AUSOM – FALL 2020

BSAF-5B

COMMERCIAL BANKING AND LENDING

Functions / Roles of Commercial Bank

Collection of Funds

Safety of Funds / Cash

Financial Institution Borrow Funds

Financial Services to general public

Loans

Banks control interest rate

Bank are implementing agents / agency / sector

SBP / Money Supply

Govt decides monetary policy

Lending

Investment Earning improve, productive use of excess liquidity. Deposit.

Rate of return higher than lending, insolvency risk / default risk on lending
activities

Financial (Banking) Transaction

Management of Money
Deposit taking entity / institution

Commercial Bank - Definitions

Companies that transact the business of banking

Banking Companies Ordinance 1962

“Accepting, for the purpose of lending and investment, of deposit of money from
general public, repayable on demand or otherwise, and withdrawable through
cheques, drafts, order or otherwise”

A commercial bank is a type of financial institution that accepts deposits, offers

lending products to customers and invests excess liquidity to earn. The net
interest rate spread is defined as the difference between markup rate charged
and cost of funds

A commercial bank is a financial institution which performs the functions of

accepting deposits from the general public and giving loans for investment with
the aim of earning profit. In fact, commercial banks, as their name suggests, axe
profit-seeking institutions, i.e., they do banking business to earn profit

A commercial bank is a financial institution that offers checking accounts,

demand deposits, business and personal loans, savings vehicles and a variety of
other related financial services

Commercial banks are financial institutions which accept demand and time
deposit that is payable on demand or otherwise, make loans to individuals and
organizations and provide services such as documentary collections, international
banking and trade financing.
Demand Deposit

Term Deposits

Bank Origin, at best, UNKOWN

Bancus /Banque meaning “Bench” (Latin/French)

“Back” German Joint Stock Co

Barter Trade

Currency (Legal Tender)

Babylonians 2000 BC King Hammurabi

UK

Bank of England established in 1694 Nationalized & became central bank in 1946

1853 stamp duty on cheques reduced.

1854 Joint Stock Company Act Limited Liability

1855 Limited Liability Act Mergers, Acquisitions

1918 Eleven Clearing Banks in UK

1955 Hire Purchase Finance

USA

17th Century US Discovered

1791 1st US Bank established Capital USD 10M

1794 Eighteen banks established in USA

1838 Freed Act – Discourage monopolies

1860 No of Banks in USA - 562

1863 National Bank Act US Bonds equal to 33% of Capital

1913 Federal Reserve Act – Loss Reserve Requirement

1935 Banking Act – Foundation for FED. FED established in 1914

1939 14.5k + Banks in USA

BASEL Agreement

Indian Sub-Continent / Pakistan

M Tughlaq 1325-1351 Currency in Indian Subcontinent

SBP 1-7-48

Oct 1948 1st Pak Note

1974 Nationalization HBL, UBL, MCB, NBP, ABL

2003 2002 1991 2005

1990-91 Privatization of Govt owned banks started

Practice and Law of Banking in Pakistan by Dr Asrar H Siddiqi

Economy expand Strategic Mgt Control

ABL Employees Stock Ownership Plan Ibrahim Group

Commercial banks Islamic Banks DFI (Development Financial
Institutions, MFB (MicroFinance Banks) Grameen Bank (Bangladesh)

SECP AMC, Pension Funds, Real Estate Investment Trust, Leasing Co, Modaraba,
Insurance

SBP BSC (Banking Services Corp)

Public Sector Banks

NBP, BoP, ZTBL (ADBP), BoK, SindhBank, 1st Women Bank, SME Bank

HBL, MCB, ABL, UBL, ACBL, BAL, SCB, Soneri, Silk Bank, Bank AlHabib, Industrial &
Commercial Bank of China, JS Bank, MIB, Samba Bank, Habib Metropolitan Bank
(HMB)

Bank Islami, Albaraka Bank, Meezan, Dubai Islamic Bank, Faysal Bank,

Citibank, Deutsche Bank

CORE FUNCTIONS OF COMMERCIAL BANKS

Accepting deposit

Lending (Public / Private Sector, International)

Investment (Debt Securities, Equity Securities, MM, Other)

Borrowing (Inter-bank, SBP, internationally)

