AN APPRAISAL OF LC OPERATION OF PRIME BANK LIMITED by noorbaduk

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									AN APPRAISAL OF LETTER OF CREDIT (L/C)
  OPERATION OF PRIME BANK LIMITED
A comprehensive study on Prime Bank Limited at Khulna Branch
 AN APPRAISAL OF LETTER OF CREDIT (L/C)
   OPERATION OF PRIME BANK LIMITED
     A comprehensive study on Prime Bank Limited at Khulna Branch



                        Internship Report
(Submitted in partial fulfillment of the requirements of BBA program)




                          Submitted By:
                     MD. Kamrul Hasan Noor
                         ID NO. 050350




                          Supervised By:
                         Tarun Kanti Bose
                             Lecturer




                          Submitted To:
                          Coordinator
               Internship & Placement Committee




                  KHULNA UNIVERSITY
              Business Administration Discipline
                        BBA Program



              Date of Submission: January 24, 2010
January 24, 2010

Coordinator
Internship and Placement Committee
Business Administration Discipline
Khulna University

Dear Sir,

Subject: An authorization letter for submission of internship report.

I have the pleasure to submit an elaborate internship report on “An Appraisal of Letter of
Credit (L/C) Operation of Prime Bank Limited” as the requirement of my BBA program.
I was assigned to work at Prime Bank Limited, Khulna branch, where I have learnt a great
deal about banking practices in Bangladesh. I am confident that my dealings with the
bank have certainly improved both my practical experience & theoretical knowledge to a
great extent.

It was undoubtedly a marvellous opportunity for me to work on this assigned topic to
actualise my knowledge of BBA program. I have written this report based on my
exposure to foreign exchange department such as Export & Import operation of Prime
Bank Limited, Khulna Branch. It is a great pleasure for me to present you this report on
practical practice in banking system.

I have given my utmost effort to reflect experience, skill and knowledge, which I acquired
at the time of orientation in Bank through this report. All of my efforts will be successful
if the report can serve its purpose.

Thank you very much for your kind cooperation and guidance.

Sincerely yours,

MD. Kamrul Hasan Noor
ID NO. 050350

Supervised by

Tarun Kanti Bose
Lecturer
Business Administration Discipline
Khulna University

                                             II
                          ACKNOWLEDGEMENT

To accomplish the objectives of the report, the assistance and contributions of a multitude
of people need to be acknowledged. At first I would like to express my gratitude to
almighty Allah for enabling me the strength and opportunity to complete my internship
report within the schedule time successfully.


I would like to express my gratitude to my supervisor Tarun Kanti Bose, Lecturer,
Business Administration Discipline, Khulna University; for all his kind cooperation to
the successful end to this report.


Special thanks to S.K. Anisuzzaman, Senior Vice President, Head of the Branch, Prime
Bank Limited, Khulna Branch; for giving me the opportunity to conduct internship
program on his bank.

Yet I have completed my study on Prime Bank Limited and it would not have been
possible without the help of some kind-hearted people in the bank. I would like to convey
my gratitude to Md. Abdur Raafi (FAVP, Prime Bank Ltd.), Gulshan Ara Ahmed
(Executive Officer, Prime Bank Ltd.), Tazbin Alam Khan (Senior Officer, Prime Bank
Ltd.) & Md. Hasan Kibria (Senior Officer, Prime Bank Ltd.) for giving me their
valuable time and my required information to prepare my report. Without their help and
co-operation, I cannot complete this report successfully.




                                            III
                              TABLE OF CONTENTS

CONTENTS                                                                 PAGE NO
Executive Summary                                                             VII
Chapter 1: Introduction
1.1 Origin of the study                                                        9
1.2 Objective of the study                                                     9
1.3 Scope of the study                                                         9
1.4 Methodology of the study                                                   9
1.5 Limitation of the study                                                   10
Chapter 2: Overview of the organization: Prime Bank Limited
2.1 History of the Bank                                                       12
2.2 Function of the Bank                                                      12
2.3 Branch Network                                                            13
2.4 Products and services                                                     13
2.5 Bank’s Corporate Organogram                                               14
2.6 Import-Export Business                                                    15
2.7 Year-wise performance at glance                                           16
Chapter 3: Literature Review                                                  17
Chapter 4: Letter of Credit Operation: A Theoretical Review
4.1 Letter of Credit                                                          21
4.2 Types of Letter of Credit                                                 22
4.3 Parties to a Letter of Credit                                             23
4.4 Uniform Customs and practices of L/C                                      24
4.5 Operational flow of the process                                           26
Chapter 5: Letter of Credit Operation: Practiced in Prime Bank Limited
5.1 Considered Factors of the L/C Applicants                                  29
5.2 Document Required while applying for L/C                                  29
5.3 Operations of Documentary Letter of Credit                                30
5.4 Bank Charges in different stages during L/C processing                    35
Chapter 6: Analysis
6.1 Analysis of Income from L/C                                               38
6.2 Analysis of Behavior or Trend                                             40
6.3 Analysis of Stability of Export-Import   44
6.4 Performance Analysis                     45
6.5 Correlation Analysis                     46
6.6 Regression Analysis                      47
Chapter 7: Findings and Conclusion
7.1 Overview of Findings                     51
7.2 Conclusion                               52
BIBLIOGRAPHY & REFERENCES                    53
                           LIST OF TABLES
Table 4.4.1 : Information of ICC& UCPDC                                  25
Table 5.4.1: Major charges in different steps for L/C processing         35
Table 6.2.3.1: Number of Import L/C Issued Per Country                   41
Table 6.2.4.1: Value of Import L/C Issued Per Country                    42
Table 6.2.5.1: Import L/C Issued Value Per Commodity                     42
Table 6.2.6.1: Analysis of Import-Export business in different Banks     43
Table 6.4.1.1: Import, Export and Non- Interest Income of 2006 to 2009   45




                          LIST OF CHARTS
Chart 4.5.1: Operational Flow of the Import-Export Process               27
Chart 6.1.1.1: Comparison of Sources of Income from Import L/C           38
Chart 6.1.2.1: Comparison of Sources of Income from Export L/C           39
Chart 6.1.3.1: Year-wise Income from Import L/C                          39
Chart 6.1.4.1: Year-wise Income from Export L/C                          40
Chart 6.2.1.1: Number of Import L/C Issued Per Year                      40
Chart 6.2.2.1: Number of Export L/C Issued Per Year                      41
Chart 6.4.1.2: Import, Export and Profit of 2006 to 2009                 45
                          EXECUTIVE SUMMARY


Bangladesh has passed a challenging and eventful year. Despite challenges, the passing
year was another successful year for the banking industry in Bangladesh. The banking
industry plays a vital role to the country’s economic growth.

Here the concern bank is the Prime Bank Limited, is well positioned to meet the
challenge and will take the opportunity of benefit from economic growth. With
establishing a worldwide network and relationship in international banking through its
518 foreign correspondents, the bank always tries to increase its foreign exchange
performance. The focus of the study was to analyze the entire process of Letter of Credit
(L/C) issuing of the bank, indentify the source of income from L/C operation and
behavior trend of the L/C operation of the bank. The study was conducted only on Prime
Bank Limited at Khulna branch and considered last four years (2006 to 2009) import-
export L/C data as sample size. Some statistical tools were used to analyze the data.

Bangladesh economy has been passed a turbulent year and its affect on the import-export
business in Bangladesh. Prime Bank Limited, Khulna branch’s foreign trade performance
is little-bit declined. Total import and export business transacted were BDT 176.18 crore
and BDT 14.43 crore respectively during 2009. The import business declined 15.18
percent but the export business grew up 89.87 percent. Stability analysis shows that
growth rate of Foreign Trade is not increasing at a desirable rate. The last two year
Foreign Trade volume is decreased that affects the branch’s non-interest income from L/C
operation.

The bank has to take special attention on import-export business. Overall, the bank must
emphasize on the domestic scenario more closely and analyze any certain trends and
strategies of their competitors and make a positive attempt to be more outward looking in
their goals.




                                            VII
  CHAPTER 1

INTRODUCTION




      8
1.1 Origin of the study

This report is a requirement for successful completion of the Internship of BBA program.
I have started my three month long internship program at Prime Bank Limited, Khulna
Branch on 01 October 2009 and at the end of the program I am submitting my internship
report heading on “An appraisal of Letter of Credit (L/C) operation of Prime Bank
Limited” which are focusing on the contribution of Export-Import Business to the overall
performance of bank especially on profitability perspective. This report is mainly based
on the information that I have collected on the Prime Bank Limited, Khulna Branch. I
have thoroughly analyzed those information and tried to make this study according to the
instruction and assigned requirements of my advisor.



