Thesis Paper

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Chapter: 1 Introduction and Background of the Study 1.1 Rational of the study
Now a days, foreign trade plays a vital role in banking. It is a system or process in which one national currency are converted into another and of transferring money from one country to another. It is mainly consist of export, import and other foreign Remittance. In a developing country, foreign direct investment (FDI), export, import, foreign remittance etc. plays very significant role. There is a great opportunity to invest the foreign remittance which also comes from wages earners working abroad, In several prospective investing fields like energy sector, telecommunication, information technology etc, in our economy. Therefore, Financing Foreign Trade has a important role to play in the financial sector of Bangladesh. Consequently, the study of Financing Foreign Trade the context of Bangladeshs developing economy world help in the overall Management of balance of payment of the country.
1.2
Objective of the study
1.2.1 General objective The general objective is to prepare and submit a report on the topic financing foreign trade by banks The case of BASIC within the time specified. 1.2.2 Specific objective 1. To know the return from export, import and remittance. 2. To estimate the cost of export, import and remittance.
2 Chapter 1: Introduction and Background of the Study
3. To examine the extent of Foreign exchange earning as compared to total earning, interest income and, non-interest income. 4. To prepare Flow chart (Time lag) of export, import and remittance. 5. To evaluate Overall performance indicators of BASIC. 6. To examine way followed by BASIC to avoid foreign exchange risk.
1.3 Methodology
The following methodology has been followed to come to a successful conclusion of the report :1.3.1 Sources of Information and data : The sources of information are: A) Primary data * Questionnaire B) Secondary data * Published Annual reports * Data Collection through personal interviews
1.3.2 Period covered Department General banking Cash Remittance Credit Division Foreign Exchange Total Total Days 30 5 5 12 20 72
Table 1.1 shows the period covered during the internship
1.3.3 The process of application of the techniques and reason A critical analysis of the data has been made through the bar diagram and line graph over the last five years. This has enable me to visualize the trend of the variables of interest over time, indicators of bank perforation have also been computed through ratios of variables and spread-burden analysis. In addition ROE, Profitability etc. have been critically analyzed. Trade finance procedure an usance of documentary credit of the BASIC has been critically evaluated through the analysis of diagram, flow charts. This will result the identification of the problems faced by BASIC and ways of removing the problems. Protection of foreign exchange risk occurring out of transaction exposure for BASIC by flowchart.
1.4 Limitation of the Study

* In collecting information, there is some problem because of the excessive nature confidentiality maintained by the officials of BASIC.
* Sometimes data could not be verified. In most case, there is not any option but assume data without verification. * As the department specified a short time, sufficient time could not spend required to make on in-depth study on such on important issue. * The scope of study was limited by the availability of data.
Chapter: 2 Organizational Profile of BASIC

2.1 Background
Bangladesh Small industries and Commerce (BASIC) Bank Limited established as a banking company under the companies act 1913 and was incorporated under this act on the 2nd august 1988. The Bank launched its operation from the 21st January 1989. It is governed by the Banking Companies act 1991. The Bank started as a joint venture enterprise of the BCC foundation with 70 percent share and the Government of Bangladesh (GOB) with the remaining 30 percent shares The BCC foundation being nonfunctional following the closure of the BCCI, the Govt. of Bangladesh took over 100 percent ownership of the Bank on 4thJune 1992. However, the Bank is not nationalized; it operates like a private Bank as before. BASIC is unique in its objective. It is a blend of development and commercial Banking functions. The memorandum and Articles of Association of the Bank stipulate that 50 percent of loanable funds require to be invested in small and cottage industries sector. As others commercial Banks, BSSIC provides their clients full-fledged commercial Banking services including collecting of deposits. Short term trade finance, working capital finance in processing and manufacturing units and financing and facilitating international trade. In the 2000, Banks Authorized capital was TK 500 million; paid up capital TK 240 million and total reserve TK 457.77 million. The Bank is required to transfer 20 percent of its net profit before tax to capital fund as per the Banking companies Act 1991.
6 Chapter 2: Organizational Profile of BASIC
2.2 Corporate Strategy

# Financing establishment of Small units of industries and business and facilate their growth. # Small balance sheet size composed of quality assets. # Steady and sustainable growth. # Adoption of new Banking technology. # Investment in a cautious way.
2.3 Organizational Goal

# To employ funds for profitable purpose in various fields with special emphasis on small scale Industries. # To undertake project promotion to identify profitable areas of investment. # To search for newer avenues for investment and develop new product to suit such needs. # To establish linkage with other institutions which are engaged in financing micro enterprises. # To co- operate and collaborate with institutions entrusted with the responsibility of promoting and aiding SSI sector.
2.4 Organizational Structure

To achieve its organizational goal, the bank conducts its operation in accordance with the major policy guidelines laid down by the board of directors, the highest policy making body. The day to day operation off the bank is looked after by the management.
2.4.1 Board of Director The Government holds 200 percent ownership of the bank. All the Directors of the board are appointed by the Government of Bangladesh. The Secretary of the Ministry of Industries is the chairman of the bank other directors of the bank are high Government executive. The managing Directo5r are at the present 6 directors including the Managing Director on the board. The present Board of Directors of the bank consists of the following members: 2.4.2 Management The management is headed by the Managing Director. He is assisted by the General Manage and Departmental heads in the head office. BASIC is different in respect of hierarchical structure from other Bank in that it is much more vertically integrated as far as reporting to the chief executive is concerned. The Branches in charge of the Bank report directly to the Managing Director and, for functional purpose, to the head of the departments. Consequently, quick decision making in disposal of cases is ensured. Organogram Of BASIC Bangladesh Limited
BOARD OF DIRECTORS
MANAGING DIRECTORS
GM OPERATION
GM DEVELOPMENT
OFFICER IN CHARGE ACCOUNT
OFFICER IN CHARGE CREDIT
AGM INTERNA TIONAL
DGM INDUSTRIAL CREDIT
AGM ESTABLI SHMENT
AGM COMPUTER
DGM
ADMINIS TRATION
2.5 Customer Service

In this department, the customer service officer is the bank representative and is often the first person contract with clients. The main job of the customer service officer is to attend any concerns expressed by the clients. They are responsible for handling any quarries by the clients and also serve as initial interviewers and inform future clients of what kinds of accounts BASIC offers. They explain what accounts is available for what clients and what prerequisites are necessary for these accounts. BASIC has saving accounts, current accounts, fixed deposits, Short- term notice account, Bearer certificate of deposit accounts etc. The customer service department works closely with the Remittance and Bills department.
2.6 Bank Performance at a glance

This section deals with performance analysis of BASIC highlighting the certain aspect of BASIC through chart and the situation of spread, Burden and productivity indicator over the last five years. 2.6.1 Main attribute of the Bank performance The chart of 2.1 to 2.10 demonstrate the bank performance having a increasing trend over the last five years. The total asset and deposits of the Bank have performance have increase in 2001 from the level of 1997 showing a steady growth rate per year over time Investment portfolio decreased by 46.92 percent over the previous year. Investment was concentrated in approved securities such a Government Treasury Bills and other Treasury Bonds. Loan and advance increased by 355.55 percent in 2001 compared to the year 2000. Operating income and net income gas increased by gradually because of these reasons an upward movement of operating expenses ratio over time. It is evident from the chart of
Amount in Million TK
10000 8000 6000 4000 2000 0 1997 1998 1999 2000 2001 Total Asset
Chart 2.1: Total Asset Amount in Million TK

1200 1000 800 600 400 200 0 1997 1998 1999 2000 2001 Total Investm ent
Chart 2.2: Total Investment Amount in Million TK

600 500 400 300 200 100 0 1997 1998 1999 2000 2001 Operating Incom e
Chart 2.3: Operating Income
10 Chapter 2: Organizational Profile of BASIC Amount in Million TK

200 150 100 50 0 1997 1998 1999 2000 2001 Operating Expenses
Chart 2.4: Operating Expenses
250 200 150 100 50 0 1997 1998 1999 2000 2001 Net Income
Chart 2.5: Net Income Amount in Million TK

1.75 1.7 1.65 1.6 1.55 1.5 1.45 1997 1998 1999 2000 2001 Productivity
Chart 2.6: Productivity
11 Chapter 2: Organizational Profile of BASIC Number of People

500 400 300 200 100 0 1997 1998 1999 2000 2001 No of Employee
Chart 2.7: No of Employee Amount in Million TK

14 12 10 8 6 4 2 0 1997 1998 1999 2000 2001 Manpower Productivity
Chart 2.8: Manpower Productivity Amount in Million TK

7000 6000 5000 4000 3000 2000 1000 0 1997 1998 1999 2000 2001 Loan and Advance
Chart 2.9: Loan and Advance
12 Chapter 2: Organizational Profile of BASIC Amount in Million TK

8000 7000 6000 5000 4000 3000 2000 1000 0 1997 1998 1999 2000 2001
Total Deposits
Chart 2.10: Total Deposits
2.6 that Productivity (total income/total expenses) has been increased gradually over the last five years. Chart 2.8 shows manpower productivity (total income/Manpower expenses) has been declined over the last five years due to loss of efficiency in managing human resources. 2.6.2 Spread and Burden Analysis Profit is defined as the difference between total income and total expenditure. Income and expenditure sources may be grouped under two heads: a) Interest b) non- interest sources .The difference between interest income and interest expenditure is known as spread and difference between non- interest income and non-interest expenditure is known as Burden. Non interest income includes income on investment, income on commission, exchange and brokerage etc. Non interest expenses include salaries and allowances, rent, tax, service charges, stamps and court fees etc. Therefore, alternatively, profit is also defined as the difference between spread and Burden. Profitability, not absolute profit, should be the criteria of measuring performance of the commercial banks. For measuring profitability, the absolute level of profit is to be deflated by volume of working fund (V), which is defined as balance sheet total minus contra items. For measuring profit and profitability, the following equation
P=SB Where, P = profit S = Spread B = Burden If we related to the equation to a common base V, then we get profitability _ P/V = S/V B/V
4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 1997 1998 1999 2000 2001 Spread Burden
Chart 2.11: Spread and Burden Analysis
The spread ratio ( spread / working fund ) of BASIC has been reduced from 4.0587 in 1997 to 3.3986 showing a decline over the last five years. On the other hand, Burden ratio ( Burden / Working fund ) has been moved decrease from 1997 to 1998 but it is increased by very sharply and during the 2000 to
2001, it is decreased because of increasing in non- interest expenses. Foreign Exchange Revenue has effect the non- interest income by very deeply. 2.6.3 Return Measure of BASIC The return on Equity (ROE) of BASIC has increased in 2001 compared to the year 2000. Interest margin cover has been increased due to increase of interest income of BASIC is in 2001. Net profit to Gross income is increased during the year 2001. The after tax return on average asset has been also been increased in 2001 compared to 2000. Return Measure Interest Margin Cover After Tax Return On Average Asset Net Profit To Gross Income After Tax Return on Equity 1997 194.64 2.28 21.48 27.96 1998 192.04 2.73 23.01 28.69 1999 112.67 2.50 20.45 27.37 2000 150.67 2.33 19.75 27.04 2001 173.91 2.45 20.51 28.06
2.7
Technology of BASIC
The Board attaches grant importance on acquisition and use of appropriate information technology in the bank. Since inception the bank has continued its effort to meet the complex and dynamic needs of customers. BASIC bank has its own software developed in 1991. Local area network (LAN) has been installed in Head office and 15 branches of the bank. Wide area network (WAN) has been set up between Head office and branches using X.28 leased line of BTTB. The bank has undertaken a project for5 introduction of Any Branch Banking automated Teller Machine and Debit Card at its 16 branches in Dhaka and Chittagong. The project will be implemented in 2002. Once completed, the valued customers will be able to withdraw or deposit cash from any branch in Dhaka and Chittagong during office hours, withdraw cash, transfer funds and pay utility bill at any time from any ATM and pay their shopping bills using a debit card. These system is called centralized.
2.8
Risk management
In banking business, no reward can be expected without risk. In this backdrop, the management has established a formal program for managing the business risk faced by the bank. Considering the present non- performing loan position of the country, BASIC bank is very much cautious about its investment. Every loan proposal is placed under careful scrutiny before approval. Proposal of large amount of loans need approval of the board of Directors. Credit lines are established for each borrower or borrower group. Internet audit team and recovery team exercise close monitoring on every loan transaction. Management regularly reviews the banks overall assets and liabilities structure and makes necessary changes in the mix asset/liabilities of balance sheet. The Bank also has a liquidity policy to ensure financing flexibility to cope with unexpected future cash demand. The Bank takes necessary action to avoid foreign exchange risk which is called as exposure.
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Chapter: 3 Foreign Trade Activities of BASIC