Assume Risk

Management of Risk (Credit, Reputation, Default, Market Risk, Operating,

Liquidity)

Manage Bank’s Capital, (D/E, RoE)

Protect Depositor
Trade Facilitation / Intl Facilitation

ADR (Asset deposit Ratio)

Financial Intermediation

Corp Governance
Financial Integrity (AML / CFT)
INDIRECT LENDING TO GOVERNMENT
HELP TURN WHEEL OF ECONOMY
SAFETY, SECURITY, LIQUIDITY
FOREIGN TRADE
TRANSFER OF FUNDS
CAPITAL ASSETS MANAGEMENT

Basic Benchmark to Establish Commercial Bank

Initially PKR 250M (1992)
BASEL I, II, III (Liquidity, Leverage, Capital Adequacy, Risk Management)
Minimum Capital Requirement (MCR): PKR 10 BILLION (Absolute measure)
For foreign banks PKR 3Billion (1-5 Br)
PKR 6Billion (6-50 Br)
PKR 10Billion (51 or more Br)

Minimum 200 Branches for commercial Banks. (Financial Inclusion)

Capital Adequacy Ratio (2013): 10.25% and then 12.5% by 31-12-19
Capital >= 12.5% of your risk weighted assets
Total Eligible Capital >=12.5%
Credit RWA + Market RWA + Operational RWA
RWA Risk Weighted Assets
Let say Credit Portfolio PKR 10 billion Exposed to Cr Risk: 60%
Credit RWA = PKR 6 billion

Customer Loan Rs 1M Security: Property PKR 0.6M. Fixed Deposit

Certificates PKR 0.4M

Assigned 60% weightage to your credit risk

Credit RWA reduce from PKR 1M to PKR 600,000
1 M x 60% = PKR 0.6 M or PKR 600,000/=

MCR:
Dev Fin Ins (FBI): PKR 6B.
MicroFinBanks PKR 1B (Nation-wide),
PKR 500M: Province
PKR 400M: Region
PKR 300M: District.
CAR: 15%

BANKER – CUSTOMER RELATIONSHIP

By opening banks account

Honor cheque Section 31, Negotiable Instrument Act 1881

Right of Lien Right to retain as asset until debt paid (Section 171
Contract Act 1872)

Right of Set Off Adjustment a loan amount (Dr Balance) against Cr Bal

Right to Service Chgs Schedule of Charges

6 Monthly (Calendar Year Basis Jan-Jun, Jul-Dec)

SBP Approval
BANKERS DUTY OF SECRECY

Mandatory under Bank Nationalization Act 1974

EXCEPTIONS

Under Legal Compulsion (Sec 6, Bankers Book Evidence Act 1891, CPC, I.T.O 2001)

Duty to Public Disclosure (National Emergency, Dormat A/c deposit surrender to

SBP Disclosure,)

Bank’s Interest (Defaulters, Unpaid rent of Lockers)

Express / Implied consent of customer (Auditors Balance Confirmation)

Common Inter-Bank Courtesy /Credit Check (Credit Worthiness Report, E-

Credit Information Bureau (of SBP) Report)

TYPES OF ACCOUNT HOLDERS

 Profit / Non-Profit Bearing Accounts

 Time Based Deposit Account 1) Daily Product Basis 2) Fixed Term
Deposit 2a) Notice Deposit (7 days – 29 days) 2b) Term Deposit (1month – 5
years)
 Short Term Deposit Medium Term Deposit Long Term Deposit
 Customer Based Deposit Account (Minor Accounts, Salary Accounts,
Individual, Business Accounts, Limited Co A/cs etc)
 Conventional vs Islamic Deposit Accounts (Faith Based)

Profit Rate is a function of Time and Amount

Profit Rate is usually directly proportional to Time and Amount [Banks’ Size,
Vulnerability for deposit, Time Criticality (June-end, Dec-end)]

Individual Account

ID Proof: Valid NIC, Service Card, Student Card, Professional

Bodies IDs (PMDC Card, CCI, PEC, etc)

Income Proof: Salary Slip, Bank Statement

Other Income Sources: Rental Income, Agri Income, Multiple

Businesses

Place of Business / Job: Visiting Card, (Followup-Br Staff Visit)

Residential / Correspondence Address: Utility Bill (IESCO, SNGPL)