1.2 Objective of the study

Before preparing the report, I would like to set up the objective of my study as-
      Define Letter of Credit and different stages of L/C processing
      Analyze the entire process of L/C issuing in Prime Bank Ltd
      Identify the sources of income from L/C operations in Prime Bank Ltd
      Identify the general behavior of the L/C issuance.



1.3 Scope of the study

A comprehensive knowledge on the organization and a thorough knowledge on the
Export-Import operation of the organization have come under the scope of the report.

The report is limited only to Import-Export Business of the Prime Bank Ltd, Khulna
Branch in last four years and L/C operation during January 2006 to December 2009.




1.4 Methodology of the study

1.4.1 Data collection: Both primary and secondary data was used for this report writing.

       1.4.1.1 Primary Data: Most of the information was collected from primary
       sources. This included the interviews with the managers and officials of the bank.


                                             9
       1.4.1.2 Secondary Data: For collection of data from the secondary sources I had
       looked the different website such as Prime Bank Limited, World Bank, Asian
       Development Bank, Bangladesh Bank, Ministry of Commerce, Export Promotion
       Bureau, etc. In need I had also taken help from different journals, newspapers &
       other available sources & relative materials.

1.4.2 Research Approach and Instrument: In this research informal questionnaire was
used to interview the bank officials instead of structured questionnaire. Observation and
experience of month long internship served as a major source of information.

1.4.3 Sample unit and sample size: Only the L/C issued from January 2006 to December
2009 in Khulna Branch of Prime Bank Ltd was taken as the sample unit and the sample
size includes all those L/Cs.

1.4.4 Analysis of Data: Some statistical tools like mean, standard deviation, variance and
coefficient of variance analysis were used in analyzing data. Moreover, correlation and
regression analysis were done for the measure of relationship of two variables and the
prediction of the value of one variable given the value of another.



1.5 Limitation of the study

The following limitations are apparent in the report:

      The project covers only last four years data gathered from the Khulna Branch of
       the Prime Bank Limited. It may not represent the overall scenario.
      By applying the coefficient of correlation I can get an idea about the direction of
       correlation but I cannot establish the exact degree of correlation between the
       variables.
      Regression analysis is likely to reach the conclusion that there is a strong link
       between two variables, whereas the influence of other, more important, variables
       may not have been estimated.




                                            10
         CHAPTER 2
OVERVIEW OF THE ORGANIZATION:
     PRIME BANK LIMITED




             11
2.1 History of the Bank

Prime Bank started its journey in the year 1995 with the firm commitment of providing
superior customer service with a difference. It started its Islamic Banking operations in
December, 1995. It was listed with both the bourses of Bangladesh viz. Chittagong Stock
Exchange and Dhaka Stock Exchange in 1999 and 2000 respectively through initial
public offering.

It was registered as Merchant Banker with the Securities and Exchange Commission,
Bangladesh in 2000 for starting its Investment Banking and Advisory services. In 2003
Prime Bank Limited became primary dealer for buying and selling securities under the
license issued by Bangladesh Bank.

It has opened its first fully owned subsidiary - Prime Exchange Co. Pte Ltd. in Singapore,
which started its operation from 8th July 2006 to offer remittance service to Bangladeshi
Nationals living in Singapore. With the aim to offer innovative banking service to the
Non Resident customers, Prime Bank Limited opened its first Offshore Banking unit in
2007 at DEPZ, Savar, a new dimension in its customer friendly business activities. The
bank opened one more Offshore Banking Units at CEPZ, Chittagong in 2008.With the
introduction of ATM in March 2008, Prime Bank Limited is now well poised towards
expansion of alternative delivery across the country.



2.2 Functions of the Bank

Prime Bank Limited provides complete range of services to its customers both domestic
and foreign. Rendering of General Banking Facilities & Utility Services, Deposit
Mobilization, providing various Credit Facilities including Working Capital to Industries,
Investment, Outward & Inward Remittances, Financing Import & Export etc. are the
major functions performed by Prime Bank Limited. In order to provide better services to
its Customers and Correspondents Prime Bank Limited is now more organized to handle
sophisticated operations through a well trained and efficient Manpower. Recently Prime
Bank Limited has entered into computer operations to provide prompt and efficient
services to the Customers.




                                           12
2.3 Branch network

The Prime Bank Group has a large and well distributed branch network of 70 full fledged
branches and 3 Off-shore Banking Unit & Booths in Bangladesh with a strong tradition of
service excellence. The Bank has also made its presence in Singapore through its fully
owned subsidiary Prime Exchange Co. Pte Ltd. for facilitating inward foreign remittance
to Bangladesh.



2.4 Products and Services

Prime Bank Limited will depend more on Technology and shall convert its products to
support the new core banking software. Given below the existing and future payment and
transaction products of Prime Bank Limited

        Financing IT sector
        Financing of industry
        Varieties Saving Scheme
        Ready cash
        Windows for SMEs
        Retail Banking
        Islamic Banking
        Internet Banking
        ATM Service
        SMS Banking ( Proposed)




                                          13
2.5 Bank’s Corporate Organogram




                                                                       Managing
                                                                       Director


     SEVP                                                                           HR       Corporate
                       DMD                DMD              ADDI. MD                                           DMD                SEVP
                                                                                  Division    Affairs



- ID                                                     -Islamic Banking
                       SEVP               SEVP                                                           - IT
- OBU                                                    -Internal Control
                                                                                                         - Retail Banking
                                                         & Compliance                                                       - LSSD
 (Back Office)                                                                                           - Cards
                                     -Credit Risk        ( Audit &                                                           - Branches
- CFRC                                                                                                                      Operation ( Other
                                                        Inspection,
 -Heads of         - Corp. Banking   Mgt & Admin.       vigilance)                                                          than Greater
Branches                             - Law &                                                                                 Dhaka Region)
                  - OBU                                  - Regulatory
 (Greater Dhaka                      Recovery           Issues
                   - MBID
 Region)                             - Treasury Front    - Finance
                   - SME
                                     Officer




                                                                             14
2.6 Import-Export Business

Prime Bank Limited has already established a worldwide network and relationship in
international Banking through its one overseas branch and 518 foreign correspondents.
The Bank has earned an excellent business reputation in handling and funding
international trade particularly in boosting export & import of the country. Total import
and export business transacted were BDT 91.4 billion and BDT 68.5 billion respectively
during 2008. The growth rate of the import business was 29.46 percent and the growth
rate of export business was 33.58 percent. It is one of the pioneers in promoting back to
back Letter of Credit for the RMG (Ready Made Garments) sector.

Prime Bank Limited always aims to increase its foreign exchange business. It has been,
however, handling bulk of the international businesses with the following multinational
Banks:

        Citibank N. A.
        American Express Bank Ltd.
        Standard Chartered Bank
        HSBC.
        Mashreq Bank

To boost up country's Export, Prime Bank Limited has been providing different kinds of
assistance to exporters. Some of which are as under:-

        Providing Pre-Shipment and Post-Shipment Finance, Export Guarantee and
         bonding facility etc.
        Concessional rate of interest for exports Finance.
        Back to Back L/C under bonded Warehouse facility
        Sight & Unasked L/C against Firm Contract for import of raw materials.
        Exporter's Retention Quota A/C both interest bearing and non-interest bearing.
        Export incentive Program.
        Banking at Export Processing Zone
        Scope for establishment of export oriented industry by 100% foreign investment
         and by joint-venture




                                              15
       Providing services to the exporter by utilizing most modernized technology like
        Swift, Internet and Fax etc. Any latest business information will be available at
        their website; http://www.primebank.com.bd/

Import Items
       Capital Machineries and Industrial raw materials.
       Fuel & Lubricants.
       Consumer goods: Fresh Fruits, Food Grain, CDSO (Crude Degummed Soyabean
        Oil), Construction Materials, Fertilizer, Chemicals, etc.

Export Items
       RMG, Shrimp, Jute & Jute goods, Leather.
       Tobacco, Ceramic tiles, Fresh vegetable.
       Tempered Quoted Glass, Bone crust, Betel-Nut etc.

