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The international transactions are made through Letter of Credit (LC), contract (open account) and other methods. In Bangladesh, import is made only through Letter of Credit as per import policy c.8 (3) and exception is allowed for quickly perishable food and goods worth US $ 50,000 (Fifty Thousand) and raw materials used in industry worth US$ 10,000 (Ten Thousand), following foreign exchange guideline of Central Bank (Volume 1, section 2, c.20 & 210). This requirement was introduced in the early 1950s due to shortage of foreign currency after the 1965 war between Pakistan and India. The underlying objective was to prevent 'false importing' i.e. pretending to import so as to transfer funds out of the country. The situation has changed. But it continues to remain a part of the system. The existing Import Policy Order of government also restricted the payment of import through LC (clause 8 - 3 and 4) with certain small amounts in special cases.
Recently, the payments against LCs were delayed beyond reasonable time and overseas suppliers and Banks were concerned by the delays. The relevant authorities quite frequently receive complaints from foreign banks for LC terms not being honoured and payments not being made on time. Due to these reasons, Bangladesh's global image is being badly affected due to some commercial banks that take excessive time to clear payments against letter of credit though there are no issues whatsoever.
The LC is a documentary credit operation which has a distinct triangular contractual arrangement: (1) the sales contract between seller and buyer. (2) the "Application and Security Agreement" or the "Reimbursing Agreement" between the buyer ( the Applicant ) and the issuer ( the issuing Bank ), and (3) the documentary credit between the issuing bank and the beneficiary. If the documentary credit is confirmed by another bank, then such bank undertakes its own contractual agreement, in addition to that of the issuing bank, to the beneficiary. Each of these contracts is independent and controls the respective relationship between the parties
The Uniform Customs & Practice for Documentary Credits (UCP 600) of International Chamber of Commerce, in Sub-Article 4 (a) recognises this relationship as it states: "A credit by its nature is a separate transaction from the sale or other contract on which it may be based. Banks are in no way concerned with or bound by such contract, even if any reference whatsoever to it is included in the credit. Consequently the undertaking of a bank to honour or negotiate or to fulfil any other obligation under the credit is not subject to claims or defence by the applicant resulting from his relationships with the issuing bank or the beneficiary." Articles 2 and 3 of UCP 600 provide the definitions and interpretations of various parties and key terms under letter of credit. Credits vs. Contracts, indicated in Article 4, states "A Credit by its nature is a separate transaction from the sale or other contract on which it may be based. Banks are in no way concerned with or bound by such contract, even if any reference whatsoever to it is included in the credit. Consequently, the undertaking of a bank to honour, to negotiate or to fulfil any other obligation under the credit is not subject to claims or defences by the applicant resulting from its relationships with the issuing bank or the beneficiary."
There is no relationship between actual consignment delivered and payment against contract through LC. The payment against LC is fulfilling the commitments of the issuing bank in regard to effecting payment subject to satisfying the credit terms fully. This settlement may be done under three separate arrangements as stipulated in the credit. These are:
(1) SETTLEMENT BY PAYMENT: The presenter/beneficiary presents the documents to the nominated or issuing bank and the bank then scrutinises the documents. If satisfied, the nominated or issuing bank makes payment to the beneficiary and in case this bank is different from the issuing bank, the documents are sent to the issuing bank. If the issuing bank is satisfied with the requirements, payment is obtained by the nominated bank from the issuing bank.
(2) SETTLEMENTS BY ACCEPTANCE: Under this arrangement, the beneficiary/presenter submits the documents to the nominated/issuing bank accompanied with a draft drawn on the bank (where the credit is available) at the specified tenor. If the bank is satisfied with the documents, it accepts these and the draft and if the bank is other than the issuing bank, then the documents are sent 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 BY NEGOTIATION: This settlement procedure starts with the submission of the documents by the beneficiary/presenter to the nominated bank accompanied by a draft drawn on the issuing bank or any other drawee, at sight or at the tenor, as specified in the credit. After making sure that the documents meet the credit requirements, the bank will purchase the drafts and/or documents, hand over advance payment or agree to advance funds on or before reimbursement is due. This bank then sends the documents and the drafts to the issuing bank. Reimbursement is obtained in the pre-agreed manner.