Biometric Verification

A/c Opening Form, Specimen Signature Card, Cheque Book

Requisition Slip (Banks standard form)

KYC / AML. Expected inflows

Business Income vs Personal Income

NIC Verification (VeriSys)

Initial Deposit / Deposit Slip (bank’s min requirement)

3rd party mandate

Letter of Thanks

Account Activation

Cheque Book

Dr Card, Net Banking

 Permission for account utilization (deposit / withdrawal)

Cr Card

Joint Account

2 or more person

a/c operation instruction (jointly operated, singly operated/any one can sign)

3rd party mandate

Partnership Account

Business A/c (Business consideration)

Registered Partnership Deed (stamp paper) Form H

Managing Partner (CEO)

Unregistered

Business common seal

Partnership Resolution (on Firms’ letterhead)

Verifying place of business

Proprietorship Account
 Business A/c (Business consideration)

Business common seal

Sole Proprietorship Account (Single Person – 100% shareholding of

business)

Proprietorship Declaration (Letterhead + sign + stamp)

Verifying place of business

Private Limited Company Account

Shareholding Limited to private individuals

Co can sue and can be sued to the extent of share capital

Registered with SECP

Memorandum of Association (Filed with SECP) (Certified by SECP)

Articles of Association -do-

Form 29 CEO, Directorship, Legal Counsel, Co Secretary,

(Certified by SECP)

Certificate of Incorporation SECP Registration proof

Board Resolution / All Directors + CEO sign. A/c operation instructions

Resolution by BoD

Public Limited Company Account

Share Allocation beyond private ownership by selling shares to general public

Registered Public Ltd Co (SECP)

 Listed (PSX) Primary (IPO) cum Secondary / Unlisted

Certificate of Commencement of Business

Trust / NGO / Society / Association

Non-Profit Sponsors – Moral Obligation Public Welfare

Common Seal + Letterhead

List of Sponsors

Trust Deed

Trust/NGO/Society Bylaws

Resolution of Trust / NGO / Society signed by Sponsors (account operation

instruction)

(Donor) Funding Agreement

Local Funding Only Local/Foreign Funding

Individuals / Corporates / Govt Individuals / Corporates / Govt

PPAF (Pakistan Poverty Alliviation Fund)

UNDP (United Nations Development Program) UNESCO, UNHCR, UNICEF

Melinda Gates Foundation (Bill Gates)

Customer approaches Branch

Submits all supporting documents

Executes bank’s forms/documents/annexure

Branch submits complete AoF to HO

 Three Divisions / Departments involved in scrutiny of documents

Operations Division Legal/Law Division Compliance Division

Coordinate FMU SBP (Financial Monitoring Unit)

LENDING / CREDIT / ADVANCES / LOANS

Depositor Profit

Inhouse expenses (Selling, General, and Administrative)

Investment Lending Activities

Basic Principles of Lending

Safety (Prudent Lending – Max Loans recovered as per terms of lending)

Aggressive vs wreckless In good faith but without negligence

ADR: Asset Deposit Ratio Investment/Loans vs Deposits

ALCO (Asset Liability Committee)

Liquidity : To meet obligations over the counter (by bank as well as customer)

Dispersal / Diversification of Assets (Loans/Advances) Portfolio

Avoid concentration of portfolio in one particular market segment

That leads to escalation in risk profile of that portfolio

Don’t put all the eggs in one basket

Industry Large/Medium/Small Scale. Manufacturing / Trading / Services

Geographical

Type of Customer

Size of Customer

Remuneration

Bank : Lending + Investment (Markup/Interest/rental, Commission/service

charges, (Loss)) (Dividends, Capital Gains/(Loss))

Bank earns to meet its obligations

Suitability

Lending to the right customer for the right purpose (why lend?)

Decision making

5 Cs of Credit
Character Actions (Borrowing) Credit History. Credit worthiness.
Regular/default, Credit Risk, Mitigation Measures, Credit Ratings /
Credit Scores – Tool & Techniques to measure credit worthiness
(lending decision)

Capacity Cash flow. Inflow vs operational (non-operational)/ financial

obligations.