2.7 Year wise Performance at a glance
                                                                                 (Taka in Million)
        Particulars               2005              2006            2007              2008

Authorized Capital                    4,000            4,000           4,000             10,000

Paid-up Capital                       1,400            1,750           2,275               2,844

Deposits                             36,022           54,724          70,512             88,021

Loans and advances                   31,916           45,010          57,683             75,156

Investments                           3,940            7,844          12,698             23,103

Import Business                      40,303           52,639          70,617             91,424

Export Business                      28,882           41,801          51,316             68,550

Foreign Remittance                    3,688           15,050          15,905             22,669

Profit after tax                         568           1,052           1,401               1,232

Earning per share                     40.59            60.11           61.57               43.32

Dividend                                 25%               30%             35%               25%

Return on average equity            22.51%           31.55%          30.68%             20.58%

Number of Branches                        41                50              61                70



                                               16
    CHAPTER 3

LITERATURE REVIEW




       17
Foreign trade can be easily defined as a business activity, which crosses national
boundaries. These may be between parties or government ones. Trade among nations is a
common occurrence and normally benefits both the exporter and importer. In many
countries, international trade accounts for more than 20% of their national incomes
(Hossain, 2009).

Foreign Exchange Department is international department of the bank. It facilitates
international trade through its various modes of services. It bridges between importers
and exporters. If the branch is authorized dealer in foreign exchange market, it can remit
foreign exchange from local country to foreign country. Some national and international
laws regulate functions of this department (Hasan, 2006). Export of goods into
Bangladesh is regulated by the ministry of commerce. The import and export both are
controlled by the Import and Export (Control) act 1950, Import policy order and public
notice issued by chief commissioner of import & export (Ahmed, 2004).

Every import and export involves documentary transaction of goods and services
between or among the parties involved. Most of the foreign trade and their exchanges are
now held in the form of documentary L/C (Ahmed, 2004). The importer when wants to
import goods from outside country at first he has to apply to a bank for opening a letter of
credit. It is a written undertaking of bank written to the seller/exporter issued at the
request of the buyer/importer to pay at site or a determinable future date (Ahmed, 2004).

Letter of credit (L/C) can be defined as a “Credit Contract” whereby the buyer’s bank is
committed (on behalf of the buyer) to place an agreed amount of money at the seller’s
disposal under some agreed conditions. Since the agreed conditions include, amongst
other things, the presentation of some specified documents, the letter of credit is called
Documentary Letter of Credit. The Uniform Customs & Practices for Documentary
Credit (UCPDC) published by international Chamber of Commerce (1993) Revision;
Publication No. 500 defines Documentary Credit (Hossain, 2009). As per Article no. 8
(a) A revocable credit is a credit which can be amended or canceled by the issuing bank
at any time without prior notification to the seller since to offers little security to the
seller (Ferdous, 2008). According to import policy unless otherwise specified, all import
is to be made by opening irrevocable L/C (amendment or cancellation with the agreement
of the opening bank, beneficiary and importer) (Ahmed, 2004), provided that the
stipulated documents are presented and the terms and conditions are satisfied by the


                                            18
seller. This sort of credit is always preferred to revocable letter of credit (Hossain, 2009).
As per Article no 9 an irrevocable credit constitutes a definite undertaking of the issuing
Bank. A credit cannot be amended or cancelled without the agreement of all parties. It
gives the seller grater assurance of payment. An irrevocable credit can be either confirms
or unconfirmed dependant on the desire of the seller (Ferdous, 2008).

Bangladesh exports a large quantity of goods and services to foreign households.
Readymade textile garments (both knitted and woven), Jute, Jute-made products, frozen
shrimps, tea are the main goods that Bangladeshi exporters exports to foreign countries.
Garments sector is the largest sector that exports the lion share of the country's export.
Bangladesh exports most of its readymade garments products to U.S.A and European
Community (EC) countries. Bangladesh exports about 40% of its readymade garments
products to U.S.A. (Hasan, 2006). Government used to give cash benefit in lieu of
bonded warehouse facility or duty drawback for export oriented domestic textile sector
and readymade garment industries. At present 25% compensatory assistance in cash is
admissible, in case of imported inputs, if the duty drawback facility has not been utilized,
or if local is used by a garment cum manufacturer of fabric’s i.e. composite textile mills.
For this purpose domestic handloom sector is admissible to get 10% cash incentives. If
the exporter is an intermediary buyer, the facility will go to the original producer of the
input. For quick disbursement of cash incentive to the exporter placement of fund in
advance made by the Bangladesh Bank to the head office Authorized Dealer banks. Cash
incentive is also admissible against export of artificial and natural flower, quilt, leather
goods and jute goods at the rate of 10% (Hossain, 2009).




                                             19
        CHAPTER 4
LETTER OF CREDIT OPERATION:
   A THEORETICAL REVIEW




            20
4.1 Letter of credit

Letter of credit is a documentary credit of a bank. This is a kind of pre-shipment
financing. Through this letter bank assures the exporter to give acceptance of his/her bills
or pay the value of the bill when importer fails to do so. In international trade, there is the
peculiar of distance and unfamiliarity between parties’ concerned exporter and importer.
If the importer fails to pay price, the exporter will find it difficult or too costly to recover
the amount. The importer is generally required to open a letter of credit with a certain
bank having branches or agent there to in both the importing and exporting countries.
Thus the importer proves his creditworthiness to the foreign exporter by obtaining a letter
of credit from the bank and sending the same to the foreign dealer.

Trade between countries is mainly financed through letter of credit. The international
chamber of commerce has defined a letter of credit as:

       “Any arrangement however named or prescribed whereby a bank (the issuing
       bank) acting at the request and in accordance with the instructions of a customer
       (the applicant of the credit), is to make payment to or to the order of a third party
       (the beneficiary ) or is to pay, accept or negotiate bills of exchange (drafts) drawn
       by the beneficiary, or authorize such payments to be made or such drafts to be
       paid, accepted or negotiated, by another bank, against stipulated terms and
       conditions.”

Letter of Credit is quite literally a letter that extends a line of credit to an individual or
business entity. A bank on behalf of one of its customers writes it. A letter of credit is a
banking mechanism that allows importers to offer secure terms to exporters.

Every Letters of Credit contain these elements:

          A payment undertaking given by the bank (issuing bank)
          On behalf of the buyer (applicant i.e.; importer)
          To pay a seller (beneficiary i.e.; exporter)
          A given amount of money
          On presentation of specified documents representing the supply of goods
          Within specific time limit




                                              21
          These documents conforming to terms and conditions set out in the letter of
           credit
          Documents to be presented at a specified place.
Thus when a stipulation is incorporated in the sale contract that the goods shall be paid by
a banker’s letter of credit , the seller need not to worry whether the goods will be cleared
by the buyer on arrival at the destination and the buyer need not block up his funds by
making payment in advance. As a matter of fact, a commercial letter of credit substitutes
the creditworthiness of the banker issuing the letter of credit since it is a promise by the
bank to pay or accept the bill, provided the exporter (the beneficiary) fulfills the terms
and conditions set out in the credit.



4.2 Types of Letter of Credit

Special Documentary Credit-

    Revolving L/C: The revolving credit is one which provides for restoring the credit
       to the original amount after it has been utilized. How many times it will be taking
       place must be specially mentioned in the credit. The revolving credit may either
       cumulative or non-cumulative. (According to Article No.18 (ii), Chapter 15 of
       GFET-1996, volume-1 this type of cannot be opened without BB approval)
    Back to Back L/C: is a new credit opened on the basis of an original credit (
       export L/C) in favour of another beneficiary under the back to back to bank
       concept, the seller as the beneficiary of the first credit offers it as security to the
       advising bank ( or negotiating bank) for the issuance of the second credit. The
       beneficiary of the BTB L/C may be located inside or outside the original
       beneficiary’s (export L/C) country.
    Transferable L/C: A transferable credit is one that can be transferred by the
       original beneficiary in full or in part to one or more subsequent beneficiary. Such
       credit can be transferred once only. That means second beneficiary has no right to
       further transfer the credit to other.
    Red Clause L/C: is a credit with special condition incorporate (is printed/ typed in
       red) into it that authorizes the confirming bank, or any other nominated bank to
       make advance to the beneficiary before presentation of documents. Under this
       credit the opening bank is liable for the pre-shipment advance made by the


                                               22
       negotiating bank, in case the beneficiary fails to repay or deliver the documents
       for negotiation.
    Green Clause L/C: is a credit with special incorporated into it wish not only
       authorizes the advising bank to grant pre-shipment advances but also storage cost
       for storing the goods prior to shipment. It is useful in situations where shipping
       space is not readily available, e.g. some African countries. It is so called so
       because the credit was originally written in Green Ink to draw attention to the
       unique nature of this credit. At present this type of Credit is not in use.
    Standby L/C: is a documentary credit or similar arrangement, however named or
       described, which represents an obligation to the beneficiary on the part of the
       issuing bank to:
   a) Repay money borrowed by the applicant, or advanced to or for the account of the
       applicant.
   b) Make payment on account of any indebtedness undertaking by the applicant
   c) Make payment on account of any default by the applicant in the performance of an
       obligation.

