Free Essay

Non Performing Loan

In: Business and Management

Submitted By Jobaidul
Words 2159
Pages 9
Zahidur Rahim Md. Zulfiquar
Vice President
The Premier Bank Ltd.

Back To Back LC

There are two things involved in importing goods. One is bringing of goods physically into the country and the other is the remittance of foreign currency in the form of cost of goods, service and performances. Unless otherwise specified, import is to be made only by opening irrevocable letter of credit.

To open BTB LC in respect of Ready Made Garments industries, let we know what is LC. A letter of Credit is a written undertaking, which is given by a bank on behalf of an importer/ buyer to pay the price/ value of goods or services to the exporter/ seller on fulfillment of some terms & conditions

When a seller is unable to supply the goods as stated in the LC and needs to purchase the goods or raw materials of the goods as stated in the LC and make payment to another supplier by opening 2nd LC is called BTB LC.

In BTB LC concept, the exporter/ seller as the beneficiary of the first LC offers the LC as security to his own bank for issuance of the 2nd LC. As an applicant of 2nd LC the seller is responsible for payment, if the 2nd seller (2nd LC applicant) is not paid by first LC. It is clear that a BTB LC will be same as first LC (called as mother LC or Export LC) except the following points:

a) First beneficiary may curtail the value of BTB LC. b) Shipment & expiry period always be earlier than the date of stipulated in the Mother LC or Export LC.


In Garments sector, Export LC is the most vital documents. More than 90% export done against export LC. As such, utmost precautionary measures to be taken when we want to provide credit facility (in the form of BTB LC, PC or SOD) to Garments Industry. It is observed that failure of most cases of export or non-repatriation of export proceeds will be happened due to proper scrutinizing or the bank did not take precautions. AD should take utmost care of the following points before opening BTB LC.

1. Issuing Bank of the export LC: LC issuing bank must be a first class bank. In this regard please see current Almanac.

2. Authentication of XLC: Arrange to confirm/ genuineness of issuance of Export LC. In case of transfer LC, Please check whether it has transferred as per Article 38 of UCPDC-600.

3. Check carefully the followings: a. LC number b. Date of issue c. Date of shipment d. Date & place of expiry e. Beneficiary f. Available by: At sight payment/ Deferred Payment by / negotiation (Prefer available at sight by negotiation) g. Commodities h. Currency & amount i. Terms of delivery: FOB, CFR, CPT, CFRC, CFRIC (FOB preferable). If terms of delivery are CFR or CPT then freight certificate to be obtained. If terms of delivery are CFRC, CFRIC or other than FOB then a declarations is required for Freight, Commission, and Insurance etc. j. Mode of shipment (AIR/ SEA/ ROAD/ RAILWAY) k. Export documents to be sent: (Other than LC opening bank should be avoided). Do not send / endorse export documents to the Importer directly. Export documents against 100% advance payment may be endorsed in favor of Importer but documents should be routed through AD Branch


In the simplest case, a documentary credit is issued in favor of the seller who ships the goods and claims payment under the credit. This simplest scenario is applicable particularly where the seller is the manufacturer or the producer of goods.

However, in some cases the buyer does business with an intermediary trader who obtains goods from other source(s). In this event, the intermediary trader will have to buy the goods before supplying them to the buyer. If Export LC is transferable, AD should follow the following points:

1. Beneficiary & transferee must be identical. 2. Transfer must be authenticated by nominated bank. 3. LC must be transferable & freely negotiable. 4. Third country transfer & involvement of several banks to be avoided. 5. At the time of transfer always follow Article 38 of UCPDC-600.


FOB LC = Export LC value – Freight Charges – Commission (Foreign/Local) – Other Charges, if any.