Existing as well as forecasted. (forward looking)

TIE: EBIT / I (Qualitative / Quantitative (ratio, horizontal,

vertical analysis, stress testing)

Capital Customer stake (D/E comparison) (whole hearted dedication to

business) (self-interest)

Collateral security. To protect loan amount. Value commensurate with loan

amount. Quality. Other considerations Default Risk

Conditions Terms and conditions, economic situation, business environment,

PEST, 5 Forces, SWOT, bank’s policies, procedures

Islamic Finance

Economics Tr of wealth through consumption & production

Finance Fund (Money + Investment) Management

Islamic Banking: Apply Economic and Financial principles in Islam to Banking.

Apply Shariah Law to Banking

Basic Principles
The prohibition of riba (interest); and
The sharing of profit and loss between a bank and its customers (Participation in
yield by bank)

Profit Sharing on agreed ratio. Risk sharing as per investment ratio.

Rab-ul-Maal (Customer) Mudarib (Multiplier/Bank) (Authorization, Skill,

Information,Market Access)

Islamic Bank as defined by Org of Islamic Conference (OIC)

An Islamic bank is a financial institution whose statutes, rules and procedures
expressly state its commitment to the principle of Shariah and to the banning of
the receipt and payment of interest on any of its operations
Permissibility Prohibition

Islamic Banking Act 1983, Malaysia

A company that carries Islamic banking business
Islamic banking business means banking business whose aims and operations do
not involve any element which is not approved by the religion of Islam

Islamic Financial Services Act (IFSA) 2013:

Accepting Islamic deposits on current account, deposit account, Saving Account,
or other similar accounts, with or without the business of paying or collecting
checks drawn by or paid in by customers; or (b) Accepting money under an
investment account; Provision of finance; and (d) Such other business as
prescribed under section 3

EVOLUTION
Egypt – 1963 1973: Naseer Social Bank 1975: IDB, DIB 1983: BIMB
2002: IFSB Malaysia (sets standards for regulatory and supervisory agencies
Socialism: Means of Production, Distribution and Exchange by community

KEY FEATURES
1. Avoid Riba (Money is potential capital, medium of exchange)
 2. Gharar (speculation, uncertainty, hoarding, gambling, excessive risk )
3. Risk Sharing
4. Focus on Halal (gaining through effort and risk sharing)
5. Contractual obligations sanctity (Avoid moral hazard, have contractual
clarity)
6. Ethical & religious considerations (no alcohol, tobacco, casino, etc
financing)
7. Trusteeship (Allah owns everything, man is a trustee. It mitigates selfish
dishonest tendencies)

IB Objectives
1. Offer Financial Services
2. Facilitate Currency Stability (Medium of Exchange, not commodity)
3. Facilitate Economic Development (Investment in Businesses to run wheel of
economy, mutual justice)
4. Optimum Resource Allocation (Funding profitable & religiously permissible
businesses)
5. Equitable Distribution of resources (among depositor, banks, businesses)
6. Optimistic Approach (Focus on long term project and goals rather than
short term approach)
COMMERCIAL LENDING

Fund Based Non-Fund Based

1 Running Finance(R /F) / Cash Finance (C/F)

2 Demand Finance / Term Finance
3 Export Refinance Facility (ERF)

 Certain banks would differentiate b/w RF and CF

 Other banks treatment the terms RF & CF synonymously

Short Term Financing / Working Capital Financing (Current Asset – Current

Liabilities)

Facility for <= 1 Year (12 months loan utilization)

Expiry Date of Loan Facility

By or before Expiry Date, bank wants to finalize the renewal of loan process so
that customer should be able to continue utilizing the loan facility for subsequent
year.

Temporary extension in the expiry date of loan facility (normally 1 month)

Facility is usually revalidated for further 1 year upon satisfactory due diligence /
review of past year’s performance

Running Finance (Overdraft Limit / OD)

Let Say RF Rs 5M

Separate Bank A/c is opened for customer in a separate bank ledger which is
generally known as RF Ledger

To facilitate Working Capital required by customer

Cash Operating Cycle

Inventory + Receivables - Payables

Days Days Days

Turnover = Sales (CGS)

Inventory

Days Inventory, Receivables & Payables

Days Inventory = Inventory X 300

CGS

Days Receivables = Avg Receivables x 300

Credit Sales

Days Payable = Trade Payables x 300

CGS

Convention of 300 / 360 / 365 days based on actual working days for particular
business