   This concept introduced by North American country. It is a type of Guarantee.



4.3 Parties to a Letter of Credit

The buyer, the seller, the issuing bank, the notifying bank, the negotiating bank, the
confirming bank and the paying bank are the parties to a letter of credit.

          Buyer/importer: the buyer/importer, who is applies to the bank for the opening
           of a letter of credit
          Seller/exporter: the seller/exporter is the beneficiary of the letter of credit
          Issuing Bank: the bank, which issues the letter if credit at the request of the
           buyer, is the issuing bank. The buyer gives instructions regarding the terms
           and conditions of the credit.
          Notifying Bank: the correspondent bank situated in the same place as that of
           the seller, which advices the credit to the beneficiary. But the notifying bank
           does not commit itself to any liability under the credit. Generally, the services




                                              23
           of a notifying bank are utilized when the credit is advised to the seller through
           a cable message.
          Negotiating Bank: the bank which negotiates the bills or drafts under the letter
           of credit. Generally, the same bank acts as the notifying and the negotiating
           bank.
          Confirming Bank: usually, the seller insists that a bank in his own country
           must confirm the credit. Such a bank is known as the confirming bank. The
           advantage of this confirmation from the seller’s point of view lies in the fact
           that he is assured of payment as soon as the shipment documents are presented
           his own centre. It may be noted that, the primary liability lies with the
           confirming bank, once the credit is confirmed by it, provided the seller fulfills
           the terms and conditions of the credit.
          Paying Bank: the bank on which the bill or draft is drawn. It can be the issuing
           bank, the notifying bank or the confirming bank.


The following section will gives a more detailed overview of how these parties participate
in the L/C operations.

A Letter of Credit, simply defined, is a written instrument issued by a bank at the
request of its customer, the Importer (Applicant), whereby the bank promises to pay the
Exporter (Beneficiary) for goods or services, provided that the Exporter presents all
documents called for, exactly as stipulated in the Letter of Credit, and meets all other
terms and conditions set out in the Letter of Credit. A Letter of Credit is also commonly
referred to as a Documentary Credit.



4.4 Uniform Customs and Practices of L/C

In order to avoid differences in interpretation of letter of credit terms, the International
Chamber of Commerce has formulated a set of rules to guide banks in the use of
documentary letter of credit, although the first attempt in this direction was made as early
as 1933, the latest version is contained in publication No. 290 which has come into
operation from October 1, 1975.




                                            24
It may, however, be pointed out here that the uniform customs and practice for
documentary credits are not law as such. The parties have voluntarily agreed to apply the
set of rules. Banks in 153 countries adhere collectively to the rules laid down in uniform
customs and practice. Bank in another 23 countries adhere individually to them. Banks in
these countries expressly state that the letters of credit issued by them are in accordance
with uniform customs and practice, publication no. 290.

UCPDC-500 is a set of rules formulated by International Chamber of Commerce (ICC) to
apply to all transactions in Letters of Credit carried out by banks. The purpose of the rules
is to bring about uniformity in the form of Letters of Credit and the practice and
procedures adopted by banks in handling the instruments. Banks all over the world handle
letters of credit, and variations in forms and procedures and the civil and commercial laws
of different countries may cause confusion in their dealings with one another. In order to
provide common understanding about the interpretation of the terms and terminology, a
uniform code is very essential. Therefore, the International Chamber of Commerce
formulated the Uniform Customs and Practice, which is universally accepted, and Letters
of Credit transactions everywhere are subject to this set of rules.

These uniform customs and practice for documentary credit were first published in 1933.
Revised versions were issued in 1951, 1962, 1974 and 1983. The last version of the
Uniform Customs and Practice for documentary credits was adopted by the ICC council
in 1993 and published as ICC publication no. 500 in may 1993.

The following table provides brief information of ICC & UCPDC-500

 Table 4.4.1 : Information of ICC& UCPDC
 ICC                            (International Chamber of Commerce) world
                                business organization
 Founded                        1919
 Membership and Association     Thousands of members companies and associations
                                of over 153 countries.
 Purpose                        To promote international trade, investment system
                                and market economy worldwide.
 ICC publication                    UCPDC-500, URR-525, URC-522 etc.
 UCPDC                              Uniform Customs and Practice for Documentary
                                    Credits.
 Application                        Import and export through L/C
 1st publication                    1933

                                             25
 Revised versions were issued     1951, 1962, 1974, 1983 and 1993
 Latest version               UCPDC (Rev. 1993)
 Effective from (in force)    January 01, 1994
 Number of Articles           49
 UCPDC-500 contains           Definition, liabilities and responsibilities of all
                              parties involved in L/C, Rules and Guidelines for
                              L/C operation (issue, advise, negotiation and
                              reimbursement).
                                                            Source : Secondary Data
Regulatory Provisions Regarding L/C

       Local Rules:
              Guidelines for foreign exchange transaction regulation on import
               (guideline-chapter-XV)
              The Import/Export Act 1950
              Import policy for the concerned year
              Customs duty, VAT, SRO, Tariff
              Rate of exchange and its application
              Fe Circular, IBD Circular
              Public notice issued by CCI&E Office


       Uniform Rules:
              UCUDC-ICC Publication No. 500
              URC-ICC Publication No.522
              URR-ICC Publication No.525
              INCOTERM-ICC Publication No.560
              Harmonized Commodity Description & Coding System (H.S. Code)


4.5 Operational Flow of the Process

The complete Import and Export process in includes the following stages. Both the
importer and exporter are involved in this flow. Some tasks are done by importer’s side
and some are done by exporter’s side and some are done by others. The process is very
much like the following:




                                            26
Chart 4.5.1: Operational Flow of the Import-Export Process


         Importer                           1
                                                                       Exporter
                                            6
                                                             9
                                      Ship of the
     2       14     15                                                      10      11
                                        Goods                     5

    Issuing Bank                                                      Negotiating
                                            13
                                                                        Bank
                           3
                                    Advising Bank
                                                        12                               8
         4
                                            7
                                                                      Confirming
    Reimbursing
                                                                        Bank
       Bank



Description of the Flow:

   1. Establish a buying and selling contract between the buyer and the seller.
   2. Submission of application with necessary documents to the bank to issue an L/C.
   3. L/C issue and advise it to the advising bank.
   4. Issue reimbursing instruction to the reimbursing bank.
   5. Advise the L/C to the exporter by the advising bank after verification of the L/C.
   6. Asking for the confirmation of the L/C to the importer.
   7. Issuing request letter by the issuing bank to the confirming bank (as per exporter’s
         requirement) to confirm the L/C.
   8. Issuing confirmation by confirming bank.
   9. Shipment of the goods.
   10. Submit required document to the negotiating bank for negotiation.
   11. Negotiate the bill by the negotiating bank and make payment to the exporter.
   12. Claim to the issuing bank or reimbursing bank for payment.
   13. Payment reimbursed by the issuing bank or reimbursing bank.
   14. Ask the importer to collect the documents from the bank.
   15. Collect documents from the issuing bank by paying the bank’s dues.




                                             27
          CHAPTER 5
 LETTER OF CREDIT OPERATION:
PRACTICED IN PRIME BANK LIMITED




               28
5.1 Considered Factors of the L/C Applicant

      Account holder of the bank: first of all, L/C applicant must be a client of the
       bank. If a new client comes in for opening L/C, he/she has to open an account
       with Prime Bank Limited first.
      Trustworthiness: this is the vital issue while considering about opening the L/C.
       the past experience of dealings with that person is considered. For a new
       applicant, his/her previous dealings with other banks are considered.
      Volume of business: the volume of business is also a major factor to be
       considered.
      Post-import retirement: Post-import retirement is another factor that will have to
       be considered for opening L/C.
      Detailed analysis of financial condition: Detailed analysis of financial condition
       of the applicant is required for the process, especially for a new applicant.
      And finally the personal relationship of the applicant with the bank or its high
       officials plays a vital role in opening L/C.



5.2 Documents required while applying for L/C

In credit operation, all parties deal with documents, and not with goods, services and/or
other performance to which documents may relate. Thus documentation has foremost
important in all types of L/C processing and operations. The following documents are
required for opening L/C with Prime Bank Limited for a new applicant.

