International Banking: Import and Export Financing

Import Financing:
Commercial banks play an important role in the financing of foreign trade of a
country. The documentary credit constituents the most important method of
financing import trade.
1. Payments Against Documents [PAD]
B opening letter of credit on behalf of buyer (importer) in favor of the seller
(exporter) banks undertake to make payments to the seller subject to shipment of
goods and submission of shipping documents in strict compliance with letter of
credit terms, giving title to goods to the buyer.
Before opening L/C it is necessary for the importer to obtain a letter of credit limit
sanctioned for him by the bank. For fixing the L/C limit, the bank would require the
detailed information on the
a.
b.
c.
d.
e.
f.

Nature of the organization of the importer

The type, quantity and value of the goods to be imported
Amount of the L/C required
Terms of payments
Financial assistance required from the bank
Importers current liabilities with the bank as well as with other banks
etc.

Only if the bank is satisfied with the credit worthiness of the importer and his actual
requirements, it may sanction a limit requiring an appropriate margin to be
deposited by the importer. Each time the importer is requested to apply to the bank
in the prescribed application form for opening L/C. this application for L/C is a
stamped documents which, besides giving details required for opening the credit,
also acts an agreement between the issuing bank and the importer (applicant). The
bank should verify the particulars required for opening the credit those are clearly
stated in the application.
If shipment is made and shipping documents are submitted by the exporter
(beneficiary) in terms of L/C, it becomes obligatory for the bank to honor its
commitment to pay import bills. If the documents are in order, payments will be
effected by negotiating bank and the relative documents to be forwarded to the L/C
opening bank. The negotiating bank will debit the opening banks account with it or
claim reimbursement from the reimbursement bank as instructed in the L/C by the
opening bank.

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International Banking: Import and Export Financing

Advising/Confirming

Make payments (7)

Instruct to
pay or
reimburse

Make payments by negotiating documents (5)

Documents (6)

Documents (4)

Issue LC (2)

Submitting

Exporter
Advising and / or

Applies in writing to issue LC (1)

Presents Documents (8)

Issuing

Sales / Purchase
contract

Or

Paying/

Pay or reimburses

Makes payment against

Importer

Figure: Step-by-step Process of Letter of Credit (L/C)

Payment of Import Bills:
If the documents received in order, the bank will lodge the shipping documents in
their
book
and
the
debit
entry originated
their against
by
the
negotiating/reimbursement bank is responded to the debit of advance portfolio
Payment Against Documents (PAD) and an intimation is sent to the importer asking
him to retire the import bills immediately. Thus the liability under L/C is converted to
banks advance. If the importer retires the bill, the transaction ends there. If any
discrepancies are found in the documents, the bank should immediately give a
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International Banking: Import and Export Financing

notice to the negotiating bank. The notice must state that the documents are being
returned and they are required to refund the amount already paid if the documents
are ultimately refused by the importer.
2. Loan Against Imported Merchandise [LIM]
At the time of opening L/C, the banks obtain an agreement from the importer on
stamped paper which provides for financing and if necessary, clearing and storage
of goods by debiting importers account at his risk and responsibilities. Importer
may also request the bank on banks prescribed form for clearing of goods from the
port when the consignment arrives. In most of the cases, banks extend credit
facility to the importer for retirement and clearing of the consignment. In that case,
the bank charges further margin from the importer to cover the custom duty, sales
tax or VAT etc.
In both the cases, whether the importer requests the bank for clearance of goods or
fails for retirement of documents on payment, the liabilities under PAD is covered to
Loan against Imported Merchandise (LIM) account and the overdue interest from the
date of negotiation to the date of transfer to LIM account is charged and
incorporated to LIM account. The advance against merchandise account is a loan
account and only amounts for clearance charges such as, custom duty, sales tax or
VAT etc. are allowed to be debited to the LIM account.
3. Loan Against Trust Receipt [LTR]
If the importer has an agreement of cash credit facilities (pledge), it is essential that
the goods are in the possession of the bank and not delivered to the importer. This
difficulty is removed by taking a Trust Receipt from the importer and allowing him to
take delivery of the goods and place them in the importers godown. Letter of Trust
Receipt is a document duly stamped and signed in the banks prescribed format by
the importer before getting delivery of the importer shipping documents. In the
trust receipt the importer specifies the goods and agrees that he is holding the
goods not as their owner but as an agent for the bank until the goods are sold or
used.
Bank may release the goods against the trust receipt of the importer depending the
rating of the customer, the bank may:
Allow the importer to use the product as well as sell the goods
Allow goods to be used for manufacture only
However, in practice, trust receipt does not secure the position of the bank to a
significant extent. The risks are:
The importer may repledge the goods with another bank or person
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International Banking: Import and Export Financing

The importer may sell the goods without remitting the amount into the bank
In case of insolvency of the importer, it would be difficult to trace the
proceeds of the goods
4. Usance Letter of Credit Payable at Sight [UPAS]
UPAS is another way of flexible trade finance. It refers to L/C arrangement where the
issuing bank grants financing for the importers, the importer makes forward
payment whereas exporter makes sight collection from drawee bank that is
responsible for discounting.

