Inland LCs in foreign currency: making local trade easier

K-1 is the starting point of Part K. It says two things.

(1) The permission. ADs are permitted to establish inland back-to-back LCs and other admissible LCs in foreign currencies, in terms of this circular. "Inland" means both the buyer and the seller are in Bangladesh, like Evelyn in Gazipur and Arman in Narayanganj. The money is still in dollars or another foreign currency.

• You met inland back-to-back LCs in Lesson 21 (G-3). There we also saw which inland LCs may be in foreign currency and when an LC must be in Taka (G-4).
• K-1 doesn't list the "other admissible LCs" here. It only says they must be allowed under this circular.

(2) The rule books. The operation of inland LCs in foreign currencies is guided by:

• the UCP in force, the ICC's rules for documentary credits;
• other international standards; and
• regulatory instructions that Bangladesh Bank issues from time to time.

So an inland LC is not a "local-only" LC with its own home-made rules. It is guided by the UCP in force and other international standards, the same rule books bankers use for LCs with buyers and suppliers abroad, plus Bangladesh Bank's instructions. Think of a cricket match in Mirpur: the ground is local, but the laws of the game are the same ones used everywhere.

K-2 makes no new rule. It describes a problem, and the rules in K-3 to K-5 are the cure. Here is the problem, in the circular's own order.

• Domestic trade in foreign currencies faces bottlenecks, because of various clauses embedded in LCs.
• These clauses are often difficult to meet within the validity of the LC. By the time the seller has the paper, the LC may be close to its end.
• The circular gives two examples, and its list ends with "etc.", so there can be others:

1. a requirement that delivery challans be signed by top officials of the LC applicant (the buyer), and
2. a requirement that the applicant accept the documents before they are submitted to the beneficiary's AD (the seller's bank).

• Result: domestic sellers often face financial difficulties because of prolonged processing time.
• And the big picture: even though the volume of transactions is significant, domestic trade, including financing by ADs, remains sluggish and lacks vibrancy.

Why does this hurt? Both examples put the buyer's own hand on the brake. If the buyer's director is busy, or the buyer is slow, the seller's payment waits, even though the goods were delivered. It is like a rickshaw puller who can only get his fare after the passenger's boss signs a note. The ride is over, but the money is not.

K-3 is the heart of Part K. First, a general request: to bring ease in domestic trade, ADs are advised to establish operational modalities (their own working methods) that simplify domestic trade transactions in foreign currencies. The circular leaves the design of those methods to each AD.

Then come firm instructions, split by the bank's role.

(a) For LC issuing ADs (the buyer's bank, like Habib's branch for Evelyn):

1. No impossible conditions. ADs shall avoid putting conditions in LCs that cannot be maintained during the validity of the LC.
2. Check unusual conditions against the deal. If the applicant wants an unusual condition, the AD shall examine whether it is in the purchase or sales contract or proforma invoice. The circular doesn't say what happens next if the deal never mentioned it, but the check itself makes everyone stop and look.
3. The bank checks the documents, not the buyer. When documents arrive for payment or acceptance, the AD shall do the usual formalities of examining them, and then pay or accept, whichever is required. In no way shall it forward the documents to the applicant for the applicant's examination and acceptance.

(b) For LC advising or nominated ADs (the seller's bank, like Arman's bank):

1. Read before advising. ADs should examine the clauses of LCs received from issuing banks and advise them to the beneficiaries. So a seller like Arman hears early what his LC demands.
2. Check and forward. On receiving documents from the beneficiary, the AD shall examine them and forward them to the issuing AD for payment or collection.

Put simply: each bank does its own checking job, and the buyer does not hold the seller's money hostage. Shirin's training line: "The documents go to the bank that made the promise, not to the person who wants a second look." Simple to say, and it saves sellers weeks.

K-4 moves inland LCs from the courier bag to the screen.

The aim. The transactional framework for inland trade needs to be brought under an electronic platform.

What ADs should do. ADs should introduce electronic options for communication about LCs, such as:

• transmission (sending the LC),
• advising,
• presentation of documents,
• acceptances, and
• all subsequent communication.

This is done under mutually agreed systems with counterparts. In other words, the issuing AD and the advising or nominated AD agree between themselves which electronic system they will use. The circular doesn't name any particular system.

The safety conditions. ADs shall have safe and secure electronic systems that are:

• approved by the Board of Directors (for foreign banks, by the competent management team), and
• compliant with the Guideline on ICT Security in force.

Why does this matter? Remember Arman waiting three weeks? If the LC, the documents and the bank's acceptance travel electronically, a lot of waiting can disappear. But speed without safety is like a motorbike without brakes, so the system must be board-approved and meet the ICT security guideline.

K-5 is one sentence, and it is about telling Bangladesh Bank what happened.

• ADs shall report the information, including acceptances, to Bangladesh Bank's online reporting system.
• They do this in accordance with the reporting routine.
• The words inter alia ("among other things") show that acceptances are one item in the report, not the only one.

K-5 doesn't list the full set of information or describe the reporting routine itself; it simply refers to the reporting routine.

Why report acceptances in particular? An acceptance is the bank's promise to pay on a future date. For an inland LC in foreign currency, each one is a foreign currency payment waiting to happen inside the country. When ADs report them, Bangladesh Bank can see how much inland trade is moving and how much is due. It is like a school register: the teacher can only plan the class if every child is marked present.

That closes Part K.