      Trade License (up to date)
      Import Registration Certificate (IRC) (up to date)
      Tax Identification Number (TIN) (up to date)
      VAT Registration Certificate (up to date)
      Membership Certificate of a bona fide trade body (up to date)
      Chamber Membership Certificate
      L/C Application (in letterhead pad of the client)
      LCA (L/C Application) form-duly filled in and signed by the importer
      IMP Form- duly filled in and signed by the importer
      Charge documents


                                             29
       Supplier’s Credit Report
       Applicant’s Credit Report
       Other necessary papers depending on the nature of import.

5.2.1 Before opening a L/C, the issuing bank must check the following

       Applicant signature verified with bank record
       L/C application properly stamped
       Pro-forma Invoice/ Indent duly accepted by the applicant
       In case of import under indent the indentor Registration No with CCI &E and
        Bangladesh Bank permission No. has been quoted in the L/C applicant form.
       The importer entitlement as per IRC
       The items are not one banned list or restricted list in accordance with current
        Import Policy Order (IPO)
       Correct HS code
       Insurance cover note mentioning the item to be importer, the port of shipment &
        destination, mode of shipment and particulars of risk coverage
       Price verification
       Ensure the import items are banded or not. If not banded and other than capital
        machineries incorporated PSI clause in the L/C


5.3 Operations of Documentary Letter of Credit

The following 05(five) major steps are involved in the operations of a documentary letter
of credit.

    1. Issuing
    2. Advising
    3. Amendment (if necessary)
    4. Presentation and
    5. Settlement




                                              30
5.3.1 L/C Issuing Process

The generalized process of L/C issuing in Prime Bank Limited is explained below. For a
business customer approached for the first time, the process will start with opening an
account with the bank.

Step 1: Application in company’s letterhead pad

       First of all, the person shall have to submit an application written or printed in the
       company’s letterhead pad. In the application he/she will have to mention the name
       of the products to be imported, margin and so on. The applicant shall have to
       apply for the required forms of the bank.

Step 2: Discussion between Prime Bank Limited and the party

       After receiving the application form, the Bank pays attention to the issues
       mentioned below:

             The products that are going to be imported are considered. Because there
              are restrictions by the government on some products.
             The quoted rates are specially analyzed as there also some restrictions by
              the government.

Step 3: Collecting forms and depositing those with necessary documents

       In this step, the applicant collects the L/C application form, LCA Form and IMP
       Form from the bank. These forms are to be filled up by the client. The forms and
       all other necessary documents are then deposited at the desk of the dealing officer.

Step 4: Checking Documents

       All the documents are checked out by the dealing officer. He/she checks specially
       the quoted rates, the terms and conditions of the indent or pro forma invoice and
       the validity of the documents. Generally the person from whom the forms are
       collected is engaged in checking out the documents.

Step 5: Putting L/C No.

       After checking the documents and L/C No. is given. Generally the officer who
       checks the documents puts the L/C No.

                                             31
Step 6: Preparing offering sheet

       The offering sheet is prepared by the dealing officer. Usually the officer who
       checks the documents prepares the offering sheet.

Step 7: Singing offering sheet

       The L/C documents are forwarded to the head office to approve the documents.
       After receiving the approving letter from head office, the offering sheet is signed
       by the dealing officer to open the L/C.

Step 8: Typing the L/C

       After the approval of opening L/C is given, the L/C is typed in a structured
       format.

Step 9: Checking the L/C

       A final check is done to find out any discrepancies after the typing is completed.
       This is done by the dealing officer who is generally in charge of the whole
       process.

Step 10: Crediting the account of the customer

       On the basis of credit arrangement with the bank of import financing, the
       customer’s account is affected with certain credit.

Step 11: Dispatching L/C

       At the final stage, the L/C is dispatched through postage mail or SWIFT or so
       forth.

Although this is the generalized process for issuing L/C, for the speed of the process
sometimes the typing and checking of documents are done before the offering sheet is
signed. Then after signing the L/C it is dispatched.

5.3.2 Advising a letter of Credit

Advising through a bank is prior of apparent of the credit to the seller. The process of
advising a credit consists of forwarding the original credit to the beneficiary to whom it is


                                             32
addressed. Before forwarding, the advising bank has to verify the signature(s) of the
officer(s) of the opening bank in case of mail L/C & should check arrangement for
authenticity in case of SWIFT L/C and ensure that the terms and conditions of the credit
are not in violation of the issuing bank does not undertake any liability.

5.3.3 Amendments to Letter of Credit

An amendment to L/C means to make a change to the terms of the credit. After opening a
L/C either beneficiary or applicant sometimes observes that the terms and conditions laid
down in the credit are not complete to serve their purpose. They need some changes or
alteration to the credit to make it workable. This is done by the way of issuance of
amendment to the L/C.

At the request of the applicant, as the issuing bank Prime Bank Limited only can issue
amendment to the L/C. there can be more than one amendment to a credit. All the
amendments form an integral part of the original credit. L/C amendments are to be
communicated by authenticated SWIFT or mail. If there is more than one amendment to a
credit, all the amendments must bear the consecutive serial number so that the missing of
any amendment can be identified by the advising bank or the beneficiary.

If the L/C is an irrevocable one, the amendment cannot be done without the consent of
both the partied; i.e. the beneficiary and the applicant. Prime Bank Limited as the issuing
bank can make amendments but if the beneficiary does not accept the amendment, it will
not be effective. If the L/C is revocable, the applicant can make any amendment to the
L/C at any time he desires and such amendment will be effective if the credit is not
executed.

Prime Bank Limited generally asks for amendment on the following points:

      Extension of shipping date
      Extension of expiry date
      Increase or decrease of L/C value
      Increase or decrease of quantity of goods
      Change in description of merchandise
      Name and address of the beneficiary
      Inserting of new clause


                                             33
       Change the mode of transport
       Change of the loading port or destination
       Change of certain terms and conditions of L/C
       Terms of delivery; i.e. FOB, CFR, CIB
       Inspection clause



5.3.4 Presentation of Documents under L/C

The seller being satisfied with the terms and conditions of the credit proceeds to dispatch
the required goods to the buyer and after that, has to present the documents evidencing
dispatching of goods to the negotiating bank on or before the stipulated expiry date of the
credit. If the documents are found in order, the bank will pay, accepts or negotiate to the
issuing bank, either

= effect payment or

= reimburses in the pre-agreed manner.

5.3.5 Settlement of L/C

Settlement means fulfilling the commitment of issuing bank is regard to effect payment
subject to satisfying the credit terms fully.

    1. Settlement of Payment
    2. Settlement of Acceptance
    3. Settlement of Negotiation


1. Settlement of Payment

Here the seller presents the doc to the paying bank. In compliance presentation paying
bank makes payment to the beneficiary and in case this bank is other than the issuing
bank, then sends the doc to the issuing bank. If the issuing bank is satisfied with the
requirements, payment is obtained by the paying bank from the issuing bank.

2. Settlement of Acceptance

Under this arrangement, seller submits the documents evidencing the shipment to the
accepting bank accompanied by the draft drawn on the bank (where credit is available) at

                                                34
the specified tenor. After being satisfied with the documents, the bank accepts the docs
and draft if it is a bank other than the issuing bank, then sends the docs to the issuing bank
stating that it has accepted the draft and at maturity the reimbursement will be obtained in
the pre-agreed manner.

3. Settlement of Negotiation

This settlement procedure starts with the submission of docs by the seller to the
negotiating bank accompanied by the draft drawn on the drawee at sight or at a tenor, as
specified in the credit. After scrutinizing that the docs meet the credit requirements, the
bank may negotiate the draft. This bank, if other than the issuing bank, then sends the
docs and the draft to the issuing bank. As usual, reimbursement will be obtained in the
pre-agreed manner.