3.1 Literature Review
Banks play a very important role in effecting Foreign Exchange Transaction of a country. Mainly transaction with overseas countries is respect of imports; exports and Foreign Remittance come under the preview of foreign exchange transactions. Banks are the vital sector by which such transactions are effected/settled. Central Bank records all sorts of foreign exchange transaction and therefore, transaction effected by the Banks and other authorized quarters are to be reported regularly (Daily, Fortnightly, Monthly, Quarterly, Yearly etc) to Bangladesh Bank by the foreign exchange department of every Banks. Foreign Exchange Department plays a vital role to earn the Banks maximum profit. This department is classified according to their activities. The foreign exchange department consists of three sections, these are as follows: # Import Section # Export Section # Foreign Remittance Section Foreign Exchange Department, Banks facilitates their clients in enhancing International Trade. The provision of finance to importers (Trust Receipt Facility, Documentary Credit Facility) and exporters (Negotiation of export Bills, Purchase of Bill for collection) encourages enterprises to engage in trade and enhance their liquidity position. Bank makes the payment International Trade through letter of credit to the exporter on behalf importers. Banks is a media of fund transfer from one party to another. In International Trade, as both importers and exporters in different countries and do not deal with same currency, they have to confront the risk of currency fluctuation. This exchange risk can be transferred from the trader to the bank i, e ready to provide the former with forward foreign exchange or currency option so that the importer and the seller can devote their time to their business.
17 Chapter 3: Foreign Trade Activities of BASIC
3.2 BASIC Bank and Trade Finance

BASIC Bank plays an important role in international trade. The trade finance department of BASIC is efficient of their activities and provides the best services to their clients. The major clients of BASIC are corporate clients. Performing their activities since 1989, BASIC has a very good relationship with the big corporate clients of Bangladesh. Trade finance department consist of Bills (Import) and Bills (Export). 3.2.1 BASIC Bank Statement policy All BASIC employees are responsible for ensuring compliance with the Bank policies and procedures Operational Manual (OM), Know Your Client (KYC), and other policies. It is imperative that the trade finance staff is fully conversant with all aspects of the above stated documents relating to Letter of Credit (L/C), Documentary and clean Collection, Bank Guarantee, and Bank to Bank Reimbursement and export Bills. 3.2.1.1 International chamber of commerce (ICC) Uniform Rules, customs and practice : Transaction relating to L/C, Documentary and clean collection, Bank to Bank reimbursement are processed subject to and in conformity with the current versions of International Chamber of Commerce Publication, Such as : UCP 500 Uniform custom and practice for documentary credit. UCP 500 Uniform Rules for collection ; and UCR 522 Uniform Rules for Bank to Bank reimbursement under documentary credits. 3.2.1.2 Credit policies : Bank has their own credit policies and procedures for all Trade finance activities. These are Credit Principle, Global credit portfolio limit, Credit categories, Types of credit activities, Credit approval, Credit administration, Credit monitoring and review.
3.2.1.3 Know Your Client ( KYC ) : Relationship Managers (RM) are responsible for ensuring that client profile are kept current and that copy is distributed in accordance with the Banks Know your client policy. 3.2.1.4 Local Regulation Manager is responsible for ensuring that local regulation relating to Trade Finance and financial reporting requirement are strictly complied with, regulation of the Importing and Exporting of the Country. Some of these include: restrictive governmental policies, exchange controls, tariffs restriction, Export/Import licensing, pre- shipment inspection, and taxation. 3.2.2 Function of Trade Finance Department Trade finance consists of the following areas of activity : * Bills Import * Bills Export * Bills Processing Unit
# Basic function :
1. 2. 3. 4.
All transactions related to Import Transaction All transactions related to Export Transaction Handling of L/C reimbursements Checking and collection of export bills for correspondent Banks.
# The activities are guided by the following guidelines : 1. Banks Operational Manual 2. Exchange Control Manual
3. 4. 5. 6. 7. 8.
Import and Export Policy Order Uniform Custom and practice Documentary Credits ICC Uniform Rules For collections ICC Uniform rules for Bank to Bank reimbursement BASIC Bank KYC policy Bangladesh sanction and boycotts
# Bills counter services 1. providing information regarding L/C 2. Receiving L/C application 3. Close investigation of L/C application by the department head 4. Forwarding the L/C 5. Review of L/C application form through the market department 6. Approving the application from through the market department # L/C document includes among many : Shipment Airway Bill or Bill of leading ; Debit advice ; Advance endorsement ; Draft ; ( Bill of exchange ) ; certificate of origin, Insurance declaration. # payment instruction for L/C is transmitted through SWIFT
CLIENT
Receiving L/C application Return L/C application
COUNTER IMPORT& EXPORT

(If any discrepancy)
IMPORT & EXPORT SCRUTINY OF L /C APPLICATION
Head of the section Get the L/C approval from the
BILLS IMPORT
Marketing Department
MARKETING DEPARTMENT Fig 3.1: (Phase of Bills counter service procedures) Chapter 3: Foreign Trade Activities of BASIC
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3.2.3 Parties Involve in Trade Finance 3.2.3.1 The applicant : The applicant is the party that induces the Banks to issues the letter of credit. The applicant is normally obligated to reimburse the Bank for any payment made under letter of credit. The issuing Bank : The issuing Bank is the Bank that issues the letter of credit. The issuing Bank undertakes an absolute obligation to pay upon presentation of documents drawn in strict conformity with the terms and condition of the letter of credit. The Advising Bank : An advising Bank simply advises a letter of credit without any obligation on its part. However, the advising Bank shall take reasonable care to check the apparent authenticity of the credit that it advises. The advising Bank is typically a Bank in the Beneficiaries. The Beneficiary : The beneficiary is the party entitled to drawn payment under the letter of credit. The beneficiary will have to present the required documents to avail payment under the letter of credit. The Confirming Bank : The confirming Bank confirms that the issuer has issued a letter of credit. The confirming Bank becomes directly obligated on the credit to the extent of its confirmation and by confirming the Bank receives the rights and obligation of an issuer. It is to be noted that confirmation is normally done by the advising bank or by a third Bank in the Beneficiary locate. The Nominating Bank : The Bank where drafts drawn under the credit are payable. In case of a usance credit where drafts are to be accepted by this Bank. The Negotiating Bank : The Bank that negotiates document under letter of credit upon presentation. Typically advising Bank as nominated as negotiating Bank.
3.2.3.2
3.2.3.3
3.2.3.4
3.2.3.5
3.2.3.6
3.2.3.7
Chapter 3: Foreign Trade Activities of BASIC
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3.2.3.8
The Reimbursement Bank : The Bank nominated by the issuing Bank to provide reimbursement to the negotiating Bank or sometimes the payee Bank. The Transferring Bank : A Bank is specifically authorized in the credit as a Transferring Bank. Typically Advising Bank is nominated as Transferring Bank. Such as Bank is authorized to make the documentary credit available in whole or in part to one or more other Beneficiary.
3.2.3.9
3.3
Bills ( Import )
Bills Import deals with L/Cs and the issuance of L/Cs for import purposes. The letter of credit serves as a vehicle for the importer and exporter to ensure that their goods and money are coming. It is important to remember that the Bank deals with documents and not goods. There are various steps towards the issuance of L/Cs; these steps will also BASIC, as will as various Banks serving as negotiating, confirming, etc. Banks. This Department deals with different types of L/Cs and payment of L/Cs. these is a clear line as to the role of the Bank as an advising Bank and as a Guarantor. L/Cs are used for the purchase and sale of goods. A buyer, Importer, or Applicant goes to their Bank and applies for a letter of credit. This letter of credit is given and the Bank then sends this L/C to another Bank in another country. They may send this L/C to a sister Bank or to an advising, confirming, or negotiating Bank. Either way these other Banks are treated as an intermediary beneficiary and the seller or exporter. The L/C is given to certify that upon the receipt of goods, the Importer will immediately send the money. Negotiating Banks are also used, where there is a different Bank, they are given the L/C ; and they will deal the payments. Some advising Banks and negotiation Banks can be one and the same. In case of the Bank of
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the other country is not known to the Importers Bank, a sister Bank known by both parties can be used as a Guarantor of funds. L/C are used mainly in trade. They usually include the mode of shipment of a specified goods, and what the port of destination is the expiry of the shipment, the document all need to be submitted to the issuing Bank, Certificate of Origin, of where the goods is produced, inspection certificates, as to quantity and quality, are countries may have their own set of demands they want to ask. There are two criteria for importing goods : 1. Commercial ( Normally BASIC takes 50% margin of total values of goods ) 2. Industrial ( Normally BASIC takes 10% margin of total values of goods) There are also two types of L/C : 1. Sight L/C : Sight L/C has also to be immediately through advanced payment can be allowed. 2. Usance L/C : Usance L/C has also to be paid at a fixed maturity date. For example, payment upon the receipt of goods. Beneficiaries that want to apply for a L/C need to have proper credit facilities. After calculating the outstanding, and there is a still room, then L/C is issued. Calculation of margin and charges are also done. Upon the receipt of goods, proper documentation is certified, and then payment is done. The reimbursement of funds can be made in through negotiating. They can be negotiated to the Bank of choice of the relevant currency.
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18000 16000 14000 12000 10000 8000 6000 4000 2000 0
BASIC Bank Exim Bank Prime Bank Dhaka Bank
2000 2001
Chart 3.2: Import business of other Banks (2000 and 2001)
Chart 3.2 shows the import amount in other Banks ( 2000 and 2001) . As compared to other Banks BASIC import amount has fallen in 2001.
3.3.1 Import Procedure and Practice