Export Financing:
Commercial banks play an important role in providing adequate financing facilities
at a cheaper cost to exporters. In order to assist the exporters to make shipment for
goods to the foreign buyers, they need finance to the following stages:
i.
ii.

Pre-shipment finance
Post-shipment finance

Banks in Bangladesh normally provide 75 to 90 percent of export order as preshipment finance.

Pre-shipment Finance
Pre-shipment finance, as its name itself suggests, covers the credit extended by
banks to exporter prior to the shipment of the goods. Such credit is granted to the
exporter for procurement and processing of raw materials, manufacturing of
finished products, packing and transporting goods for export. In other words, it is
the facility extended to the exporter before and till the goods are shipped for
exporting to foreign countries.
The exporters may borrow money or avail facility during pre-shipment stages in the
following ways:

a. Packing Credit (PC)

Packing credit is a short-term advance with a fixed repayment date granted by the
bank to an eligible exporter for the purpose of buying, processing, manufacturing,
packing and shipping of the goods for export. The credit is gradually extended for
payment of freight, handling charges, insurance and export duties.
A packing credit advance does not normally extend beyond 180 days and has to be
liquidated by negotiation/purchase of the export bills covering the particular
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International Banking: Import and Export Financing

shipment for which the packing credit is granted. The packing credit facility may be
extended in the form of:
1. Hypothecation of goods
When credit is intended for procuring and processing of raw materials into finished
products for export, hypothecation facility is extended.
2. Pledge
Under this form of credit, the goods to be exported remain in the possession of the
bank or it approved clearing agents.
3. Export Trust Receipt
Under this arrangement, credit is allowed against trust receipt and exportable goods
remain in the custody of exporter but he is required to execute a stamped trust
receipt in favor of the bank.

b. Advance under Red Clause Letter of Credit

In a Red Clause Letter of Credit, a special clause is incorporated into it which
authorizes the negotiating bank to make pre-shipment advance to the exporter of
the credit to enable him to manufacture or buy goods from local supplies.

c. Back to Back Credit

A back-to-back credit is a security or ancillary credit opened by a bank on behalf of
the beneficiary of the original credit, in favor of supplier located inside or outside
the original beneficiarys country.
It happens that sometimes exporters may receive L/C from foreign buyers for export
of goods to them but the exporters may not be the actual manufacturer or
producers of exportable goods. They have to procure the goods from the
manufacturer (within or outside) to enable them (exporter) to complete the deal
under the L/C. In such case, the original credit should be an irrevocable credit. The
terms and conditions of both credits should be substantially except:
Suppliers name of the back-to-back credit will be different
The invoice value of the goods on the second credit is a little less than that of
the first credit
The validity of second credit should also be a little earlier than that of the first
credit leaving sufficient time for the exporter to ship the goods within of the
first credit
i.

Post-shipment Finance
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International Banking: Import and Export Financing

The need for post-shipment finance arises because exporters who sell goods abroad
have to wait for a long time before payment is received from overseas buyers. The
actual periods of waiting depends on the payment terms. In the meantime, exporter
may need funds to carry on his normal export activities. And banks are the main
source for the exporters to seek the finance. Post-shipment credit takes the
following shape:
1. Negotiation of documents under L/C
2. Purchase of foreign bill under D.P and D.A bills
3. Advance against foreign bills under collection
When the documents are received under an L/C for negotiation, the negotiating
bank in that case is acting as agent to the overseas bank that has opened and
established the L/C. when the bank is satisfied that the documents satisfy the
requirement of the credit, they may be negotiated and amount is paid to the
exporter. A slight discrepancy in the documents may provide an excuse to the
issuing bank to refuse reimbursement of the amount already paid to the exporter.
The alternatives available to the bank are:

Confirmation of opening bank

Negotiation under reserve
Negotiation under indemnity
Take under collection
Purchase of foreign bills under D/P and D/A bills

The export finance by way of negotiation of Documents against Payment (D/P) and
Documents against Acceptance (D/A) bills is generally given to the exporters. Credit
facilities in respect of such bills should be granted to customers after careful
security of the creditworthiness, business experience and integrity of the drawer
and drawee of the bills.
However, banks accept export bills for collection of proceeds under written
instructions from the beneficiary (exporter) when the documents (drawn against an
L/C) contain some discrepancies and are not eligible for negotiation. An exporter,
whose bill has been taken for collection by the bank, may require funds urgently.
The bank may accommodate him by allowing an overdraft or granting a loan upto
certain percentage of the value of the bill under collection. In addition to the export
bills as security, bank may ask for collateral security like a guarantee by a third
party and mortgage of property.

Bank Financia Management [FNB 505], F&B, JU