5.4 Bank charge in different steps during L/C processing

The following table shows the major cost accounts that the bank charges for different
steps in L/C processing:

 Table 5.4.1: Major charges in different steps for L/C processing
 L/C opening charges
 Import L/C     1st Quarter
                                        L/C value × .5%
                Subsequent Qtr.
 Export L/C     1st Quarter
                                        L/C value × .5%
                Subsequent Qtr.
 Postage charges
 Mail                                   Taka 300
 Courier                                At actual, Min. Taka 1,000
 SWIFT                                  At actual, Min. Taka 3,000
 Amendment Charges                      Taka 750
 Other Charges
 Export L/C advising                    Taka 750
 L/C transfer                           Taka 500 + Actual Telex Charge
 EXP issuing                            Taka 100
                                                                 Source: Primary Data




                                             35
   IMPORTER: IMPORT REGISTRATION CERTIFICATE, MEMBERSHIP CERTIFICATE, INDENT/PROFORMA INVOICE,
   INSURANCE COVER NOTE, APPLICATION


   BANKER: LCA, IMP FORM, APPLICATION AGREEMENT FOR CONFIRMED L/C

   BANKER: CHECK SANCTIONING APPROVAL, CREDIBILITY OF IMPORTER & SUPPLIER, IPO, HS CODE, ASCERTAIN
   DUTY

   BANKER: OPENING L/C- CREATING CONTRA LIABILITY; DEBIT IMPORTERS A/C FOR MARGIN, COMMISSION &
   OTHER CHARGES

   DESPATCH/TRANSMIT THE L/C TO THE BENEFICIARY THROUGH ISSUING BANK’S CORRESPONDENT IN THE
   BENEFICIARY’S COUNTRY

   RECEIPT OF IMPORT DOCUMENTS FROM NEGOTIATING/COLLECTING BANK


                                         SCRUTINY OF IMPORT DOCUMENTS


                                                   INFORM NEGOTIATING BANK ABOUT DISCREPANCSIES
      ARE THE                YES
      DOCS
      DISCREPANT?
                                                   INFORM OPENER ABOUT DISCREPANSIES


                               YES                            DO THEY AGREE TO ACCEPT DOCS
       NO
                                                              DESPITE DISCREPANSIES?
                                                                                                    NO

                                                          ASK NEGOTIATING BANK FOR DISPOSAL INSTRUCTION

LODGEMENT OF IMPORT BILLS
DR. PAD (BILL AMT+ INT – MARGIN)                                         YES
CR. H.O. A/C REIMBURSING BANK                        DO THEY AGREE
REVERSAL OF CONTRA LIABILITY                         TO ACCEPT DOCS               DELIVER DOCS TO THE IMPORTER
                                                     DESPITE                      FOR RELEASE OF GOODS
                                                     DISCREPANSIES?

                                                                               COLLECT PROCEEDS FROM IMPORTER
                                                                               DR. S.D. A/C MARGIN ON L/C
ASK THE OPENER TO TAKE DELIVERY OF                                             DR. IMPORTER’S A/C
IMPORT DOCUMENTS FOR RELEASE OF GOODS                             NO           CR. H.O. A/C COLLECTING BANK
                                                                               REVERSAL OF CONTRA LIABILITY

                                              SEND BANK DOCUMENTS
                                              DR. S.D. A/C MARGIN ON L/C
                                              CR. IMPORTER’S A/C
                                              REVERSAL OF CONTRA LIABILITY



                                              RETIRE THE BILL BY CREATION OF LIM WITH H.O. APPROVAL
                                   NO         DR. FROCED LIM (PAD AMOUNT + INTEREST)
        HAVE THEY                             CR. PAD
        RESPONDED?                            CLEAR THE GOODS THROUGH BANK’S APPROVED CLEARING AGENT AND
                                              STORE THE SAME UNDER BANK’S EFFECTIVE CONTROL RELEVANT
                                              EXPENSES IN CONNECTION WITH CLEARING OF GOODS TO BE DEBITED TO
                                              FORCED LIM A/C

                                              IF YOU AGREE, RECOVER FURTHER MARGIN FROM THE OPENER AND
                                   YES        RETIRE THE DOCUMENTS BY CREATION OF LIM-
     HAVE THEY                                DR. OPENER A/C FOR FURTHER MARGIN, IF ANY
     APPROACHED FOR POST                      CR. PAD
     IMPORT FINANCE?                          DR. FORCED LIM (PAD AMOUNT+ INTEREST)
                                              CR. PAD
                                              CLEAR THE GOODS THROUGH BANK’S APPROVED CLEARING AGENT AND STORE
                                              THE SAME UNDER BANK’S EFFECTIVE CONTROL RELEVANT EXPENSES IN
                                              CONNECTION WITH CLEARING OF GOODS TO BE DEBITED TO FORCED LIM A/C



                                                     36
CHAPTER 6

ANALYSIS




   37
6.1 Analysis of Income from L/C

In processing L/C, Prime Bank earns income through charging various activities relating
to it such as L/C opening charge, postage charge including mailing and SWIFT,
amendment charge, and miscellaneous charges which include issuance of Bank
Certificate, advice etc. as the amount of income of any party is considered as confidential
information and the author committed not to disclose the figures, the following section
provides only an idea of comparison of income from L/C related activities. In case of
Export L/C processing, all most all the Export L/C are contract L/C.


6.1.1 Comparison of Sources of Income from Import L/C


The following chart exhibits a comparison of income at Prime Bank, Khulna Branch,
from different activities relating L/C processing without mentioning the confidential
income amounts, during the last four year from 2006 to 2009.


Chart 6.1.1.1: Comparison of Sources of Income from Import L/C
                                                        The chart shows that L/C opening
                       Income                           charge acts as the major source of
                                                        income from import L/C as it
                  1%
             1%                                         provides more than ninety percent
             7%                                         of   the   total.   Earnings   from
                                      Opening Charge    miscellaneous       charges     and
                                      Postage
                                                        postage charges constitute just
                                      Amendment
                                                        below two percent of the bank’s
                                      Miscellaneous
                                                        total income from import L/C
                  91%
                                                        whereas income from amendment
                                                        is about one tenth of the bank’s
                                                        total income from import L/C.


6.1.2 Comparison of Sources of Income from Export L/C
The following chart exhibits a comparison of income at Prime Bank, Khulna Branch,
from different activities relating L/C processing without mentioning the confidential
income amounts, during the last four year from 2006 to 2009.


                                            38
Chart 6.1.2.1: Comparison of Sources of Income from Export L/C
                                                                           The chart shows that L/C opening
                                      Income                               charge acts as the major source of
                               2%
                                                                           income from Export L/C as it

  26%                                                                      provides more than half of the total.
                                                                           Earnings   from     postage   charges
                                                          Opening Charge
                                                                           constitutes about one fourth of the
                                                          Postage
                                                                           bank’s total income whereas income
                                                          Miscellaneous
                                                                           from miscellaneous is just two
                                            72%                            percent of the bank’s total income.




6.1.3 Year-wise Income from Import L/C

The following chart exhibits a comparison of year-wise income at Prime Bank, Khulna
Branch, from Import L/C with mentioning the confidential income amounts, during the
last four year from 2006 to 2009.

Chart 6.1.3.1: Year-wise Income from Import L/C

                                                                            The chart shows that in 2007 the
                                             112.63
                      120.00
                                                                            income was highest and afterwards
                      100.00
                                                                            the income is decreasing gradually.
   Income ( in Lac)




                       80.00                             64.41
                                                                            Comparing with year 2007, the
                       60.00                                     51.33
                                                                            passing year (2009) marks only
                       40.00        27.58
                                                                            half of the year 2007’s income
                       20.00
                                                                            from import L/C.
                          -
                                    2006     2007     2008       2009

                                                  Year




                                                                    39
6.1.4 Year-wise Income from Export L/C

The following chart exhibits a comparison of year-wise income at Prime Bank Ltd,
Khulna Branch, from Export L/C with mentioning the confidential income amounts,
during the last four year from 2006 to 2009.

Chart 6.1.4.1: Year-wise Income from Export L/C

                                                                  2.79          The chart shows that income is
                            3.00
                            2.50                                                increasing gradually in every year.
    Income ( in Lac)




                            2.00                      1.56                      In 2006 when export income was
                            1.50            1.02                                only forty-five thousand whereas
                            1.00                                                income in 2009 grows up at BDT
                                    0.45
                            0.50
                                                                                2.79 Lac that means the within four
                              -
                                                                                years income from export L/C is
                                   2006    2007     2008         2009

                                               Year
                                                                                growing up at more than five
                                                                                multiply.


6.2 Analysis of Behavior or Trend


6.2.1 Number of Import L/C Issued Per Year

The following chart shows the number of import L/C issued per year at Prime Bank Ltd,
Khulna Branch, during the period of last four year from 2006 to 2009.

Chart 6.2.1.1: Number of Import L/C Issued Per Year

                            200                                                   The chart shows that the highest
                                            153
   No of import LC Issued




                            150                           122                     no. of import L/C opened in 2007
                                                                          99
                            100                                                   and the lowest no. of L/C is
                                    64
                             50
                                                                                  opened in 2006. In 2009 import
                                                                                  L/C       open   number   is   not
                             0
                                   2006     2007          2008           2009     satisfactory compared with the
                                                   Year                           previous L/C issued number.




                                                                        40
6.2.2 Number of Export L/C Issued Per Year

The following chart shows the number of import L/C issued per year at Prime Bank Ltd,
Khulna Branch, during the last four year from 2006 to 2009. It is noted that this branch
only export Betel nut as export item.