1. Regulation 2. Import policy 3. Licensing for Imports 4. Making the purchase contract 5. Opening the Letter if Credit 6. Amendments to Letter of Credit 7. Securing and Lodgment of Documents 8.Verification and Lodgment of Documents by the L/C opening Bank
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8000 7800 7600 7400 7200 7000 6800 6600 6400 1997 1998 1999 2000 2001 Im port
Chart 3.3: Import business of BASIC Bank
Chart 3.3 shows the import in million taka of BASIC Bank. The import has increased during the period 1997 to 2000. But in 2001 import is decreased, due to imposition of the restriction of L/C margin.
Number of items
6000 5000 4000 3000 2000 1000 0 1997 1998 1999 2000 2001 L/C Opened Im port Bill Received
Chart 3.4: No. of L/C opened, Import bill received
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The total number of L/C opened and import bill received are presented in the chart 3.4.
Number of items
200 150 100 50 0
Guarantee
1997 1998 1999 2000 2001
Chart 3.5: Number of Guarantee
Chart 3.5 shows number of Guarantees provides by BASIC Bank. It is increased by gradually.
600 500 400 300 200 100 0 1997 1998 1999 2000 2001 Guarantee
Chart 3.6: Amount of Guarantee
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Amount of Guarantee increased as increase the number of Guarantee which is shown as chart 3.6. It is increased by 47 percent in 2001 as compare in the year 2000.
3.3.2 Documentary Credit (D/C)

Documentary credit is written undertaking given by a Bank ( Issuing Bank, Opening Bank ) to a seller ( Beneficiary, Exporter ) at the request and on the instruction of the Buyer ( Applicant, Importer ) to pay either at sight or at a determinable future date, a stated sum of money against stipulated documents and fulfillment of all the terms and condition in the D/C. it is most suitable on the following circumstances : # when the importer is not well known, the exporter selling on credit terms may have importers promise of payments backs by a buyer Banker. # on the other hand, the importer may not wish to pay the exporter until it is reasonably certain that the merchandise has been shipped in the good condition. A D/C in this case, can satisfy both the exporter and the importer. 3.3.2.1 Various steps in the operation of Documentary Credit # The importer and exporter have made a contract before a D/C is issued. # Importer applies for a letter of credit from his Banker known as the issuing Bank. He may have to use his credit line. # Issuing Bank opens a D/C, which is channeled through its overseas correspondent Bank, known as advising Bank. # Advising Bank informs the exporter ( The Beneficiary) of the arrival of the D/C. # Exporter ships the goods to the importer or other designated place as stipulated in the D/C.
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# Meanwhile, he prepare his own documents and collect transport documents or other documents from relevant parties. All these documents will be sent to his Banker who is acting as the negotiating Bank. # Negotiating of Export Bills happen when the Banker agrees to provide him with finance. In such case, he obtains immediately upon presentation of documents. If not the document will be sent to the issuing Bank for payment or on an approval basis as in the next step.
COTRAC T
,
IMPORTER BUYER APPLICANT
SHIP GOOD S
EXPORTER SELLER BENIFICIARY
APPLY L/C
RELEASE DOCUMENT S AGAINST CASH
TAKE DELEVERY GOODS
NEGOTIAT ION OF EXPORT BILLS
PREPARE AND PASS DOCUMEN T
ADVIS E L/C
MAKE PAYMENT
ISSUING BANK
SEND DOCUMENT
ADVISING, CONFIRMING,NE GOTIATING BANK
L/C
Diagram 3.7: Steps in D/C
# documents are sent to issuing Bank ( Or reimbursement Bank which is a Bank nominated by the issuing Bank to honor reimbursement from negotiating Bank ) for reimbursement or payment. # Issuing Bank honors its undertaking to pay the negotiating Bank on condition that the documents comply with D/C terms and condition. # Issuing Bank release documents to importers when the letter makes payment to the former or against the letter trust receipt facility.
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# Importer takes delivery of goods upon presenting on the transport documents. 3.3.2.2 Different types of documentary credit A. Red clause credit A red clause credit is a special type of credit with a clause inserted which authorizes the advising or confirming Bank to make advances to the Beneficiary before presentation of the documents. The credit specifies the amount of the advance to be given to the Beneficiary, which can be in the form of a percentage or a fixed sum. In other wards, it is a pre- shipment finance in the form of a loan the advising / confirming Bank provides to the beneficiary, with payment of principle and interest Guaranteed by the issuing Bank of the client, which in turn has a right of recourse to the applicant in case the beneficiary fails to ship goods and default in the payment of the advance. Possible risk in issuing a red clause credit : * Exporter may use the advance for other purpose. * Documents presented from the exporter may have discrepancies unacceptable to the importer. B. Revolving Credit A revolving credit is a credit, which provide for the amount of the credit to be renewed automatically after use without the need to renew the credit every time. It can be renewed with respect to either : # Time # Amount ( i, e total value of the credit )
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A Revolving credit With respect to time can be cumulative or non cumulative. A cumulative revolving credit allows any unused credit amount of a previous to be carried forward to the next month. A non cumulative revolving credit, on the other hand, provides for a maximum amount of credit to drawn for the month, the amount of that month ( Full amount or any utilized balance ) will be forfeited automatically.
C. Transferable Letter of Credit A Transferable letter of credit, which can be transferred in whole or in part by the original beneficiary to one or more Second Beneficiaries . It is normally used when the first beneficiary does not supply the goods himself, but acts as a middleman between the supplier and ultimate buyer. D. Back To Back Credit When beneficiary receives a documentary credit which is not transferable, and he can not furnish the goods himself, he may arrange with the Banker to issue a second credit ( which is known as Back to Back L/C) to a supplier to supply the goods. As the two credits cover the same goods, the Back to Back credit must be issued with identical terms to the master credit that the credit amount, unit price if any. They expiry date may have to be advanced. The Bank issuing Back to Back Credit will obtain repayment through the master credit which is deposited to the issuing Bank of the Back to Back Credit.
30 FOREIGN COUNTRY
ULTIMAT E BUYER APPLICA NT L/C
BANGLADESH
MASTER L/C ISSUING BANK
ADVISING BANK
MIDDLEMAN BENIFICIARY OF MASTER L/C APPLICANT OF B/B L/C
B/B L/C ISSUING BANK
ADVISING BANK/NEG OTIATING BANK
SUPPLIER BENIFICIARY OF B.B L/C
Diagram 3.8: Shows the Back to Back Credit Procedure
E. Standby Credit A standby credit is a guarantee type of documentary credit. It might in many form such as pure loan forms, bid bond and performance guarantee form etc. F. Confirmed Credit If a letter of credit is confirmed by a Bank (The advising Bank), this mean that, in addition to the definite undertaking to the issuing to honor beneficiarys draft, the advising Bank also makes its a promise to pay the beneficiary. Such confirmation by the advising Bank not only confirms the undertaking of the issuing
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Bans but also constitutes an additional promises on the part of the advising Bank (which becomes a confirming bank) 3.3.2.3 Stage to a documentary Credit (A) (B) (C) (D) (E) (F) (G) Issuance of L/C Execution of Amendment Advising Letter Of Credit Confirming Letter OF Credit Advising Amendment Negotiation The process include following : * At negotiating Bank * At issuing Bank Banks in beneficiary locate
REIMBURSEMENT BANK
BASIC Bank
ISSUING BANK
ADVING BANK
CORRESPONENT BANK
CONFIRMING BANK
NEGOTIATING BANK
BENIFICIARY
Diagram 3.9: BASIC involvement in D/C
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3.3.2.4 Advantages and Disadvantages of Documentary Credit DOCUMENTARY CREDIT Advantages IMPORTER
* An importer can be assured the exporter has complied with certain steams and conditions as specified in the D/C before payment. * He can insist of shipment of goods with in a certain time by stipulating a latest shipment date. * He can have export advice from his Banker as to the D/C terms. * He can ask for financial assistance from his Banker such as T/R. * Protection offered by DCP500. * The risk of non payment is lower provided he complies with D/C terms and condition. * It is a safe method through which to obtain prompt payment after shipment. * The exporter can have export advice from his Banker. * The exporter also can seek financial assistance from his Banker before the buyer makes payment, such as negotiation of export Bills advance etc.
Disadvantages
* Since Banks deals in document only : Goods may not be the same as these specified in the credit. * Issuing Bank are obligated to pay even through the conditions of goods may be poor. * D/C commission are relatively costly. * Line of credit or application is necessary before an importer can open an D/C, this may cause extra inconvenience and is time consuming. * It is comparatively costly. * Sometimes, the terms and condition can not be fulfilled such as unreasonable shipment date and expiry date, adding on D/C the clause of Restriction of a designated vessel to be informed by D/C amendment . * The goods are shipped before receiving payment ; So it is not 100% safe.
EXPORTER
33 Amount in Million TK
8000 7000 6000 5000 4000 3000 2000 1000 0 1997 1998 1999 2000 2001 L/C Opened Including Inland L/C
Chart 3.10: L/C Opened including inland L/C
Chart 3.10 shows that the during the 1997 to 2000, the amount of L/C opened has been increased. But in 2001, the amount of has been decreased due to increase in L/C margin.
3.3.3 How settlement takes place under a Documentary Credit

