Around a month ago, BB (Bangladesh Bank) issued a strong warning for punitive action including cancellation of AD licence against AD (Authorised Dealers) banks, if found unnecessarily delaying payment against LC (Letter of Credit) established by those banks. It is being alleged for quite a while that many commercial banks of our country are not honoring drafts drawn under LCs opened by them. This is causing frustration among foreign exporters and the dealing banks as well. This type of delay in making payment without any valid reason is not only damaging country's reputation but also increasing the import cost exorbitantly because the exporter of foreign countries adds all operational costs including interest on delayed payment with the price of goods.
CONSEQUENCE OF NON-PAYMENT AGAINST LC: With the opening of LC, issuing bank undertakes to make payment against presentation of compliance documents which is determined by the terms and conditions stipulated in the LC itself and ICC rule, particularly UCPDC (Uniform Customs and practice of documentary credit) and ISBP (International Standard Banking Practice). Payment can only be held or delayed under two specific circumstances of which one is presentation of non-compliant documents i.e., when discrepancy is found and not accepted by the applicant i.e., importer, while the other is an act of court i.e., when the country's court issues injunction on the payment. In all other cases, issuing banks will have to make payment as per their undertaking stipulated in the LC. We have to keep in mind that usually LCs established by our banks are not accepted by the exporters of developed countries unless the LCs are confirmed by their local banks or internationally reputed large banks. Add confirming bank is considered as nominated bank which also undertakes to make payment on behalf of issuing bank upon receipt of compliance documents. So, when the exporter submits compliant documents, confirming bank instantly makes payment and subsequently claims reimbursement from issuing bank. If our banks after issuing LC, do not make payment upon receipt of compliant documents, they technically delay payment to their counterparts with whom they maintain not only correspondent relationship but also counterparty limit. Now a days, many banks in the developed world do not show interest to maintain correspondent relationship with our banks and non-payment against LCs will further worsen the situation. Many banks have even lodged compliant to ICC (International Chamber of Commerce) against some Bangladeshi banks which did not make payment against submission of compliant documents.
ERROR AND DISCREPANCY ARE NOT SAME: In support of non-payment against LCs, issuing banks in our country always resort to two pretexts of which one is discrepancy while the other is non-submission of bill of entry. We have experienced that our bankers indiscriminately identify discrepancies while examining documents presented under LC. What can be considered as legitimate discrepancy and what not are clearly mentioned in the UCPDC and ISBP guidelines. Set of documents may contain many errors or deficiencies but all may not fall under the provision of UCPDC and ISBP and as such will not be considered as legitimate discrepancy. We have to keep in mind that errors or deficiencies covered under UCPDC and ISBP are considered as legitimate discrepancies against which payment can be held. So, all discrepancies must be errors but all errors may not be discrepancies. Our bankers must clearly understand this and refrain from indiscriminately identifying discrepancies. Although receiving discrepant documents is a very common practice in banking business, there is a standard practice of handling discrepant documents which must be strictly followed.
BILL OF ENTRY IS NOT PART OF LC DOCUMENTS: In most of the cases of non-payment or delayed payment against LC, issuing banks in our country mostly refer to the circular issued by BB which states that against discrepant documents payment can be made only upon submission of bill of entry issued by our custom authority. This document is the proof of arrival of goods imported under LC. Bangladesh Bank must withdraw or relax the application of this circular because this is contrary to the standard practice of documentary credit. Keeping this circular valid, BB's recent warning may not improve the situation. This bill of entry may be considered as an important document but it does not constitute a part of LC documents. This practice is exclusively an internal control mechanism which is not found in many countries. In general, banks deal with documents not with the goods. So, banks are obliged to honor their payment obligation if and only compliant documents are presented even though goods physically do not arrive. However, if there is suspicious that there may be fraudulent activity, banks may resort to some strategic approaches. In normal course of action, if issuing bank receives discrepant documents and that discrepancy is accepted by the importer, banks will be unequivocally allowed to make payment without any delay in the name of submitting bill of entry. If bill of entry is not issued meaning goods have not arrived and importer accepts the documents, it is tantamount to criminal offence and should be dealt with accordingly. At best, BB can ask AD banks to submit list of the importers who accept discrepant documents but do not produce corresponding bill of entry. We know there is such practice in our banking but this can now be strictly followed involving other agencies including Anti-Corruption Commission and law enforcing agencies, if found necessary. Under any circumstances, AD banks should be exempted from withholding payment on the pretext of non-submission of bill of entry against discrepant documents.
BRINGING CHANGES IN BB'S PUNITIVE MEASURES: In the wake of complaints against many banks for not honouring drafts drawn under LCs issued by them, BB's recent warning to the AD banks is of course a very timely initiative. However, in order to make the warning effective, BB will have to go further to enforce its decision. We have previously experienced that many BB instructions have been taken very lightly or ignored by commercial banks. So, BB should actively consider bringing about changes in the punitive measures in that imposing substantial financial penalty can be the appropriate approach. It has been proven all over the world that huge financial penalty has worked well than any other regulatory punishment in controlling banks and financial institutions.
Nironjan Roy is a banker based in Toronto, Canada. firstname.lastname@example.org