Chart 6.2.2.1: Number of Export L/C Issued Per Year


                            50                                                 The chart shows that export L/C
                                                                      39
   No of export LC Issued




                            40                                                 advised is increasing gradually in
                                             26            26
                            30                                                 every year. In 2006 export L/C
                            20
                                  9                                            was only nine but after four year
                            10
                                                                               it grows up no of export L/C at
                             0
                                 2006        2007          2008      2009      39.
                                                    Year




6.2.3 Number of Import L/C issued per Country

The following table shows the number of import L/C issued to different countries from
Prime Bank Ltd, Khulna Branch, during the last four year from 2006 to 2009.



Table 6.2.3.1: Number of Import L/C Issued Per Country

Year                                    2006                2007            2008         2009           Total
INDIA                                    54                  114             72           31             271
SRILANKA                                  1                                   2            1               4
USA                                       1                                   1            3               5
INDONESIA                                 2                      3            3            5              13
CHINA                                     1                      5           14           32              52
AUSTRALIA                                 2                      1            5            1               9
S. KOREA                                                         3            1            3               7
NEPAL                                                           13           14            5              32
UAE                                                              1            1            4               6
OTHERS                                   3                      13            9           14              39


6.2.4 Country-wise import L/C issued value

The following table shows the import L/C issued value to different countries at Prime
Bank Ltd, Khulna Branch, during the last four year from 2006 to 2009.

                                                                     41
Table 6.2.4.1: Value of Import L/C Issued Per Country
                                                                    (Amount in Crore Taka)
Year                2006             2007             2008          2009        Total
INDIA               57.39           369.23           132.05          8.28       566.96
SRILANKA              .12                               .34           .25          .71
USA                 18.19                               .38           .16        18.74
INDONESIA             .33            2.09               .76          1.02         4.22
CHINA                 .13            2.64              1.06         27.47        31.30
AUSTRALIA            1.94             .16              3.12           .75         6.17
S. KOREA                             1.14               .04           .51         1.69
NEPAL                                5.41             26.10          5.99        37.50
UAE                                   .07               .36           .57         1.00
OTHERS              2.64            13.52             43.45        131.17       190.79


These two table show that India and China dominate the import market. The highest
number of import L/C opened the beneficiary country India. But we see an interesting
trend is that Bangladeshi import market is gradually grasped by China where India is
losing Bangladeshi import market day by day.



6.2.5 Commodity-wise Import L/C

The following table shows the import L/C issued value to different items at Prime Bank
Ltd, Khulna Branch, during the last four year from 2006 to 2009.

Table 6.2.5.1: Import L/C Issued Value Per Commodity
                                                                (Amount in Crore Taka)
Year                        2006                2007            2008              2009
Fresh Fruits                                      .77            1.86              2.72
Rice                        32.28             261.38           65.63
Wheat                       18.19              13.73           33.26            124.38
Sugar                        7.25              72.94           51.37
Lentils                      3.96                6.50            3.82            12.25
Onion                         .19                7.95             .36              1.76
Garlic                                                            .05              1.40
Chick Peas                   1.94                   .58          1.75               .77
Soyabean                    11.40                 13.62          7.05
Extraction
TSP                                                            30.45                26.14
Printing                     4.93                  5.68         5.35                 3.56
Materials
Accessories                   .04                  1.00            1.81               .88
Others                        .58                 10.12            4.96              2.32


                                             42
The table shows that highest imported item value is wheat. The Bangladeshi importer also
imports rice, sugar, lentils, onion, fresh fruits, TSP, accessories. But the shows interesting
figure where in the last year no import L/C is issued on Rice and sugar from Prime Bank
Ltd, Khulna Branch but the previous year those two items dominates the import market.



6.2.6 Analysis of Import-Export business in different Banks

The following table shows the import and export business in different banks at Khulna
region, during the last two years.

Table 6.2.6.1: Analysis of Import-Export business in different Banks
                                                                      (Amount in Crore Taka)
       Year                           2008                               2009
Name of the Bank       PBL           IBBL      ABBL          PBL         IBBL        ABBL
No of Import L/C        122           145          45         99           119         34
Import L/C Value      207.72         411.79        4.41     176.18      181.77        3.83
No of Export L/C         21           61           31         27           31          12
Export L/C Value        7.60         36.22         7.58     14.43        99.92        7.15

Here two other commercial banks are randomly selected which are involved in foreign
business operation in Khulna and after analyzing of these two banks import-export data
along with Prime Bank Limited’s import-export data, a conclusion can be drawn that
every bank’s import business is declining in 2009 compared with 2008 but export
business is indicating a positive growth or less declining position in 2009 compared with
2008. If we consider only the three conducting branch, Islamic Bank Bangladesh Limited
performance in foreign business operation is better than the two others.




                                              43
6.3 Analysis of Stability of Export-Import

              Standard Deviation, Variance and Co-efficient of Variation

                               Import        Export    FrnTrd
                  2006            80.76         2.02       82.78
                  2007           394.27         4.01      398.28
                  2008           207.72         7.60      215.32
                  2009           176.18        14.43      190.61
                  Sum            858.93        28.06      886.99
                  Avg.           214.73         7.02      221.75
                   SD            113.71         4.73      113.45
               Variance       12,929.45        22.32   12,871.64
              Co-efficient        52.95        67.38       51.16
              of Variation


              Growth Rate Import

                  Year       Import       Import Growth Rate
                  2006         80.76
                  2007        394.27                   388.20%
                  2008        207.72                   - 47.31%
                  2009        176.18                   - 15.18%
                   SD         113.71                   198.16%

              Growth Rate Export

                  Year       Export       Export Growth Rate
                  2006         2.02
                  2007         4.01                     98.51%
                  2008         7.60                     89.52%
                  2009        14.43                     89.87%
                   SD          4.73                      4.16%

              Growth Rate Foreign Trade

                  Year         FT            FT Growth Rate
                  2006        82.78
                  2007       398.28                    381.13%
                  2008       215.32                    - 45.94%
                  2009       190.61                    - 11.47%
                   SD        113.45                    193.71%




                                          44
Stability analysis shows that import volume is decreased after 2007 but export volume is
gradually increasing in every year. Growth rate of Foreign Trade is not increasing at a
desirable rate. The last two year Foreign Trade volume is decreased. As coefficient of
variance of import is less variable than the coefficient of variance of export, the import
growth rate is more consistence and more stable than export growth rate because.




6.4 Performance analysis

6.4.1 Import-Export Business

                                 Table 6.4.1.1: Import, Export and Non- Interest Income of 2006 to 2009

                                                                           (Amount in Crore Taka)
                                                 Import      Export        Non-Interest Income
                                   2006           80.76        2.02               0.28
                                   2007          394.27        4.01               1.14
                                   2008          207.72        7.60               0.66
                                   2009          176.18       14.43               0.54


The performance of the Prime Bank Limited in the last four (4) years especially in the
sector of import and Export and comparison of the data with the non interest income from
foreign exchange trade of the branch is shown above and graphically presented below:

                                  Chart 6.4.1.2: Import, Export and Profit of 2006 to 2009


                                 400
                                 350
          Amount in Crore Taka




                                 300
                                 250
                                                                                   Import
                                 200
                                                                                   Export
                                 150                                               Non-Interest Income
                                 100
                                  50
                                   0
                                          2006     2007    2008     2009




                                                               45
6.5 Correlation Analysis

A statistical tool like correlation analysis is done here to determine the relationship
between the following:

      Import business and non-interest income
      Export business and non-interest income

6.5.1 Correlation between Import and Non-interest income

                                                                        (Amount in Crore Taka)
                                                      Non-Interest
             Import      (����-���� ̅)                      Income         (����-����)
Year             X           ����      ��������                  Y             ����         ��������      ��������
  2006         80.76     (133.97) 17,948.63               0.28         (0.38)      0.14     50.24
  2007        394.27      179.54 32,233.71                1.14          0.49       0.24     87.08
  2008        207.72       (7.01)   49.18                 0.66          0.66       0.44    (4.63)
  2009        176.18      (38.55) 1,486.30                0.54         (0.12)      0.01      4.43
Sum/Avg.      214.73              51,717.82               0.66                     0.82    137.12
                                          ��������                       137.12
Co-efficient of Correlation:    r=                          r=
                                       ���� 2 × ���� 2               51,717.82 × .82

                                 r = 0.003215

Co-efficient of determination, ���� 2 = .000010336


6.5.2 Correlation between Export and Non-interest income

                                                                        (Amount in Crore Taka)
                                                      Non-Interest
              Export      (����-����)                                      (����-����)
                                                        Income
  Year           X          ����           ��������              Y             ����         ��������     ��������
  2006          2.02      (5.00)       24.95              0.28         (0.38)      0.14     1.87
  2007          4.01      (3.01)        9.03              1.14          0.49       0.24    (1.46)
  2008          7.60       0.59         0.34              0.66          0.66       0.44     0.39
  2009         14.43       7.42        54.98              0.54         (0.12)      0.01    (0.85)
Sum/Avg.        7.02                   89.30              0.66                     0.82    (0.05)


                                          ��������                       −.05
Co-efficient of Correlation:    r=                          r=
                                       ���� 2 × ���� 2               89.30 × .82

                                 r = -.00069

Co-efficient of determination, ���� 2 = .000000476

                                                 46
Correlation analysis shows that there is a low degree of positive correlation exists
between Import and Non-Interest Income as well as Export and Non-Interest Income that
means in both cases non-interest income increases when import or export business
volume increase. Import business generates more non-interest income compared with
export business because import and non-interest income correlation of determination
value is higher than export and non-interest income correlation of determination value.