When the seller surrenders the documents, he expects the Bank to honor its obligation under the credit in return. Before the Bank can do so, however, it must ;make certain that the documents comply in ever respects with the credit conditions. Since this examination must be done with special care the Banks must be allowed a reasonable period o time for it. Once the documents have been found in order, the Bank proceeds as follows : 3.3.3.1 In case of a sight credit : A. If confirmed by the advising Bank : The Bank which had confirmed the credit upon notification, is obliged to make payment. Hence the seller will receive a definite credit advice from the Bank.
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B. If the credit is irrevocable but not confirmed by the advising Bank, or if is a revocable credit in either of these case the second Bank is not liable to make payment, because it is merely acting as the agent of the issuing Bank. C. If is a important to the seller to have the invoice amount available immediately against the documents, he should inquire in advance with the advising in case whether it can make payment when the documents are submitted. In such case it is even better to ask contracting partner to open an irrevocable credit confirmed by the advising Bank, so that its definite obligation to any pay exists. 3.3.3.2 In case of usance credit Hence the seller will have to submit to the Bank a Bill of exchange drawn on a Bank, issued in accordance with the credit terms, together with the prescribed documents. This draft will be return to the seller duly accepted as soon as the Bank has examined the documents and found them to be in order. If desired, the seller can have the accepted Bill of exchange discounted. 3.3.3.3 In case of a Deferred payment period :
In this case the Bank will not pay the credit amount immediately as sight, but only after a specified period has elapsed. The Bank will give the exporter a receipt indicating the exact payment date.
3.4
Bills ( Export )
They deal with incoming L/Cs from various Banks. BASIC usually serves as an advising Bank ; But sometimes at request it also serves as confirming and negotiating Bank.
35 Amount in Million TK
16000 14000 12000 10000 8000 6000 4000 2000 0 2000 2001 BASIC Bank Exim Bank Prime Bank Dhaka Bank
Chart 3.11: Export amount in other Banks
Chart 3.11 shows the export amount in other Banks (2000 and 2001). As compared to other Banks BASIC export amount has increased in 2001. This department has to verify L/Cs. As a confirming Bank, BASIC takes responsibility over the issuing Bank. If the issuing Bank does not pay the beneficiary then BASIC has to as an advising Bank its job is to verify the L/C, and if it passes their checklist ; Advise it. If all documents are in accordance with the L/C then payment can be authorized.
6000 5000 4000 3000 2000 1000 0 1997 1998 1999 2000 2001 Export
Chart 3.12: Export Chapter 3: Foreign Trade Activities of BASIC
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Chart 3.12 shows the increasing export in million taka over time supported by BASIC Bank. 3.4.1 Export financing 3.4.1.1 pre shipment credit 3.4.1.2 post shipment credit Financing of exports constitutes an important part of a Bank activities. The exporter needs finance at various stages ; Some at the Pre shipment stage and the other of the post shipment stage. 3.4.1.1 Pre shipment credit Pre shipment credit, as the name suggest, is given to finance the Activities of an exporter prior to the actual shipment of goods. Pre shipment credit is essentially as short term credit and liquidated by negotiation or purchase of export bills covering the merchandise. Generally, the Bank grants pre shipment credit against irrevocable, confirmed, unrestricted letter of credit received by an exporter from an overseas buyer. Before extending pre shipment credit, the Bank takes into consideration the credit worthiness, export performance of the exporter and other documents and information which are otherwise required for section of loan as per the existing rules and regulation in force. Pre shipment credit given under the following arrangement : 1. Cash credit against hypothecation : under these arrangement a credit is sanctioned against hypothecation of the raw materials or finished goods intended for export. 2. Cash credit against pledge : Not infrequently, a cash credit limit is sanctioned against pledge of exportable goods or raw materials.
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3. Cash credit against Trust Receipt : Under this arrangement credit limit is sanctioned against trust receipt. 4. packing credit : This facility is generally extended when the goods become ready for the shipment for a very short period. Packing credit is given to the exporter against the security of railway receipt, steamers receipts etc. evidencing transformation of the merchandise of the goods. 5. Back to Back Letter of Credit : under these arrangement the Bank finances an export by opening a letter of credit on behalf of the exporter who has received a letter of credit from the overseas buyer but is not the actual manufacturers of producer of the exportable goods. 6. Advance under Red clause Letter of Credit : under the red clause Letter of Credit, the Bank provides advance to the exporter prior to shipment under the authority of the opening Bank. 7. Procedure for sanction of pre shipment finance : The following are some of the points that must be borne in mind for this purpose : a) Export Letter of Credit should from a reputable Bank abroad whose status has to be ascertained. The letter of credit should be irrevocable, unrestricted, and valid and preferably confirmed. b) Expiry date of letter of credit should be properly recorded in the book. c) The credit worthiness of the exporter and his exporter performance are to be invariably ascertained. d) The period for which the credit is sanctioned should be clearly mentioned. e) Incase of pledge Bankers effective control should be mentioned.
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f) Charges documents and other necessary documents as stipulated in the sanction letter should be properly obtained. g) Guarantee / Policies should be obtained under the export credit scheme administered by Insurance Company. 3.4.1.2 Post Shipment Credit Post shipment credit is given to the exporter by Banks after the actual shipment of goods. The necessity for post shipment credit arises because the exporter who have shipped the goods have to wait for a long receiving payment for the overseas buyers ; the period of waiting depends on the terms of payment. The exporter needs funds to carry on his normal export activities. The Bank are the natural sources to seek the finance for these activities. BASIC also finance the export at post shipment stage on verification of the credit worthiness and soundness of both the buyers and the seller by preparing application for limit (AFL). 1. Negotiating documents under letter of credit The document generally include (a) Bill of exchange or Draft (b) Bill of lading (c) Insurance Policy (d) Indent / Proforma Invoice (e) Invoice (f) Certificate of origin (g) Inspection certificate (h) Packing list (i) Weight list and (j) Any other documents specially called for in the letter of credit. 2. Purchase of DP and DA bills
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The provision of finance by way of negotiation of documents against payment (DP) and documents against acceptance (DA) bills is generally made in favor of the exporter who have been given bill purchase limit. The Bank should obtain instruction from the drawer of the bill covering the following aspects : (a) documents against payment or acceptance (b) Instruction to protest (c) Notice for dishonor (d) Collection charges and interest (e) The case in need (g) Presentation of the bill 3. Advance Against Bills for collection : The Bank generally accept bills for collection of proceeds when they are not drawn under a letter of credit or when the documents, even through drawn against in L/Cs contains some discrepancies.
3.4.2 Operating procedure

3.4.2.1 Telex / Swift Messages : The procedures are as follows according to the system : The following Telex and Messages to be received from the Register : 1. Export L/Cs 2. Amendments 3. Other messages : * Test Authentication * Acceptance of documents * Other Correspondence
Note : a. For unauthenticated messages telex is to be sent to our correspondent for authentication.
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b. Some messages are to be sent to local Bank for test authentication. c. Bills and L/C related messages to be filled in the respective fill.
3.4.2.2 Advising : The procedure are as follows according to the system :
* Take reference for Telex, SWIFT and mail L/Cs and amendments from the L/C register. * Fill up L/C checklist. * Prepare and obtain allocation regarding MOC * Insert L/Cs and amendments in the system. * Type L/C, amendment and authentication advising letter. * Making photocopy of all messages. * Short letter and Telex after signing L/Cs, amendments and authentication. * Mail information letter to beneficiary by courier. * Mail outside Dhakas L/C and amendments by courier and pack mail.
5000 4000 3000 2000 1000 0 1997 1998 1999 2000 2001 Advising
Chart 3.13: Total amount of Advising Chapter 3: Foreign Trade Activities of BASIC
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Chart 3.13 shows the total amount of export L/C advising by BASIC Bank. It is almost 80 percent of total export business of BASIC Bank. 3.4.2.3 Negotiation The procedure of negotiation are as follows according to the system : * Scrutinize documents. * Prepare sanction memo and obtain manager (RM). * System input in DCCS BPS and CAS. * Release Negotiation from DCCS. approval from relationship
3.4.2.4 Confirmation The procedure are as follows according to the system : * Obtain allocation through FSI. * Obtain clients consent regarding changes. * Prepare sanction memo. * Perform DCCS transaction and prepare voucher. * Type and mail add confirmation letter. 3.4.2.5 Document Mailing The procedure are as follows according to the system : * Mail negotiated, discrepant, CAD and local documents. * Type bill schedule. * Endorse bill of exchange and shipping documents. * Forward duplicate EXP L/C. * Endorse in L/Cs. * Photocopy of the documents.
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Shorts Bills. * Mail clients information * Cancel F.B. Stamp for usance bill. * Mail duplicate EXP L/C to Bangladesh Bank. 3.4.2.6 Transaction The procedure are as follows according to the system : * FW reporting. * Payment upon negotiation. * Negotiation reversal entry (after realization). * Collection payment * F.C. accounts transaction and tax deduction (for advance payment dices). * Advance payment. * Clean L/Cs transaction. * Sanction memo. * Negotiation in DCCS. * Accounting voucher preparation. * Telex/SWIFT message transaction. * L/C balance control. * Packing credit reconciliation. * Debit postage and F.B Stamp charges. * Debit advising commission (only for clients). * Entries for bill discounting and advising charges. * Local Bank advising Bank charges payment. * Collect DD and checks (for advising charges and advance payment). * Debit certification issuance charges. * Margin endorsement in B/B L/C file. * Payment endorsement in EXP. * Sort EXPS for Bangladesh Bank after signing.
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3.4.3 Methods of payment in export sales

The following methods of payment are ranked in the order of measuring risk to the exporter. In other wards, they are increasingly unfavorable to the exporter but favored by the importer. a. Cash in advance b. Documentary credit (note: this already explained above the bills import) c. Documentary collection (note: this defined to next section) d. Open document As a general rule, the greater the protection is afforded to the seller (exporter), the more risky or convenient are the payment terms for the buyers (importer) a. Cash in advance Cash in advance gives exporter the greatest protection because exporter either before shipment or upon arrival of the goods receive of payment. It allows the exporter to avoid tying his own funds. It is most useful when the importers country is facing instability such as political uncertainty. Sometimes exchange controls of the importers country may cause payment delays or even prevent method it most suitable.
Diagram 3.15 shows the procedure of cash in advance

