There are two types of financing under documentary credit: Pre-shipment financing n LC PACKING CREDIT Post-Shipment Financing BILL PURCHASED UPAS LATR LIM
DOCUMENTARY COLLECTIONS: A documentary collection is a transaction whereby the exporter entrusts the collection of a payment to the remitting bank (exporter's bank), which sends documents to a collecting bank (importer's bank), along with instructions for payment. Funds are received from the importer and remitted to the exporter through the banks involved in the collection in exchange for those documents. Documentary collections involve the use of a draft that requires the importer to pay the face amount either on sight (document against payment- D/P) or on a specified date in the future (document against acceptance-D/A). The draft lists instructions that specify the documents required for the transfer of title to the goods. Although banks do act as facilitators for their clients under collections, documentary collections offer no verification process and limited recourse in the event of nonpayment. Drafts are generally less expensive than letters of credit.
FINANCING UNDER DOCUMENTARY COLLECTION: Under the documentary collection, there are two types of payment methods or tools for raising trade finance-document against payment (DP basis) and Documents Against Acceptance (DA basis). The bank finance the export bills to the full value before the buyers make payment or the date of maturity of the accepted bills. This means the exporters reduce the turnaround time for business and improve the cash flow. The bills accepted by the buyer are basically of negotiable nature which enables the holder of the bill to raise finance by discounting the bills at the financial centre..
CONSIGNMENT SALE: Consignment sale is the method of international trade payment where by the exporter ships the goods to the agent appointed by the him in the country abroad who sells the goods and remit proceeds to the exporter. The control of the goods remains in the hand of the exporter and the unsold goods is shipped back to the exporter. The relation between the two parties is that of consignor and consignee, not that of buyer and seller. The consignor is entitled to receive all the expenses in connection with consignment. The consignee is not responsible for damage of goods during transport or any other procedure. Goods are sold at the risk of the consignor with profit or loss belonging to the consignor only.
BANK PAYMENT OBLIGATION (BPO): Swift and the ICC Banking Commission have jointly produced a set of rules on Bank Payment Obligation (BPO), which can be defined as an irrevocable conditional undertaking to pay given amount from one bank to another. Bank Payment Obligation can also be viewed as an electronic letter of credit and is an alternative means of settlement in international trade. It provides the benefits of a letter of credit (LC) in an automated environment and enables banks to offer flexible risk mitigation and financing services across the supply chain to their corporate customers.
TRADE FINANCE IN BANGLADESH: In Bangladesh, the banks control the major part of trade finance. The industrial enterprises in Bangladesh are enjoying inter-company loan facilities from the international suppliers by issuing usance documentary credit where a major role is being played by the banks by their irrevocable undertaking through issuing credit in favour of the seller. Most of the industrial importers are leaning to the offshore financial centre to settle their overseas import obligation by taking buyer's credit which is popularly known as the UPAS LC by which the price advantage is hugely considered and compared by the importer to that of the USANCE LC. Since the rate of interest offered by the offshore financial centre is more favourable than that of suppliers, the rate of raising buyers' credit has got huge momentum in Bangladesh. Regarding export from Bangladesh, the usage of export LC is decreasing day by day and dependence on the sales contract under open account arrangement are on the rise because of the international buyers who prefer sales contract instead of documentary credit for their trade cost minimisation.
The trade finance taken by the exporters of Bangladesh before the shipment are the Back to Back credit facility for procuring raw materials, packing credit for pre-shipment processing and overdraft or export cash credit (ECC). In the post-shipment trade financing, Bangladesh is lagging behind the international practice and is delimited in respect of a few trade financing mechanism such as bill purchase and bill discounting. The banks and the other stakeholder should come forward with the latest trade finance mechanism such as the factoring, forfaiting, assignment of proceeds which are mostly related with the receivables financing.
The banks in Bangladesh are engaged only in receivables financing by offering trade credit through bill purchase and discounting. But in international trade finance, factoring market is on the rise, even in India the factoring market is 0.62 per cent of GDP (gross domestic product), 6.62 per cent in China and 0.13 per cent in Sri Lanka (Source BIBM journal). Though IDLC started factoring in 2005, the endeavour stopped after a few months due to inadequate policy support.
RECOMMENDATIONS: Adequate regulatory policy support for launching trade finance techniques is required for flourishing export from Bangladesh.
Skilled human resource on the trade finance is a demand of the time.
Trade finance should be SME focused.
Ease in raising low-cost finance from home and abroad.
Traditionally, trade finance - mainly letters of credit and other self-liquidating instruments of payments for trade - received preferential treatment from national and international regulators on grounds that it was one of the safest, most collateralised and self-liquidating form of finance. Trade can eradicate poverty from society, new and innovative endeavour is on in the trade finance market for facilitating trade promotion. BPO is the latest effort of the International Chamber of Commerce which may replace the traditional letter of credit with the electronic one in the days to come.
The writer is Head of Offshore banking unit, Bank Asia Limited.