|CREDIT REPORT | |Suppliers’ credit report must be obtained. |
|PRO FORMA INVOICE | |Pro forma Invoice must be original one, signed by the seller & accepted by the |
| | |buyer. |
| | | |
|OTHERS | |Country of origin, terms of delivery, usance period, port of loading & discharge, |
| | |mode of transport, particulars of merchandise (item, specification, quantity, |
| | |quality, unit price, total price) shipping mark etc. must be mentioned clearly in |
| | |the Pro forma Invoice. |
| | | |
| | |H.S code number must appear on Pro forma Invoice. |
| | | |
|H S CODE | |Insurance cover note value must be 10% excess of proposed BTB LC value. If the BTB|
| | |LC consists of a clause that allows +10% or +5% then 10% or 5% more will be added |
| | |in the insurance cover note value. |
| | | |
|INSURANCE COVERAGE | |In case of private insurance Company it must be reinsured with Sadharan Bima |
| | |Corporation. |
| | |If premium paid through P.O/Cheque then the LC opener must submit photocopy at the|
| | |time of opening of LC. |
| | |Form ‘ST’ (Ga) to be submitted at the time of opening of LC. |
| | |Duly filled in by the applicant. |
|LCAF | |Signed by the applicant. |
| | |H.S Code No. must be mentioned clearly. |
|IMP | |The applicant should sign on IMP. |
| | |Separate set to be obtained in case of partial shipment allowed. |
|LC OPENING | |o On being satisfied AD may open BTB LC after incorporating LC |
| | |number in the LC opening register (specific register for opening Back to Back LC |
| | |and using specific code number). LC to be opened at the request of the applicant |
| | |by: |
| | | |
| | |1) Air Mail or |
| | |2) SWIFT |
| | | |
|Following points to be observed strictly:| |o a) LC amount (not exceeding permissible portion of FOB value). |
| | |b) Name of the beneficiary |
| | |c) Shipment & expiry date |
| | |d) Country of expiry of the LC. |
| | |e) Mode of transport |
| | |f) Usance Period, Negotiation period |
| | |g) Inspection clause |
| | |h) Payment clause |
| | |i) Incorporation of LCAF number, HS code no. |
| | |j) Export LC number |
| | |k) Detailed description of merchandise |
|SHIPMENT & EXPIRY DATE | |o In consideration of production capacity of a garments and expiry date |
| | |of the export LC, shipment & expiry date of a BTB LC are to be fixed. |
| | |Mode of transport is also to be considered in this regard. |
|USANCE PERIOD | |o Usance period for BTB LC is maximum 180 days. |
| | |From the date of Bill of Lading. |
| | |From the date of negotiation |
| | |From the date of acceptance of the Draft/Bill of Exchange. |
| | | |
| | |o No BTB LC to be opened against contract. But in practice ADs are used to|
|BTB AGAINST CONTRACT | |open BTB LC against contract frequently. As per Import Policy Order 2009 – 2012. |
| | |AD may import raw materials on at sight/ usance basis against contract on the |
| | |basis of banker-Customer relationship. |


a. Export LC (XLC) must be marked under lien b. Lien mark will be as under:

|L I E N with The Premier Bank Ltd |
|…………………………………….Branch. |

c. Export LC to be filed party wise d. Number & amount of BTB LC must be Endorsed on the back of the Export LC e. Handover LC copy to the importer after transmitting/ dispatch of LC. f. LC copy should not be handed over to the importer before Transmission or dispatch

The foreign currency amount of proposed LC to be converted into local currency @ B.C selling rate to determine the amount (in thousand figures) for Commission and Liability. At the time of opening of BTB LC following vouchers are to be passed

| Dr. Party’s A/C |
|Cr. Income A/C Comm. on LC |
|Cr. Income A/C SWIFT/ Courier charges |
|Cr. Income A/C Others (if any) |

Thereafter following contra vouchers to be passed at B.C selling rate: -(Amount in thousand figure)

|Dr. Customer’s liability on LC (BTB) |
|Cr. Banker’s liability on LC (BTB) |


In absence of original import document clients may request for issuance of shipping guarantee to clear the consignment. In that case Authorized Dealer should obtain a declaration from the client to the effect that they will accept original import documents despite of discrepancies. Authorized Dealer should record the shipping guarantee number, date and amount in a register as well as in the LC file. The following vouchers are to be passed to recover commission.

| Dr. Party’s A/C |
|Cr. I/A Comm. on (S/G) |

Thereafter LC liability to be reversed and shipping guarantee liability to be passed as under:


| Dr. Banker’s liability for LC (BTB) |
|Cr. Customer’s liability for LC (BTB) |


| Dr. Customer’s liability for S/G |
|Cr. Banker’s liability for S/G |


On receipt of original shipping document the same should be checked with LC terms immediately. If any discrepancy is found, it should be informed to the Importer for their acceptance. Documents to be lodged in Accepted Bill for payment (ABP) or IFDBC register & an entry to be given in ABP register or IFDBC register

Shipping guarantee liability to be reversed and acceptance liability to be created by passing following vouchers:


| Dr. Banker’s liability for S/G |
|Cr. Customer’s liability for S/G |


|Dr. Customer’s Liability for Accepted Bill or IFDBC (BTB) |
|Cr. Banker’s liability for Accepted Bill or IFDBC (BTB) |

Thereafter, maturity date of the import bill should be conveyed to the foreign bank from which documents have been received. Acceptance commission to be realized immediately from the importer. Following vouchers are to be passed:

| Dr. Party’s A/C |
|Cr. I/A Comm. On Acceptance |
|Cr. I/A Swift/Postage. |


On receipt of original shipping document the same should be checked with LC terms immediately. If any discrepancy is observed the same to be informed to the foreign bank by SWIFT/AIR MAIL within 5 banking days from the date of receipt of documents and Documents to be lodged in Accepted Bill for payment (ABP) or IFDBC register & an entry to be given in ABP register or IFDBC register