IMPORTER BUYER DRAWEE
1. Pays exporter before exporter makes Delivery of goods
EXPORTER SELLER DRAWER
2. Delivery of goods upon receipt of Payment
Diagram 3.15: Cash in Advance Chapter 3: Foreign Trade Activities of BASIC
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3.4.3.1 Open account It is become an increasingly important payment method recently where the exporter ships the goods first and bills the importer later. The credit items are arranged between the buyer and the seller, but the seller has little evidence of the importers obligation to pay a certain amount at the certain date. This payment method is, therefore, risky for the seller. Diagram 3.16 shows open account procedure
1. Exporters ships the goods before being paid
2. Importer makes payment upon
EXPORTER SELLER DRAWER
Receipt of goods Diagram 3.16: Open Account
Although the payment method bears a higher risk for seller, open accounts sales have greatly expanded due to the major increase in international trade, and the sellers eager to major export volume. A comparative statement of the methods of payment is given below with the classification of risk category and merits and demerits of each method:
45 Method Cash in advance Sight draft Risk L M/L Chief advantages No credit extension is required. Chief disadvantages Can limit sales potential disturb some potential customer. Retains control and title; If customer does not or Ensured payment before cannot accept goods, goods are delivered. goods remains at port of entry and no payment is due. Bank accepts the If revocable, terms can responsibility to pay; change during contract payment upon week. presentation of papers. Lowers customer resistance by allowing extended payment. Facilities Lowers resistance. delivery; customer Same as sight draft, plus goods are delivered before payment is due or received. Capital tied up until sales; must establish distributions credit worthiness; need political countries; increased risk from currency controls. High risk; Seller must finance production; increased risk from currency controls.
Letter of credit Irrevocable Revocable Time draft
M M/H
M/H Consignment sales M/H
Open account
Simplified procedure; No customer resistance.
* L: Low risk ; M: Medium risk ; H: High risk 3.4.3.2 Principal Trade Product The composition, origin and destination of trade have changed little since 1980. Ready made garment (RMG) remain the biggest foreign earner, while textile and yarn remain the biggest import item. The RMG sector had exceeded the export target for 1998. According to the export promotion Bureau (EXB) and the world Bank, leather and fisheries have fallen short of their export target. The flood had adversely affected the fisheries and the leather sector, and it is unlikely that the export target for these sectors will be
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achieved. In import sector, BASIC Bank import has fallen in the year 2001 because of the imposition of restriction on L/C margin.
Principal Export Garments Jute Products Others 2001 50% 20% 30%
And
Principal Import Industrial Raw Material Garment accessories Capital Machinery Others 2001 30% 30% 20% 20%
Chart 3.l7: shows principal Export and Import in 2001
3.5 Collection
Collection are a method of settling the monitory side of international Trade transactions in both goods and services. Where goods are Involved, the documents allowing the buyer to take delivery of these Goods will be routed through Banks in the exporters and importers Countries.
6000 5000 4000 3000 2000 1000 0 1997 1998 1999 2000 2001 Export Bill Collection
Chart 3.18: Export Bill Collection Chapter 3: Foreign Trade Activities of BASIC
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Chart 3.18 shows that the total amount of export bill collection over the year. It is increased very sharply growth rate during the 1997 to 2001. There are two types of collection. The first type is documentary collection, which means collection of : * Financial documents and commercial documents. * Commercial documents only. The type is clean collection. It consist of one or more bills of exchange or promissory notes, for obtaining cash. Clean collection requires no other commercial documents to be attached. Please refer to the diagram on 3.19 for an explanation of various steps in the operation of the collection : 1. The exporter ships the goods to the importer according to the contract or importers instruction. 2. The exporter present documents to his Banker (known as remitting Bank) forward forwarding. 3. The remitting Bank forwards documents to its overseas correspondent Bank (known as presenting Bank) according to the instruction to the exporter in the collection order.
Note: The Bank actually making presentation of documents to the importer is known as presenting Bank. In most case, the remitting Bank forwards documents to the presenting Bank, which will further present documents to the importer. In exceptional case, ( for example, the remitting Bank has no correspondent relationship with presenting Bank designed by the principle ), the remitting Bank may forward documents to another Bank to buyers country. Such as its overseas branch, which is known as the collecting Bank as shown by the dotted arrows in our diagram. The collecting Bank then forwards documents to the designed presenting Bank.
4. The presenting Bank informs the importer of the arrival of the document and instructs him to make payment or acceptance according to the instruction of the collection order, against the release documents.
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5. The importer makes payment (under D/P) or accepts draft (under D/A) depending ion the instruction of the collection order. 6. The presenting Bank sends payment to remitting Bank immediately (under D/P) or upon remitting Bank immediately (under D/P) or upon maturity (under D/A). 7. The remitting Bank pays the exporter. Diagram 3.19 shows the collection procedure
1. Goods shipped to buyer
EXPORTER SELLER PRINCIPLE

7. Pays export 2. Forward Documents
4.Present 5. Makes payment or document accepts draft for payment 6. Sent payment 3. Forward Documents Forward Documents
COLLECTING BANK
PRESENTING BANK
REMITTING BANK
Diagram 3.19: Collection
Like a D/C application form, a collection order is designed for the customer to give clear instruction to the Bank so that the Bank can act strictly in accordance with the customer instructions. The Bank in processing is acting as agent for the customer to collect Proceeds. Based on the instruction of the collection order, the Bank known as remitting Bank, will pass on the same instruction to the overseas collecting Bank by
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means of its own covering letter known as Covering Schedule . Among all instruction, a collection order should contain at least the following instruction : * Name and address of the drawee; * Name of the documents and the number of originals and copies. * Whether the collection is under D/P or D/A? * Who is the bear of the charges? * Whether to store the goods and insure the goods in the case of dishonor; * Name, address and power of the case of need; * Amount to be collected.
3.5.1 Documentary collection

These collection entails the use of commercial documentation, they are concerned with goods and, although not obliged, Bank frequently take steps to protect the goods in their customers interests. 3.5.1.1 Outward documentary collection : 1. Receipt to client 2. Action by operating department 3. Action upon receipt of advise of collection paid 4. Bills purchases/Advances/Discounts 3.5.1.2 Inward documentary collection : 1. Checking of document and Remitting Bank instructions 2. Advise to the Drawee 3. Drawees right to examine the documents 4. Control over financial documents 5. Acceptance of usance drafts 6. Handling by the collecting Bank 7. Draft by Drawee 8. Days of Grace 9. Resident agent (In case of need)
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The payment instruction in a documentary collection is usually a bill of exchange, which is drawn by exporter (Seller) on the importer (buyer) The bill of exchange that can be drawn are the following two types : 1. Sight bill : A bill of exchange drawn by the drawer (exporter) at sight for immediate payment.
Number of items
9000 8000 7000 6000 5000 4000 3000 2000 1000 0 Collection
1997 1998 1999 2000 2001
Chart 3.20: Number of Collection
Chart 3.20 shows the number of BASIC Bank Collection during the year 1997 2001. Showing an increase till 2000 and then decline in 2001. 2. Term bill : (usance bill) A bill of exchange drawn by the drawer (exporter) and provides times for the drawee to pay at a fixed or determinable future date, such as 30 days sight. 3.5.2 Clean Collection Collection, which do not include goods but consist of documentation only, usually a bill of exchange, or occasionally a check, is known as clean
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collections. They are frequently used for the settlement of trade on open account and for service rendered, rather than goods supplied. They are very simple for Banks to process since goods are not directly involved. The term Collection applies to the procedure under which payment to the client for a check, draft or similar instrument is made only after the proceeds have been received from the Drawee. Thus Collection require special handling. Clean Collection are Collection of financial documents not accompanied by commercial documents. Financial documents are Bill of exchange, Promissory Notes, Checks, Payment receipts or other similar instruments used for obtaining the payment of the money.
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3.5.3 Advantages and Disadvantages of Clean Collection COLLECTION Advantages

can take possession of the goods before payment. * For D/A collection, the buyer can inspect and sell the goods before payment. Terms bill provide the buyer with a period of credit from the exporter. Hence its liquidity can improved.
Disadvantages
of exchange ( Notwithstanding the poor condition of the goods ). Legal action can be taken against him. * If he refuse to accept or pay a bill, pretest by the exporter against non acceptance or the exporter can take non payment, this can damage the reputation of the importer. * Loss of control over goods under D/A. * No guarantee that buyer will pay because Presenting Banks are to collect the Payment only. * In case of delays or difficulties, an exporter has to bear all the cost arising such as demurrage charges in the importers country. * He has to bear buyers credit risk and country risk.
IMPORTER * For clean collection, buyers * If he default on an accepted Bill
EXPORTER * It is cheaper than D/A.
* A presenting Bank may have influence over the foreign buyer and thus he more able to collect the payment than an open account basis. * Exporters may obtain immediate payment by negotiation of the bill or applying for Bank advance. * Exporter can retain control over the goods D/P. * Compare to open account, an exporter trading under collection basis can apply for bills advance from its Banker including clean collection or documentary collection.
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3.6 Banks facilities and Services to Exporter and Importer
3.6.1 Export facilities and Services a. Overdraft (O/D): Overdraft are granted to a customer in order to finance his daily business requirements and assist his cash flow position. b. Bills (Advance): The Bank may agree to offer thus type of finance if it thinks that the Exporter is reliable. c. Negotiation of export bills: After the beneficiary has effected shipment, he may present documents to his Banker for negotiation. Sight bills might be negotiated by the exporters Bank. d. Performance Bond: This is a written instrument, issued by a Bank or a surety company, stating that the exporter will comply with the terms of the contract with the buyer, otherwise the buyer will receive compensation for any losses suffered as a result of the exporters failure to perform under the contract. e. Guarantee/Indemnity: Guarantee and Indemnity are Banking service available to both exporters and importers. f. Red clause credit: It is a pre-shipment finance granted to the exporter by and at the risk of the issuing Bank. g. Packing loan: The purpose of packing loan is to help the exporter to buy raw-materials for production or to buy the necessary goods required by the D/C. h. Letter of Indemnity: It is a undertaking given by a Bank on behalf of his customer to another Bank. The Bank giving the promise is primarily liable.
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i. Leasing: This is a financial arrangement in which the Banks and their subsidiary companies known as lesser of leasing companies hold the title to property or equipment which the customer known as the leases use it. j. Hire purchase: This is a type of loan arrangement in which the acquisition of the asset is completed by way of installment finance. k. Factoring: Factoring is a special type of financing that Banks do not only take over the account receivables of their clients, but also provide additional services such as management accounting system collecting debts and cash flow management. 3.6.2 Import facilities and services a. Overdraft (O/D) b. Documentary Credit Facility (D/C) c. Loan against imported merchandise: LAM is an advance to the importer based on the imported goods as the security. d. Trust receipt facility: This is a document executed by a customer who agrees to hold the goods in trust for and on behalf of the Bank. e. Shipping Guarantee: A shipping guarantee is an undertaking given by a Bank on behalf of his customer to a shipping company to return the original transport documents. f. Collection
3.7 Critical Review of Foreign Trade Financing by BASIC

This section deals with the critical review of Foreign Trade Financing by BASIC. This is based of the observation made in this chapter and facts and, data collected during my Internship. Also in the basis of analysis made while reviewing the procedure of Import and Export Trade Financing through diagram and chart. The review of foreign trade financing are as follows:
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# Corporate clients are the major clients of BASIC for trade financing. The bulk trade financing of BASIC is attributed to obtain the business in Trade Financing of many private and NCB Banks. This due to reputation, Variety of services by BASIC throughout the country. BASIC use SWIFT in order to make the fund transfer faster, safer and easier. # KYC (Know Your Client) and AFL (Application For Limit) contain detailed information about clients profile and the limit for credit facilities, margin etc are always being updated and pursued by the BASIC staff. This systematic procedure has become a broad-based policy of BASIC being followed for trade financing. # The import in million taka has been declining in 2001 compare to 2000, while the export in million taka supported by BASIC has increasing over time. This demonstrates the role-played by BASIC in facilitating the trade. It is observed that export L/C advising have maintained a steady growth over the period of 1997 2001.BASIC is dedicated to being preferred L/C correspondent. # Among the problem in trade finance, in turn delays the issuance of L/C. The other major one associated with trade section (Export) is the lack of LAN facilities for which BASIC staff has to share with one another for their work. # It is observed that the total of export bill negotiation has a increase trend over the period of 1997-2001. # There exist diverse and variety of Bank facilities and services available in BASIC and being extended (by BASIC) to exporters and importers. These include, negotiation of export bill, guarantee, trust receipt facilities. # The general problems often encounter by BASIC in export financing procedure are specified below as respondent:
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1. Delay of shipment 2. Documents Discrepancy 3. Political Risk (Covered by UCP-500) While addressing these problems, BASIC responded by delaying payment and returning documents to issuing Bank as well.
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3.8 Remittance
Designing a global Remittance policy The task facing International financial executives is to co-ordinate the used of the various financial linkages in a manner consistent with value maximization for the firm as a whole. This tasks require the following four inter-related decisions : 1. How much money (if any) to remit 2. When to do so. 3. Where to transmit these funds 4. Which transfer method(s) to use A common or shared responsibility with cash development is the custodianship of the volt. Two groups independently monitor the inflow and outflow of financial instruments to and from the volt. Another task here is to sign foreign check and drafts. Bangladesh Bank checks deposits are processed for collection from Bangladesh Bank.
12000 10000 8000 6000 4000 2000 0 1997 1998 1999 2000 2001 Remittance
Chart 3.21: Remittance
Chart 3.21 shows Remittance in Million taka of BASIC Bank. It is shown that BASIC Banks Remittance business has been increased by steady growth rate during the year 1997 2001.
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Remittance Department This Department deals with the basic paying and receiving of funds into the Bank, for the clients. They transfer, or wire money abroad as well as locally through TT or SWIFT, etc. They deals with Foreign Currency time placements and balance certificates for clients. They work very closely with the cash department. It is the Remittance Department, which also issues monthly salaries both locally and Internationally for some of their clients. They also sell Government bonds to clients and organizations. Remittance Department works as an intermediary for clients and actions taken on their accounts. They are here to issue drafts as well as notify clients on changes on their accounts and the causes of those changes. Automatic credits and debits are not necessary done, especially in cases of International transactions. Sometimes credit will be available at a certain value date. They deal with fund transfers both locally and abroad as well. They deal with Inter Bank transfers, for example, if there is a Bank transfer where BASIC does not have a branch like Kurigram then they will transfer their fund to a Bank in Dhaka that has an office in Kurigram. Through these various functions, they are able to serve their clients. A principal mode of remitting fund abroad is through SWIFT Society for Inter Bank financial communication an online communication system. Other traditional mode TT. Telex, Mailing of Drafts, and transfer of TCs is also used. In both case of incoming and outgoing remittances the purpose is to be disclosed. Local fund transfer is also done here, ther areas of transfer activities include: 1. Issuance of Pay order 2. Salaries 3. TT to Chittagong 4. TT to other parts of the country
3.8.1 Inward Remittance