6.6 Regression Analysis

A statistical tool regression analysis is done here to predict the unknown values of one
variable from known values of another variable.

6.6.1 Calculation of Regression Function of Import

                                                  (Amount in Crore Taka)
                          Import      Non-Interest
                                        Income
                  Year       X             Y            XY        ���� ����
                  2006     80.76          0.28         22.61 6522.18
                  2007    394.27          1.14        449.47 155449
                  2008    207.72          0.66        137.10 43147.6
                  2009    176.18          0.54         95.14 31039.4
                  Sum     858.93          2.62        704.31 236,158
                  Avg.    214.73          0.66


             XY −n XY              704.31−4×214.73×.66
Slop, b =                     b=                                    b = .00274
             X 2 −n X 2            236,158−4×214.73 2

Intercept, a = ���� - b����       a = .66-(.00274)×214.73               a = .0666



Regression Equation of Import, Non-Interest Income(Y)        = a + bX

                                                             = .0666+ (.00274)× X




                                            47
6.6.2 Calculation of Regression Function of Export

                                                   (Amount in Crore Taka)
                                       Non-Interest
                           Export
                                         Income
                  Year        X             Y           XY          ��������
                  2006       2.02          0.28         0.57       4.08
                  2007       4.01          1.14         4.57      16.08
                  2008       7.60          0.66         5.02      57.76
                  2009      14.43          0.54         7.79     208.22
                  Sum       28.06          2.62        17.95     286.15
                  Avg.       7.02          0.66


             XY −n X Y              17.95−4×7.02×.66
Slop, b =                      b=                                   b = -89.7386
             X 2 −n X 2             286.15−4×7.02 2

Intercept, a = ���� - b����        a = .66-(-89.7386)×7.02              a = 630.1713

Regression Equation of Export, Non-Interest Income(Y)        = a + bX

                                                             = 630.1713 + (- 89.7386)× X

6.6.3 Calculation of Regression Function of Foreign Trade

                                                         (Amount in Crore Taka)
                          Foreign       Non-Interest
                           Trade          Income
              Year           X               Y               XY         ���� ����
              2006         82.78            0.28            23.18     6852.53
              2007        398.28            1.14           454.04   158,626.96
              2008        215.32            0.66           142.11    46,362.70
              2009        190.61            0.54           102.93    36,332.17
              Sum         886.99            2.62           722.26   248,174.36
              Avg.        221.75            0.66


             XY −n XY                      722.26−4×221.75×.66
Slop, b =                             b=                                  b = 0.00274
             X 2 −n X 2                    248,174.36−4×221.75 2

Intercept, a = ���� - b����               a = .66 - (0.00274)×221.75          a = 0.0465

Regression Equation of Foreign Trade, Non-Interest Income(Y) = a + bX

                                                                 = 0.0465 + (0.00274)× X




                                             48
So, if the bank has a Non-Interest Income target of Tk. 1.00 crore in next year,

The bank is required to generate the following:

Regression Equation of Import, Non-Interest Income (Y) = 0 .0666+ (.00274)× X

Regression Equation of Export, Non-Interest Income (Y) = 630.1713 + (- 89.7386)× X



Target Import,        1 = .0666+ (.00274) × X

                       X = .9334 / 0.00274

                       X = 340.64 Crore



Or, Target Export,    1 = 630.1713 + (- 89.7386) × X

                       X = - 629.1713 / -89.7386

                       X = 7.01 Crore

And the combination of Import and Export, the Foreign Exchange Trade volume would
be BDT 347.65 crore to obtain targeted non-interest income 1.00 crore Taka.




                                             49
      CHAPTER 7

Findings and Conclusion




          50
7.1 Overview of Findings

      The whole process of Letter of Credit is highly dependable on the personal skills
       of the officers engaged in the process.

      For regular and old client, Letter of Credit issuance does not take more than an
       hour. But for new clients, it generally takes around one to two hours, provided no
       discrepancy found in documents deposited.

      Relationship and introduction with the client plays a vital role in processing Letter
       of Credit, especially the time factor.

      More than three-forth of the total Foreign Trade’s income is come from opening
       charges of Letter of Credit. Other sources of income from Letter of Credit
       includes: postage charges, amendments charges, advise charges etc.

      China and India are the major countries from where exports come against the
       Import L/C.

      The branch issues varieties items L/C but the highest L/C value item is wheat.
       Rice and sugar two dominants import item L/C is not issued in the last year.

      Stability analysis shows that import volume is decreased after 2007 but export
       volume is gradually increasing in every year. Growth rate of Foreign Trade is not
       increasing at a desirable rate. The last two year Foreign Trade volume is
       decreased.

      Performance analysis shows that non-interest income is gradually decreasing in
       the last two year. In the year 2007 this branch gained its highest non-interest
       income of Taka 1.14 crore. And the highest amount of export reaches in the year
       2009 of Taka 14.43 crore.

      Correlation analysis shows that there is a low degree of positive correlation exists
       between Import and Non-Interest Income as well as Export and Non-Interest
       Income.




                                                51
7.2 Conclusion

In the end it can be concluded that Prime Bank Limited is performing its foreign trade
performance in a very efficient way. Prime Bank Limited is well positioned to meet the
challenge and will take the opportunity of benefit from economic growth. The bank is
serving as a partner and advisor of the clients to trade, commerce and industry. This
strategy is supported by wide spectrum of products and services. Prime Bank Limited is
maintaining a well-structured communication from top to bottom level. Each official
treats the foreign trade service of the bank as a very important part of the bank to succeed
in the corporate world. Prime Bank Limited places utmost importance on managing
foreign exchange. The bank always tries to increase its foreign exchange performance. As
the bank is located in commercial area, it is a great opportunity for the bank to attract
customers. The Bank has been functioning with a network of total 70 branches. Besides,
Prime Bank Limited has at present 518 Foreign Correspondents abroad and regularly it
increases the number of foreign correspondents which helps to explore its business area.
Though it has some problem with its foreign exchange department, it is always trying to
accelerate its foreign trade. Overall, the bank must make a positive attempt to be more
outward looking in their goals and aware of what is happening. They must also emphasize
on the domestic scenario more closely and analyze any certain trends and strategies of
their competitors. The bank must accept any failures and think of them as an objective to
pursue future goals instead of blaming such failures on other factors.




                                            52
                          BIBLIOGRAPHY & REFERENCES

Ahmed Md Nasir (2004), A study on Foerign Exchange Management of Islami Bank
Bangladesh Limited, Khulna, Business Administration Discipline, Khulna University, P.-
51, 67

Gupta, S.P & Gupta, M.P (2003) “Business Statistics”, Sultan Chand & Sons
Publications, 12th Edition.

Ferdous S.M. Tanvir (2008), Documentary Credit Tracking System of IBBL, Department
of Business Administration, International Islamic University Chittagong, Dhaka Campus,
P.-36

Hasan Md. Monjrul (2006), An overview of Consumer Banking, “Improvement of
operational procedure for better customer satisfaction” of Premier bank Dhanmondi
branch, Master of Science Business Administration Stamford University, Bangladesh P.-
36, 76

Hossain Aashek (2009), Foreign Trade Procedures of National Bank Limited (NBL),
Bachelor of Business Administration, Southeast University, P.-26, 31, 49

http://www.bangladesh-bank.org

http://www.adb.org

http://www. blogs.worldbank.org

http://www.epb.gov.bd

http://www.mincom.gov.bd

http://www.primebank.com.bd

Kothari C.R., (2004) “Research Methodology”, New Age International Publications, 2nd
Edition.

Prime Bank Limited, Annual Report 2006, 2007, 2008




                                           53

								
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