The following vouchers are to be passed for reversal of LC liability and creation of IFDBC liability:


| Dr. Banker’s liability for LC (BTB) |
|Cr. Customer’s liability for LC (BTB) |


| Dr. Customer’s Liability for ABP (BTB) |
|Cr. Banker’s Liability for ABP (BTB) |

After obtaining acceptance from the importer, maturity date should be conveyed to the foreign bank from which documents have been received. Following vouchers are to be passed:


| Dr. Banker’s Liability for ABP (BTB) |
|Cr. Customer’s Liability for ABP (BTB) |
| |

Thereafter, acceptance commission to be realized immediately as under:

| Dr. Party’s A/C |
|Cr. Comm. On Acceptance |
|Cr. I/A Swift/Postage |


Accepted bill should be paid on maturity positively to fulfill International Commitment. Accepted bills are to be paid from the repatriated export proceeds of related export LC. Following vouchers are to be passed at the rate applied against relative Export Bills (FBDP/FDBC)

| Dr. BLO A/C or Margin held in FC |
|Cr. Head Office ( Nostro a/c) or |
|Cr. P.O Issued A/C. |
|Cr. I/A Others. |

After payment of accepted bills, accepted liability to be reversed according to the following vouchers:


|Dr. Banker’s Liability for ABP (BTB) |
|Cr. Customer’s Liability for ABP (BTB) |


At the time of payment of accepted bills, if repatriated export proceeds are not available in the BLO A/C, the Authorized Dealer should settle the accepted bills by creating Demand Loan in the name of the importer. Authorized Dealer should also inform to NBR, Custom Authority and
Bangladesh Bank regarding stock-lot, short shipment and non-repatriation of export proceeds. Branch should also obtain Charge Documents duly signed and stamped by the borrower with a repayment schedule. The following vouchers are to be passed for creation of Demand Loan at BC selling rate. Demand loan is to be created Export LC wise.

Demand/Forced Loan interest to be charged from the following day of maturity date at commercial rate prevailing at the time of creation of Demand/Forced Loan

|Dr. Demand / Forced Loan A/C |
|Cr. HO or PO issued A/C (Local LC) Apply @TT Doc) |
|Cr. I/A Exchange Earning |
|Cr. Income a/c others (if any) |


|Dr. Banker’s liability for Accepted Bill (BTB) |
|Cr. Customer’s liability for Accepted Bill (BTB) |…...

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Non Performing Assets default would be considered non-performing. After a prolonged period of non-payment, the lender will force the borrower to liquidate any assets that were pledged as part of the debt agreement. If no assets were pledged, the lenders might write-off the asset as a bad debt and then sell it at a discount to a collections agency. Definition A loan or lease that is not meeting its stated principal and interest payments. Banks usually classify as nonperforming assets any commercial loans which are more than 90 days overdue and any consumer loans which are more than 180 days overdue. More generally, an asset which is not producing income. Definition of 'Non-Performing Asset - NPA ' of banks A classification used by financial institutions that refer to loans that are in jeopardy of default. Once the borrower has failed to make interest or principal payments for 90 days the loan is considered to be a non-performing asset. Also known as “non-performing loan”. Investopedia explains 'Non-Performing Asset - NPA ' Non-performing assets are problematic for financial institutions since they depend on interest payments for income. Troublesome pressure from the economy can lead to a sharp increase in non-performing loans and often results in massive write-downs.

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Non Performing Assets

...RECOVERY OF NPA STATUS AND CHALLENGES IN THE INDIAN BANKING SYSTEM EXECUTIVE SUMMARY: Non-performing Assets means a loan which has been classified by a bank or financial institution as substandard or loss assets. According to this default status would be given to borrower if the dues are not paid for 90 days. Asset Classification: * Standard: are the ones in which the bank is receiving interest as well as the principal amount of the loan regularly from the customer. If asset fails to be in this category i.e. amount due more than 90 days then it is NPA and NPAs are further need to be classified in sub categories. i) Sub-standard: the account holder comes in this category when they don’t pay three instalments continuously after 90 days and up to 1 year; ii) doubtful NPA; iii) Loss Assets: under this 100% provision is made. When account holder comes in this category their account can be written off by the banks. Types of NPA: * Gross NPA: reflects the quality of the loan made by the banks. * Net NPA: reflects the actual burden of the banks. The main reason behind NPA would be lack of proper enquiry by the bank, wilful defaulter, change in government policies etc. which could affect the bank by restriction on flow of cash by the bank for sanctioning a loan, drain of profit, bad affects on goodwill, etc. There are different acts and institution for the NPA recovery like SARFAESI ACT, 2002; SARC; ARC; DRT; Lokadalats;......

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