IT improves international trade services

Trade payment is at the heart of international activities of banks in Bangladesh and Letter of Credit (LC) remains the most widely-used method of trade payment both in import and export transactions.
A recent study revealed that in 2012 (January-December), 86 per cent import payments from the country was made through LCs which slightly decreased to 84 per cent in 2013. In case of exports, the figure was 60 per cent in 2012 which declined to 52 per cent in 2013. In spite of the change, documentary credit remains the most widely-used international trade payment method in the country.
The status is very different from the global scenario where 'Open Account' is the most popular form of trade payment method. Globally, use of LC is only around 10 per cent though it is considered the most reliable trade payment method. Though documentary credit is recognised as the most reliable form of trade payment, involvement of high cost limits its use. Another notable limitation of the technique is that under the payment method, banks make payment on the basis of documents alone. Moreover, it is not on the preference list of importers.
Because of some regulatory compulsion, documentary credit is the most commonly used method in making import payment from Bangladesh. According to the import policy of the country, other than a few exceptions, the use of LC is a must for all imports. In case of exports, there is an implicit restriction. Bankers are required to sign Export Form according to which bankers and exporters both would be equally responsible if export proceeds do not enter the country within 120 days after the date of shipment. Thus, bankers generally sign Export Form only to facilitate 'documentary collection' and 'documentary credit' or LC. In export receipt, documentary collection was used in case of around 45 per cent cases, as revealed in a review of the Bangladesh Institute of Bank Management (BIBM). No significant difference was observed in Chittagong, the trade hub of the country, in connection with trade payment practice. In case of import payments, LC was used in 79 per cent cases; and in cases of exports LC was used in 48 per cent cases in Chittagong in 2013. The figures are not significantly different from the overall country figures.
Documentary collection was the second most important method of payments both in exports and imports (44 per cent and 13 per cent respectively) in Chittagong. With  regard to major sectors in imports (edible oil, wheat, pulses, oilseeds, and dairy products), documentary credit or LC was used in 100 per cent cases (other than a few instances of the importation of edible oil where documentary collections were used).
However, in case of exports in major sectors (RMG, jute goods, leather, fish and shrimp and raw jute), documentary collection and cash in advance were also in use.
In Bangladesh, all LCs opened are irrevocable in nature, as required by the import policy order of the country. Under UCP 600 (the set of rules of LC) also, LC means irrevocable LC. Of the special type of LC, a significant number is back-to-back. This is because of the garments sector that imports raw materials from abroad for meeting their export orders. The BIBM survey shows that 31 per cent of the total letters of credit were back-to-back (foreign) that amounted to 33 per cent of the total amount in 2013 (slightly lower as compared to 2012 and 2011). Practically, the demand for confirmed credit increased following the global crisis of 2008-09. The number and volume of the increased confirmed letters of credit since 2012 can be explained by the increasing use of Usance Payable at Sight or UPAS in Bangladesh that requires confirmation on the part of the financing bank.  The slight decrease in the confirmed credit in 2013 may give an indication of getting back the global economy to normal.
In Bangladesh, all LCs received are irrevocable in nature, as required by the UCP 600. Of the total export letters of credit, a significant number is transferable letter of credit. Existence of a large number of buying houses is one of the reasons for dominance of transferable LC. Buying houses (of the garment products) are not the actual manufacturers and therefore, for procuring the goods, they are required to transfer the LCs to the real manufacturers. Moreover, the practice of sub-contracting by the garment manufacturers is also very common for which an LC is transferred.  The survey data indicates an increase in the confirmed credit in exportation from the country. This is due to the demand of the confirmed LC by some local exporters to export to the countries that were facing political instability (like Egypt) during 2013.
Alongside facilitation of trade payments, banks offer financing facilities to the exporters and importers. Though generally interest rate is not regulated by the Bangladesh Bank, in export financing (packing credit), banks are not allowed to charge more than 7.0 per cent interest to support exporters. It has already been mentioned that back-to-back LC is a very popular trade financing technique used by the banks to support garment exporters of the country. Banks also purchase documents of the exporters submitted under LC and documentary collection. Using LC, banks also offer financing facilities to the importers. Other popular import financing techniques related to LC are called as Payment against Document or PAD, Loan against Imported Merchandise or LIM and Loan against Trust Receipt or LTR.
Trade services departments of banks also offer local LC-related services. Some malpractices with credit default and accommodation bills shook the banking industry of the country mainly during 2012. There were instances when documentary nature of the operational procedure of LC was made the culprit.
Practically, banks dealing with documents mean they deal with those which are shadows of the goods. There is no doubt that only transaction of documents without goods is not acceptable under LC operation and it is not difficult for the banks to ensure that in local LCs. The central bank of the country has undertaken notable steps in this connection. Banks' true intention and strong role of internal control and compliance of banks would be needed to handle the problem.   
Performance of banks with regard to the trade facilitation has changed and the market share of the private commercial banks (PCBs) has increased significantly over the years. According to the BIBM Review, 74 per cent export proceeds entered the country through PCBs in 2013 (increased from 71 per cent in 2011). The figures for state-owned commercial banks (SoCBs) and foreign commercial banks (FCBs) were 14 per cent and 12 per cent respectively in 2013.
Similar status may be observed in case of import payments, where 69 per cent payments flow out of the country through PCBs. Major portion of trade finance facilities of the country are offered by the PCBs that ranged between 56-57 per cent during 2011-2013. PCBs of the country as a group was followed by the SoCBs that offered 38-39 per cent of the total trade finance during the period. The contribution of the FCBs was around 5.0 per cent during the period.  
In recent years, remarkable changes may be observed in the operational efficiency of the trade services departments of banks. Information technology is rapidly changing the nature of international trade services and LC operation in the country. Adoption of ICT-based activities like internet banking on trade services and online reporting to the Bangladesh Bank have enabled banks to go for faster decision making, prompt documentation and processing.
Internally, quite a few banks are fully relying on software-based operations. It is a remarkable achievement that almost all executives working in the trade services departments of different banks have training exposures.  A considerable number of employees of the concerned departments have received training from the BIBM. A remarkable improvement in connection with development of professional bankers in the trade services area is reflected with the growing number of Certified Documentary Credit Specialist (CDCS) in the banking sector of the country.
Prof. Shah M Ahsan Habib, Director (Training) of the  Bangladesh Institute of Bank Management (BIBM), Mirpur, Dhaka, was the team leader of the BIBM Survey Team on Trade Services.
 ahsan@bibm.org.bd