Function in Inward Remittance
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Step 1 : Fund Received Step 2 : Clarification by * Own Client * Other Client * Foreign Mission and International Bodies Step 3 : If the fund is for own client * Check faster account * Valid IRC Copy * Vat Register Certificate * C Form * Check the fund account * Message transfer date * process the fund
6000 5000 4000 3000 2000 1000 0 1997 1998 1999 2000 2001 Inward Remittance
Chart 3.22: Inward Remittance
Chart 3.22 shows that Inward Remittance has been increased very sharply during the year 1997 2001of BASIC Bank.
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If the fund is for other client * Inform the other Bank * C Form * Check the fund amount * Message transfer date * Process the fund If the fund is for Foreign Mission and International Bodies * Message transfer date * Process the fund Step 4 : Process the fund
3.8.2 Outward Remittance

Outward Remittance Bank Condition : Client must have an account in BASIC Process : 1. Travel Mucilaginous 2. Document transfer by SWIFT other transaction activities Types of Transaction (Remittance Department) : 1. Govt. Bond Sold 2. Govt. Bond Encasement 3. Govt. Bond interest paid 4. Other Bank check collection 5. Standing instruction 6. NFCD Open
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7. NFCD interest paid

6000 5000 4000 3000 2000 1000 0 1997 1998 1999 2000 2001 Outw ard Remittance
Chart 3.23: Outward Remittance
Chart 3.23 shows that Outward Remittance has been increased by steady growth rate in the year 1997 2001of BASIC Bank. 8. NFCD Encasement 9. Credit Advance/Debit Advance 10. Outgoing Payment Instruction 11. Collection item both local/Foreign 12. Incoming Payment Instruction 13. Pay order Installed 14. Salary Disbursed 15. Foreign Currency Draft Issued 16. Correspondence 17. Incoming Collection 18. Bangladesh Bank Check Collection
3.9 Introduction to Foreign Exchange

a. Foreign Exchange Business
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In Foreign Exchange Business, the Commodity is Currency, Buying and Selling of any currency against local currency is called Foreign Exchange Business. According to Bangladesh Bank order 1972, Foreign exchange means foreign currency and includes any Instrument drawn, accepted made and issued under clause 13 of section 16 of the Bangladesh Bank order 1972, all deposit and credit and balances payable in any foreign currency and any drafts, Travelers checks, Letter of Credit and bills of exchange, expressed or drawn in Bangladesh Currency but payable in any foreign currency. b. Foreign Exchange Rate The rate of exchange is the price of the one currency expressed inters of another currency. The rate at which exchange dealer would buy or sell foreign exchange in terms of the domestic currency is known as the rate of exchange. From the point of view of a resident of Bangladesh, the term exchange rate means the price of foreign exchange in terms of Bangladesh taka. c. Foreign Exchange Transactions All transactions related to FOREX are monitored and controlled by the Treasury Department of the Bank. This Department is responsible for providing all FOREX rate, interest rates. Basically there are two types of transactions taking place through out of the Bank spots and forwards. Sometimes there is a Swap deals (spot followed by a forward between 2 currencies). Approximately 95% of all FOREX transactions are spot transactions. Spot transactions could be a customer converting some amount of cash foreign currency to taka, debiting ones foreign currency account to remit some other foreign currency to a foreign country etc.
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3.9.1 Different terms used in foreign exchange

Terminology of foreign exchange market. A foreign exchange rate is the price of one currency expressed in terms of another currency. Spot rate : A spot rate is a rate quoted immediately, for delivery of the currency to the buyer within the working days. Forward rate : The exchange rate quoted for transaction which called for the delivery of the currency at future date. Inter Bank market : This is a foreign market for commercial Banks only and the rate is known as Inter Bank. A spot exchange contract is : * An immediately firm and binding contract between a Bank and its customers. * For the purpose or sale of specified quantity of a stated foreign currency. * At a rate of exchange currency quoted in the market. * For delivery of the currency within the working days of agreeing the rate. A forward exchange contract is : * An immediately firm and binding contract between a Bank and its customer. * For the purpose or sale of specified quantity of a stated foreign currency. * At a rate of exchange fixed at the time the contract is made. * For delivery at a future time agreed upon when the contract is made. A Forward Exchange Contract may be either fixed of option (a) Fixed means that performance of the contract may take place on a specified date in the future. (b) Option means that performance of the contract may take place, at the option of the customer, on any date before maturity. Importers who are not
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absolutely certain about the arrival date of shipping documents will purchase the option Forward contract and not fixed forward contract. * Premium and Discount Forward rate for a currency is quoted as an adjustment to the spot rate. This department is at a either Premium or a Discount. If the forward rate of a currency is more expensive than the spot rate, it is quoted in premium If the forward rate for a currency is more cheaper than the spot rate, it is quoted in discount. Direct and Indirect Foreign Exchange Rate : A direct foreign exchange rate (Direct quoted) is the amount of home currency for one unit of foreign currency. An indirect foreign exchange rate is the amount of foreign currency for one unit of home currency. * Buying rate and Selling rate Buying rate means the Bank is buying the currency. The customer is selling the currency to the Bank in this transaction. Selling rate means the Bank is selling the currency. The customer is buying the currency to the Bank in this transaction. Exchange rate are quoted in Buying rate and Selling rate, the difference of the rate is called Spread.
3.9.2 Relevancy of Foreign Exchange Revenue for BASIC

Revenue generated in Foreign Exchange (FOREX) business has turn out to be an important element for generating income for BASIC. As shown as Chart 3.24 FOREX Revenue constituted about on an average 23% of the interest income, which is very important operating activity of a Bank. Hence BASIC
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substantially depended on FOREX Revenue its Burden (Non-Operating expenses and Overhead).
800 700 600 500 400 300 200 100 0 1997 1998 1999 2000 2001 Foreign Exchange Revenue Interest Income
Chart 3.24: FOREX Revenue and Interest Income
It is clear from the following chart 3.25 that FOREX Revenue has been growing steady over time and hence has increasing trend. So, it overriding importance for BASIC cant be ignored and over emphasized.
300 250 200 150 100 50 0 1997 1998 1999 2000 2001 Foreign Excange Revenue Non - interest income
Chart 3.25: FOREX Revenue and Interest Income
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FOREX Revenue in relation to total income of BASIC is shown in the following chart 3.26. In BASIC about on an average total income come from the Revenue generated from the FOREX business.
1200 1000 800 600 400 200 0 1997 1998 1999 2000 2001 Foreign Exchange Revenue Total Income
Chart 3.26: FOREX Revenue and Total Income Note : Foreign exchange revenue include commission, exchange and brokerage earned by BASIC in foreign exchange business.
3.10 Factor Affecting Fluctuation In Exchange Rates

Medium and Long Term Factors : 1. Balance of payment If the country suffer from a balance of payment deficit, its currency will depreciate. If, on the other hand, a country experiences balance of payment surplus, its currency will appreciate. 2. Rate of Inflation If the country suffer from high inflation rate, its currency will depreciate. On the other hand, if a country experiences a relatively low Inflation rate, its currency will appreciate. 3. Interest Rate
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The currency, which gives a relatively high interest rate, will appreciate while the currency, which only offer a relatively low interest rate, will appreciate. Short Term Factors : 1. Official Intervention 2. Hot Money Hot Money refers to money, which flows in for speculative purpose. When Hot Money Flows into a country, its currency will appreciate and vice versa. Hot money is a very substantial forces affecting the movement in exchange rate. Its flows into a country interest rates are expected to rise, and especially when there is a speculation that the currencys exchange rate will appreciate. On the other hand, when Hot money flows out, it will put pressure on the countrys currency, resulting in depreciation.
3.10.1 Exchange rate in Bangladesh and its function over time

Bangladesh currency is pegged to composite of nine currency. In Bangladesh capital account transaction are regulated even through our currency is made convertible in current account of the Balance of Payment in 1993 and therefore our exchange rate is technically fixed. The four factors that are usually taken into consideration while determining exchange rate in Bangladesh are given below : a) Real affective exchange rate (REER has a positive relationship with exchange rate) b) Balance of current account (BOCA has a negative relationship with exchange rate) c) Foreign Exchange Revenue (FER has a negative relationship with exchange rate d) Unofficial exchange rate (UER has a negative relationship with exchange rate).
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Chapter: 4 Evaluation of Foreign Exchange Operation of BASIC