Bangladeshi regulations do not follow the international banking practices and also do not abide by UCP 600 although all LCs promise to follow UCP 600. In Bangladesh, Foreign Exchange Regulation Act, 1947 (FERA, 1947) has empowered Bangladesh Bank to regulate all kinds of foreign exchange dealings in Bangladesh. According to Bangladesh Bank's regulations, importers are required to submit proofs that the goods for which remittance is made from Bangladesh are physically imported into the country. If the import is made by sea route, the documents required to be submitted is called Bill of Entry. For shipment by post, the required document is Custom's Certified Invoice and if by air, Airway Bill.
As per the Foreign exchange guideline of Central Bank (Volume 1, Chapter 7, clause 26, page 34), authorised dealer bank (ADs) may allow remittance against discrepant documents/documents received directly by the importers after the goods have been cleared from the customs, on the basis of the relative letter of credit authorised form (LCAF), the authenticated copy of the customs bill of entry for consumption or customs certified invoice in the case of import by post/ courier and the relative invoices.
Clause 31 of the regulation mentioned that (a) the AD will obtain invoice, in duplicate, both of which will be certified by them. After recording in the IMP form (Import payment application form) the particulars of the remittance effected, the original IMP form along with a copy of the customs certified invoice shall be forwarded to the Bangladesh Bank with the usual monthly returns. (b) The duplicate copy of IMP form will be retained by the AD. Subsequently when the authenticated copy of the bill of entry/customs certified invoice is submitted by the importer, the particulars therein should be matched and checked with those in the IMP form and invoice filed earlier, to see if the merchandise for which remittance was made has been duly received in Bangladesh.
If no 'material discrepancy' is detected, the case should be considered closed, with the duplicate IMP form, invoice and custom bill of entry/custom certified invoice filed together for eventual inspection and disposal instruction from inspection team of Bangladesh Bank. In the event goods are completely lost (c32), duplicate copy of the IMP form should be forwarded to the Bangladesh Bank giving full particulars of the loss and the manner in which the insurance claim has been collected. In the event of partial loss, the authenticated copy of the customs bill of entry for the goods actually cleared should be submitted giving full particulars of the loss and the manner in which the insurance claim has been collected.
Interestingly, the same regulation said ADs shall make payment of import liabilities as per LC/ contracts (both local and foreign) on maturity (c34). Failure in settlement of import liability as per credit/contract terms may result in punitive actions including revocation of AD license by Bangladesh Bank.
All LCs from Bangladesh follow Uniform Customs & Practice for Documentary Credits (UCP 600). But strict regulations involving the methods of payment in the country is different from what is mentioned in UCP 600. The existing regulations of central bank linking the payment with release of consignment from customs, loss of consignment or payment of insurance claim etc are not in conformity with UCP 600. Even, in case of discrepancy in the documents, the bank is bound to pay to the bank of beneficiary upon acceptance of document by the importer. A written consent of importer or acceptance of documents to release the consignment is sufficient acceptance of discrepancy of documents by the importer.
Unfortunately, Central Bank regulations and more conservative attitude of bankers delay the payment causing bad impact on image of banking system in Bangladesh.
This is driving overseas suppliers to add cost to the prices of their materials to make up for additional expenses and additional insurance coverage for payment. Bangladesh is paying huge amount of valuable foreign currency to cover up these costs.
On the other hand, many international banks and overseas suppliers are asking for advance payments for imports. The prevailing regulations and the government do not allow advance payment for import. The situation is worsening day-by-day.
In the case of 'Gooryonly (BD) Textiles Ltd. vs. Chartkar 54 DLR (AD) 2002', the appellate division of Bangladesh Supreme Court held that "a letter credit is independent and unqualified by the contract of sale or underlying transaction and the autonomy of the same is required to be protected." The regulation of Bangladesh Bank related to payment should be amended to match the international standard and UCP 600.
M S Siddiqui is a Legal Economist.