Financing will be made after deduction the BTB, accessories and other such expenses from export order. But no more than 10% of commercial invoice value.
- BB will Finance against any PC maximum for 180 days. Tenor may be extended maximum for 60 days against application. Application for refinancing should be made to SFD of Bangladesh Bank.
- Exporters having any overdue export bill created within the previous 2 years are not eligible for refinance facility. Loan — defaulters are not eligible for financing facility.
Precaution for Sanctioning Pre-shipment Credit
- Preparing credit report in the Banks prescribed format should properly assess credit worthiness of the exporter.
- Period for which the credit is sanctioned should be clearly mentioned in the sanction later
- Charge documents as well as any other documents as mentioned in the sanction latter should be obtained and got properly executed by the borrower.
- Export documents should be carefully scrutinized before negotiation of export bills. If the export bill is negotiated under LC, it should be ensured that all its terms and conditions have been fully complied with.
- The LC should be from the correspondent bank or a reputable foreign bank whose status should be verified. The LC must be irrevocable (preferably confirmed) and unrestricted.
- The date of expiry of LC should be properly recorded in the register. No drawings should be allowed after the expiry of the credit unless extended.
- If the shipment is covered by the policies issued by Sadharan Bima Corporation under the export credit guarantee scheme, the related policy should be obtained in favor of the bank.
Back-to-Back letter of credit
- Unique, non-funded facility for the exporters in Bangladesh. The ADs may open back to back (BTB) 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.
- The back to back LC value shall not exceed the admissible percentage of net FOB value of the relative master export LC
- Usance period is 180 days.
- Inland back to back LCs denominated in foreign exchange may be opened in favor of the local manufacturer-cum-suppliers of inputs, against master export LCs received by export oriented manufacturing units operating under the bonded warehouse system
Export Development Fund
- AD banks can borrow US Dollar funds from the EDF administered by Bangladesh Bank against their foreign currency loans to manufacturer-exporters for input procurements. The details operational procedures are available in the relevant FE Circulars/Circular Letters issued by Bangladesh Bank from time to time.
- Interest rate 2%
- Tenor is 180 days, may extended for upto 270 days.
Post Shipment Credit
- Post shipment credit refers to the credit facilities extended to the exporters by the banks after shipment of the goods against export documents.
- Necessity for such credit arises as the exporter cannot afford to wait for a long time without paying manufacturers/ suppliers or remain out of fund for long.
- Before extending such credit, it is necessary for banks to look carefully into the financial soundness of exporters and importers/buyers as well as other relevant documents connected with the export in accordance with the rules and regulations in force.
Purchase/Negotiation/Discount of export documents
- AD can discount the export bills and finance to the exporters.
- Financing by discounting Export bills is applicable both for direct and deemed exporters.
Discounting of direct and deemed export bills in foreign exchange.
Beneficiaries of usance export bills against direct and deemed exports of products produced in Bangladesh may arrange to discount bills for immediate financing through their own AD banks subject to compliance of the following instructions:
- ADs shall have to be ensured that the usance bills presented for discounting are out of bonafide direct/deemed export transactions
- ADs may arrange fund against the discounting of usance bills in foreign exchange through their own OBUs/correspondent banks, financial institutions abroad or international financing institutions;
- Expenses of the customers for discounting bills shall not exceed six-months LIBOR + 3.5% (all in cost) pa including all types of commissions /charges/fees/interests;
- AD banks shall submit statement (Appendix 5/38) to FEPD, Bangladesh Bank, Head Office of discounting of direct/deemed export bills in foreign exchange on monthly basis by 15th day of the following month.
The above instruction was amended by FE 23/2020 which allow the AD to discount in FC from its own fund, provided that the dedicated portion of the fund is not committed to meet other liabilities.
Advance Against Bills for Collection
- 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.
- Banks generally accept export bills for collection of proceeds when they are not drawn under an L/C or when the documents, even though drawn against an L/C contain some discrepancies.
- In addition to the export bills, banks may ask for collateral security like a guarantee by a third party or an equitable/ registered mortgage of property.
Financing against Export under open account credit terms
Authorized Dealers (ADs) may allow exporters to ship goods on sales contracts under open account credit terms within the statutory period, subject to compliance with following instructions:
- Exports shall be executed against payment undertaking/payment risk coverage for settlement of export bills/receivables within the permissible statutory period by international factoring companies/foreign banks/foreign financial institutions /trade financiers/ insurance entities
- Payment undertaking/payment risk coverage by designated institutions abroad shall be, in case of default by importers, received in such a way so as to be ensured of payment on priority basis in accordance with appropriate underlying arrangements for settlement on the basis of physical/electronic presentation of export invoices/bills/documents.
Export under open account credit terms
- Payment undertaking/payment risk coverage from designated institutions abroad may contain option for early payment on non-recourse basis.
- ADs shall satisfy themselves that exporters are appropriately financed. Expenses for guarantee commission against payment undertaking/payment risk coverage, and interest with relevant charges for early payment shall not exceed six-months USD LIBOR + 3.50 % PA excluding normal bank charges
- ADs should have counterparty arrangements/relations for such transactions with designated institutions of repute with acceptable credit ratings operating under the licenses of central banks/competent authorities
- In case of issuance of transport documents in the name of importers or other nominated parties as per arrangements, ADs may give instruction (as per format) to carrier companies. Export invoices/bills/documents can be sent abroad through banking channel/electronic platform/suitable arrangements directly to designated institutions/importers/other relevant parties as per requirement of the underlying arrangements.
- Subject to observance of relevant instructions noted herein, ADs may extend early payment facilities to exporters on non-recourse basis out of their own funds against payment undertaking/payment risk coverage from designated institutions abroad