IMPORT BASIC Bank Exim Bank Prime Bank Dhaka Bank Amount in Million TK 2000 2001 7948.00 7542.80 4199.70 8519.70 11709.60 13427.60 13827.90 17649.10
BASIC Bank
IMPORT
1997 7071.56
1998 7208.20 1997 2178 2851 1997 45 1997 211.5
1999 7391.10 1999 4874 5843 1999 166
2000 7948.40
2001 7542.80
L/C Opened Import bill received
1998 4611 4853 1998 93 1998 254.4 1998 6774.7
Number of item 2000 2001 5058 4439 5759 5013 Number of item 2000 2001 150 182
No of guarantee
Guarantee
Amount in million TK 1999 2000 2001 268.5 342.4 503.3 Amount in million TK 1999 2000 2001 7321.3 7975.5 7350.5 7
L/C opened including Inland L/C
1997 3471.9
Chapter 4: Evaluation of Foreign Exchange Operation of BASIC
69
EXPORT BASIC Bank Exim Bank Prime Bank Dhaka Bank
Amount in million TK 2000 2001 5557.00 5957.90 2797.30 7442.2 12319.90 14186.60 6494.00 6182.50
BASIC Bank
EXPORT 1997 3754.8 7 1997 3003.8 9 1997 3161 1997 2553.1 1997 3793 1997 3985.2 4 1997 1903.6 4 1998 4420.2 0 1998 3536.1 6 1998 5533 1998 4492.0 1998 6640 1998 5858.60 Amount in million TK 1999 2000 2001 5060.3 5557.0 5957.90 3 0 Amount in million TK 1999 2000 2001 4048.2 4445.6 4766.32 4 0 1999 6407 Number of item 2000 2001 7070 6797
Amount of advising
Export bill negotiation
Export bill collection
Amount in million TK 1999 2000 2001 5211.4 5556.6 5948.4 1999 7688 Number of item 2000 2001 8484 8156
Collection
REMITTANCE
Amount in million TK 1999 2000 2001 6920.8 9459.0 10547.78 0 0 1999 3329.0 0 Amount in million TK 2000 2001 4445.50 5447.30
Inward Remittance
1998 2825.30
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Outward Remittance
1997 2081.6 0
1998 2960.30
Amount in million TK 1999 2000 2001 3591.0 5053.50 5100.48 0 Amount in million TK 1999 2000 2001 147.21 124.17 153.41 531.97 646.64 786.15 Amount in million TK 1999 2000 2001 147.21 124.17 153.41 262.26 230.83 255.61 Amount in million TK 1999 2000 2001 147.21 124.17 153.41 794.59 877.47 1047.76
Foreign exchange revenue Interest income
1997 95.39 346.43 1997 95.39 113.98 1997 95.39 460.41
1998 104.11 481.84 1998 104.11 127.28 1998 104.11 609.12
Foreign exchange revenue Non interest income
Foreign exchange revenue Total income
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72
Chapter: 5 Theoretical Deliberation of Foreign Exchange Risk Management 5.1 Introduction to Foreign Exchange Exposure
Exposure is risk out of exchange rate changes. The degree to which a participants in the foreign exchange market is affected by exchange rate changes. The possibility of such risk is much higher for the business that is engage in International Business Activities. In measuring the exposure two approaches are followed : # Accounting Approach # Economic Approach # Accounting Approach It is also term as balance sheet approach in which the balance sheet items are divided into current asset and liabilities and to point out which items would be affected by exchange rate changes and which item would not be affected. # Economic Approach It forecasted on the impact of exchange rate changes on the future cash flows on the firm I.e. the extent to which the present value of the firm would be affected by a given changes in exchange rate. There are three types of Foreign Exchange Exposure which are given below: # Economic Exposure # Transaction Exposure # Translation Exposure
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Conceptual comparison of difference between Economic, Transaction and Translation Exposure.
Chapter 5: Theoretical Deliberation of Foreign Exchange Risk Management
Movement of time when exchange rate changes Operating Exposure Changes in expected cash flows Arising because of an unexpected Changes in exchange rate. Transaction Exposure Impact of setting outstanding obligations entered into before Changes in exchange rates but To be settled after changes in Exchange rate.
Translation Exposure Changes in consolidated financial Statements causes by a changes in Exchange rate. Diagram 3.1: Shows movement in time when exchange rate changes
5.2 Economic Exposure

It measures the changes the value of the firm that from changes in future operating cash flow cause by unexpected changes in exchange rate. 5.2.1 Causes of Economic Exposure * If there are a deviation for the purchasing power parity i,e the real exchange rate changed. * Exchange rate change cause relating price change. * If the Govt. imposed tax on nominal profit rather than on real profit. * Some cash flows are fixed in nominal terms.
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5.2.2 Impact of Economic Exposure Any unexpected changes in exchange rate affect the cash expected cash flow depending on time horizon : 1. Short run Measure its impact on unexpected cash flows in one year operating budget. 2. Medium run a. Equilibrium case Impact would be on the cash flow express in two to five years operating budget assuming equilibrium conditions among inflation rate, interest rate or foreign exchange rate. Under equilibrium condition, the firm would be able to adjust crisis and other factor cause overtime to maintain expected level of cash flows. If equilibrium exist, the firms economic exposure would be zero. b. Dis-equilibrium case In these case, the time horizon is also two to five years for operating budget. In these situation, the firm would not be able to adjust crisis and factor cause and would cause economic exposure. 3. Long run Its impact would be on the long-run cash flows affect belong five years. 5.2.3 Managing Economic Exposure # Diversity Operations Making shift in sources of raw-materials, components, finished product. If spare capacity exist in one location production run can be landed in another location to minimize exchange risk. # Diversity in Financing source : The Firm can enjoy the benefit of International Fishers through affecting diversifying financing sources from different market if interest rate differential, do not equal except change exchange rate, the firm can take the advantage of lower cost of capital.
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5.3 Transaction Exposure

Transaction exposure measures the change in the value of outstanding financial obligations period to exchange rate change. If measures the gains or losses arises from the settlement of financial obligations in foreign transaction. 5.3.1 Causes of Transaction Exposure # Purchase or sell on credit whose price is stated in foreign currency. # Borrowing or lending funds and payment is made in foreign currency. # Being a party to an unperformed foreign exchange contract. 5.3.2 Managing Transaction Exposure # Contractual Technique Hedging in foreign market, money market, future market and option market. # Operating Strategy Using leads and laps in payment terms and setting re-invoicing centre. # Swap Agreement A foreign exchange Swap is an agreement between two parties to exchange a given amount of one currency for another and, after a period of time, to a give back the original amounts Swapped.
5.4 Translation Exposure

Translation Exposure arises from reporting and consul rating and to converting the results of foreign subsidiaries from local currency to home currency. 5.4.1 Methods of Translation Exposure a. Current and non-current Method : Under these method, the balance sheet items are divided into current asset and liabilities and non-
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current asset and liabilities. Current asset and liabilities are translated at current exchange rate and non-current asset and liabilities are translated as Historic rate. Income statement is translated at the
average exchange rate except for those Revenue and expenses associated with non-current asset and liabilities. b. Monetary and non-monetary Methods : Asset and liabilities are divided into monetary asset and liabilities and non-monetary asset and liabilities. Monetary asset and liabilities are translated at current exchange rate and non-monetary asset and liabilities would be translated as Historic rate. Income and expenses are translated into monetary asset and liabilities would be translated into average exchange rate. Income and expenses are related into monetary asset and liabilities would be translated into Historic rate. c. Temporal Method : The temporal method is a modifying version of monetary asset and liabilities method. The only difference between Temporal and monetary and non-monetary method is that the Inventory will be translated at fixed rate but it would be translated at current rate if the Inventory has been shown in the Balance Sheet at the LIFO Method. d. Current rate Method : The method utilize, the all items are translated at current exchange rate. 5.4.2 Managing Transaction Exposure a. Balance Sheet Hedged : Balance sheet hedge calls for having equal amount of exposed foreign currency asset and liabilities on the firms consolidated Balance Sheet. If these can be achieved for each foreign currency, Net transaction exposure would be zero. A change in exchange rate will change the value of exposed asset in equal but opposite direction. In opposite direction to change the value expose liabilities.
77
b. Contractual Hedged : Contractual hedge is a complete speculating operation and for it is not highly recommended as a means of managing exposure but even then some firms use these techniques through practicing in the option and future market.
5.5 Ways of avoiding Exchange Risk

1. Forward exchange contract : * An immediately firm and binding contract * For the purchase and sale of a specified quantity * At a rate of exchange fixed at a time the contract is made. * For delivery at a future time Types : Contracts a) Fixed performance at a specified data in the future b) Option : Performance at any data between two specified date (Note: Option under forward exchange contract should not be mixed up with currency option). 2. Currency Option 3. Open a foreign currency account Buy foreign currency and deposit it in a foreign currency account. Any receipts and payments are to be made from this account so as to avoid any losses in the movement of exchange rate.
5.6 Ways followed by BASIC to control Transaction Exposure and Exchange Risk
1. BASIC tries to solve transaction exposure (FX) by ways of foreign Bank settlement. The treasury department of BASIC focuses on the money market hedging while handling foreign exchange risk arising out of foreign exchange transaction. The treasury department is entrusted with managing the Foreign Currency Denominate assets and
78
its risk through involvement in money market. Treasury, at first convert the Foreign Currency and square its position neutral. As a result BASIC has placed the foreign currency in call money market.
2. Deposit of the money market hedge being followed, BASIC used to undertake the following two methods of hedging the FC denominated assets : * Forward market hedge : Based on clients instruction and their own requirement BASIC uses forward rate to hedge their position. * Swap : A foreign Exchange Swap is an agreement between two parties to exchange a given amount of one currency for another and, after a period of time, to give back the original amounts Swapped. BASIC provides the above provisions of hedging facilities to its clients in order to avoid foreign exchange risk.
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Chapter : 6
Summary and Conclusion 6.1 Summary and Conclusion

The BASIC Bank continued to succeed in attaining satisfactory results in increasingly competitive markets. This is due to the collective efforts made by the management, employees, clients and well-wishers. The board extends its gratitude to Bangladesh Bank, Ministry of Finance, Ministry of Industries and Bangladesh Small and Cottage Industries corporation for their co-operation in making operation success. The study focuses on the dimension of FINANCING FOREIGN TRADE BY BANKS The case of BASIC Bank Limited highlights the Bank performance, Reviewing Foreign Trade Management, Remittance, Management of Foreign Exchange Risk out of Foreign currency denominated transaction by BASIC. The overall finding of the study are summarized below :
# BASIC is profitable, because it has a largest Spread as compared to Burden. Spread is high enough to cover the Burden, thats why BASIC is profitable. The Spread ratio has been reduced from 1997 to 2001 and Burden ratio has been moved decrease from 1997 to 1998 but in 1999 it is increased by very sharply and during the 2000 to 2001, it is decreased because of increasing in non-interest expenses. The return measure shows that it is on an average increase gradually by BASIC. # While reviewing the procedure for Export and Import and Foreign Trade Financing the following features of BASIC have been emerged given as below :
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Chapter 6: Summary and Conclusion
# BASIC Bank have been a pioneer in correspondent Banking and is recognized in Industry leader in cash letter services. It was stated that BASIC Bank pursues quantity and provides exceptional values to their clients by their wide facilities of correspondent relationship.
In chapter three shows that Corporate clients are the major clients of BASIC for trade financing. The bulk trade financing of BASIC is attributed to obtaining the business in trade financing of many private and NCB Banks. This done to reputation, variety of services of BASIC throughout the country. KYC (know your client) and AFL (application for limit) contain detailed information about clients and profile the limit for credit facilities, margin etc are always being updated and pursued by the BASIC staff. This systematic procedure has become a broad-based policy of BASIC being followed for trade financing. It is analyzed that the both Inward and Outward Remittance of BASIC has been increased over the last five years. While analyzing the relevancy of foreign exchange revenue of BASIC it is turned out that foreign exchange revenue constitute a significant portion of its income. Hence, BASIC substantially depends on FOREX Revenue to reduce its Burden. Because of the significance of foreign exchange revenue for FOREX, the importance of FOREX business cant be ignored.
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In chapter five, Deals with Foreign Exchange Risk Management (Exposure). While highlighting all types of managing transaction exposure in foreign exchange business, this study investigates the ways followed by BASIC to avoid FOREX risk. While handling FOREX risk arising out of FOREX transaction, the treasury department of BASIC focused on money market hedge. BASIC used to follow two other method of hedging Foreign currency denominated asset. Based on client requirement, BASIC used forward rate to hedge their position and also use, Swap of converting the currency into one in order to manage its FOREX risk.
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6.2 Recommendation
83
APPENDIX
_____________________________________________________________
Chapter : 2
2.1 Total Asset 2.2 Total Investment 2.3 Operating Income 2.4 Operating Expenses 2.5 Net Income (PAT) 1997 94.61 1998 136.15 Amount in Million TK 1999 2000 2001 159.95 173.34 213.67 1997 98.95 1998 108.21 Amount in Million TK 1999 2000 2001 130.97 157.45 189.89 1997 270.58 1998 335.12 Amount in Million TK 1999 2000 2001 410.18 468.05 586.02 1997 645.52 1998 1067.8 7 Amount in Million TK 1999 2000 2001 731.15 1074.1 870.36 8 1997 4350.1 4 1998 5620.5 7 Amount in Million TK 1999 2000 2001 7173.1 7730.6 9721.93 7 7
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2.6
Productivity
1997 1.7126
1998 1.6700
Amount in Million TK 1999 2000 2001 1.5418 1.5479 1.6135
2.7 No of Employees 2.8 Manpower Productivity 2.9 1997 10.7221 1998 12.5024 Amount in Million TK 1999 2000 2001 12.311 11.639 10.32 Amount in Million TK 1999 2000 2001 3660.1 4618.7 6260.78 1 3 Amount in Million TK 1999 2000 2001 5647.9 5845.1 7512.62 3 5 1997 351 1998 372 1999 417 2000 453 Number 2001 497
Loan and Advance

2.10
1997 2474.2 5
1998 3034.6 4
Total Deposits
2.11 Spread/Working fund Burden/Working fund
1997 3541.6 0
1998 4551.1 8
1997 4.0587 0.3455
1998 4.0088 0.3392
1999 2.0573 1.8351
2000 3.0686 0.9492
2001 3.3986 0.6759
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2.12
YEA R VOLU ME OF WOR KING FUND INTE REST PAID MANP OWE R EXPO NSES OTHE R EXPE NSES NONINTE REST EXPE NSES TOTA L EXPE NSES INTE REST EANR NED NONINTE REST INCO ME TOTA L INCO ME SPRE AD BURD EN PROFI T
(V)
1
(K) 3 169.8 7 256.5 2 384.3 9 409.4 1 455.7 4
(M) 4 42.94 48.78 64.54 75.39 100.9 2
(O) 5 56.01 59.49 66.43 86.06 88.97
2 4350. 14 5620. 57 7173. 17 7730. 67 9721. 93
1997 1998 1999 2000 2001
N=M +O 6=5+ 4 98.95 108.2 1 130.9 7 157.4 5 189.8 9
E=K+ N 7=3+ 6 268.8 3 364.7 3 515.3 6 566.8 6 645.6 3
(R) 8 346.4 3 481.8 4 531.9 7 646.6 4 786.1 5
(C) 9 113.9 8 127.2 8 262.6 2 230.8 3 255.6 1
I=R+ C 10=8 +9 460.4 1 609.1 2 794.5 9 877.4 7 1041. 76
S=RE 11=83 176.5 6 225.3 2 147.5 8 237.2 3 330.4 1
B=NC 12=69 15.03 19.07 131.6 5 73.38 65.72
P=S+ B 13=1 1+12 191.5 8 244.3 9 279.2 3 310.6 1 346.1 2
2.13 Return Measure 1997 Interest Margin Cover 194.64 After tax return on equity 27.96 Net profit to gross income 21.48 After tax return on average 2.28 asset 1998 192.04 28.69 23.01 2.73 1999 112.67 27.37 20.45 2.50 2000 150.67 27.04 19.75 2.33 2001 173.91 28.04 20.51 2.45
Chapter : 3
86
3.2 IMPORT BASIC Bank Exim Bank Prime Bank Dhaka Bank
3.3 BASIC Bank FOREIGN EXCHANGE BUSINESS

Amount in million TK
IMPORT 3.4 L/C Opened Import bill received 3.5 No of guarantee 3.6 Guarantee 3.10 L/C opened including Inland L/C
1997 7071.56
1998 7208.20
1999 7391.10
2000 7948.40
2001 7542.80
1997 2178 2851
1998 4611 4853
1999 4874 5843
Number of item 2000 2001 5058 4439 5759 5013 Number of item 2000 2001 150 182
1997 45
1998 93
1999 166
1997 211.5
1998 254.4
Amount in million TK 1999 2000 2001 268.5 342.4 503.3 Amount in million TK 1999 2000 2001 7321.3 7975.5 7350.5 7
1997 3471.9
1998 6774.7
87
3.11 EXPORT BASIC Bank Exim Bank Prime Bank Dhaka Bank
3.12 BASIC Bank EXPORT 3.13 Amount of advising 3.14 Export bill negotiation 3.18 Export bill collection 3.20 Collection 1997 3793 1998 6640 1999 7688 Number of item 2000 2001 8484 8156 1997 2553.1 1998 4492.0 Amount in million TK 1999 2000 2001 5211.4 5556.6 5948.4 1997 3161 1998 5533 1999 6407 Number of item 2000 2001 7070 6797 1997 3003.8 9 1998 3536.1 6 Amount in million TK 1999 2000 2001 4048.2 4445.6 4766.32 4 0 1997 3754.8 7 1998 4420.2 0 Amount in million TK 1999 2000 2001 5060.3 5557.0 5957.90 3 0
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3.21 BASIC Bank REMITTANCE 1997 3985.2 4 1998 5858.60 Amount in million TK 1999 2000 2001 6920.8 9459.0 10547.78 0 0
3.22 Inward Remittance 3.23 Outward Remittance 3,24 Foreign exchange revenue Interest income 3.25 Foreign exchange revenue Non interest income 3.26 Amount in million TK 1997 95.39 113.98 1998 104.11 127.28 Amount in million TK 1999 2000 2001 147.21 124.17 153.41 262.26 230.83 255.61 1997 95.39 346.43 1998 104.11 481.84 Amount in million TK 1999 2000 2001 147.21 124.17 153.41 531.97 646.64 786.15 1997 2081.6 0 1998 2960.30 Amount in million TK 1999 2000 2001 3591.0 5053.50 5100.48 0 1997 1903.6 4 1998 2825.30 1999 3329.0 0 Amount in million TK 2000 2001 4445.50 5447.30
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Foreign exchange revenue Total income
1997 95.39 460.41
1998 104.11 609.12
1999 147.21 794.59
2000 124.17 877.47
2001 153.41 1047.76
BIBLOGRAPHY
_____________________________________________________________ # BASIC Bank Limited, Annual report 1997 2001 # web: www.basicbankbd.com # Foundation of International trade finance, KWLUK, The Hong Kong Institute of Bankers. # Multinational Business Finance Eiteman, Stonehill and Moffelt. 6th edition. # Multinational Financial Management, Allan C. Shapiro, 4th edition. # Business Finance, Prof. M Shahjahan Mina, 3rd edition. # Annual report of Exim Bank, Prime Bank and Dhaka Bank, 2001.
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1

Objective of the study

2 Chapter 1: Introduction and Background of the Study

3 Chapter 1: Introduction and Background of the Study

Table 1.1 shows the period covered during the internship

1.4 Limitation of the Study

4 Chapter 1: Introduction and Background of the Study

Chapter: 2 Organizational Profile of BASIC

6 Chapter 2: Organizational Profile of BASIC

2.2 Corporate Strategy

2.3 Organizational Goal

2.4 Organizational Structure

7 Chapter 2: Organizational Profile of BASIC

OFFICER IN CHARGE ACCOUNT

OFFICER IN CHARGE CREDIT

AGM INTERNA TIONAL

DGM INDUSTRIAL CREDIT

AGM ESTABLI SHMENT

8 Chapter 2: Organizational Profile of BASIC

2.5 Customer Service

2.6 Bank Performance at a glance

9 Chapter 2: Organizational Profile of BASIC

Chart 2.1: Total Asset Amount in Million TK

Chart 2.2: Total Investment Amount in Million TK

Chart 2.3: Operating Income

10 Chapter 2: Organizational Profile of BASIC Amount in Million TK

Chart 2.4: Operating Expenses

Chart 2.5: Net Income Amount in Million TK

Chart 2.6: Productivity

11 Chapter 2: Organizational Profile of BASIC Number of People

Chart 2.7: No of Employee Amount in Million TK

Chart 2.8: Manpower Productivity Amount in Million TK

Chart 2.9: Loan and Advance

12 Chapter 2: Organizational Profile of BASIC Amount in Million TK

Chart 2.10: Total Deposits

13 Chapter 2: Organizational Profile of BASIC

Chart 2.11: Spread and Burden Analysis

14 Chapter 2: Organizational Profile of BASIC

15 Chapter 2: Organizational Profile of BASIC

Chapter: 3 Foreign Trade Activities of BASIC

17 Chapter 3: Foreign Trade Activities of BASIC

3.2 BASIC Bank and Trade Finance

18 Chapter 3: Foreign Trade Activities of BASIC

19 Chapter 3: Foreign Trade Activities of BASIC

COUNTER IMPORT& EXPORT

IMPORT & EXPORT SCRUTINY OF L /C APPLICATION

Head of the section Get the L/C approval from the

Chapter 3: Foreign Trade Activities of BASIC

Chapter 3: Foreign Trade Activities of BASIC

Chapter 3: Foreign Trade Activities of BASIC

BASIC Bank Exim Bank Prime Bank Dhaka Bank

Chart 3.2: Import business of other Banks (2000 and 2001)

3.3.1 Import Procedure and Practice

Chapter 3: Foreign Trade Activities of BASIC

Chart 3.3: Import business of BASIC Bank

Chart 3.4: No. of L/C opened, Import bill received

Chapter 3: Foreign Trade Activities of BASIC

1997 1998 1999 2000 2001

Chart 3.5: Number of Guarantee

Chart 3.6: Amount of Guarantee

Chapter 3: Foreign Trade Activities of BASIC

3.3.2 Documentary Credit (D/C)

IMPORTER BUYER APPLICANT

EXPORTER SELLER BENIFICIARY