Days Inventory + Days Receivable - Days Payable= Net Cash Operating Cycle
(Days)

Example: 50+40-45= 45

CGS x 360 (or 300 days as feasible)

NCOC (Days)

CGS x 360

NCOC (Days)

Calculation of Net Working Capital Requirement

Forecasted / Projected Financial Statements

 Judgemental / Estimation / Expectation

 Difference of opinion between bank and customer
 Under financing
 Actual or True Financial Statements indicating Actual Business Operating
Performance
 Link b/w historical and forecasted data. Assumptions
 Assumptions have to be questioned (Rationale for assumptions)

Clean Loans (unsecured loans)

Purpose

Repayment Capacity

Repayment Time Period

In case of default, Lender’s security/coverage/protection

Running Finance / Cash Finance (Amount: WCR (COC)

Possible Due Diligence

Cash Flow Based Lending

RF

Securing loan facility is significant and its part of bank’s policy and SBP guidelines
compliance

Primary Security: Hypothecation of stocks and/or Receivables.

Secondary Security (Collateral): Pledge of stocks/Mortgage of Property / Liquid
security (Readily converted to cash without legal intervention)

Borrower can or cannot be mortgagor

Value of Collateral is generally more than loan amount. E.g. RF loan for Rs 15M
Collateral Rs. 20M. Security margin. 33% margin in security

Nature of RF/CF is same but product dynamics are different

CF Pledge (CF Facility against pledge of stock)

Stock Report ( Hypothecated Assets Detail, usually provided by customer to bank

on monthly basis)

Stock Report 31/10/20 Rs. 10M (Raw Material 2M, Semi-Finished 3M, Finished
5M)

RF (Full utilized) Rs 25M (60% bank financed 40% client financed

60% of 25M = Rs 15M Customer 25M – 15M = 10M

Short of stock by Rs 5M (Receivables Rs 5M)

Let say loan was 50% utilized. RF loan outstanding 31/10/20 i.e. Rs 12.5M

As on 31/10/20 customer is supposed to hold stock worth Rs 7.5M ( 12.5M x 60%)

Stock in Godown / warehouse Rs 20M

CF (pledge) (Margin: 25%) Loan:Rs 15M

Safe Margin available

D/O Issue (Delivery Order)

Its an authority issued by bank to Mucaddam (godown/warehouse keeper) to

release specific quantity/quality of goods to borrower (customer)

Mucaddam acts (primarily) for the benefit of the bank and at the cost of the
borrower (customer)

500,000 worth of stock is required by customer

Customer bank a/c will be debited by bank

Cash deposited by customer: Rs. 667,000/=

500,000 = Rs.667,000

0.75

1-margin requirement = 1-0.25=0.75

Loan (o/s) : Security (Pledge of Stock)

Loan : Security 15: 20

3:4

Mucaddam: Individual / (Mostly) Firm/Corporate Entity

SECURITIES OFFERED BY CUSTOMERS TO SECURE BANK LOANS

Hypothecation of Stocks (under control of Customer / NO PLEDGE)

Pledge of Stock (CF Product)

Properties as Security (Residential / Commercial / Industrial / Agricultural)

Liquid Securities: (Bonds/ Stocks/Investment Certificates/bank deposits)

Rs 15,000,000 – Rs 667,000 = Rs 14,333,000

DEMAND FINANCE

Demand Finance Facility PKR 24M

Repay24 Monthly Installments

1M per month customer pays to adjust the DF Facility of 24M

TRADE FINANCE
Export Finance Scheme (EFS) SBP / Export Refinance (ERF)
(BANKS) SCHEMES
Suppliers Credit: Credit provided by supplier (exporter) to
buyer (importer)
EFS started in 1973 by SBP
SBP Funds involved
Concessionary Finance (markup rate < market rate)
Markup rate is driven by KIBOR (Bid / Offer) approx 7.3% +
(say spread: 3%) (End user – borrower : 7.3%+3%=10.3%
Max Tenor 180 days
Commercial Bank Fund NOT involved
To encourage exporter by meeting their operating
requirements
Country Foreign Exchange Reserves
Trade Balance / Current A/c improve
Max. Spread of Commercial Bank: 1% (bank may reduced his
share of 1% as per mutual consent between bank and
customer)
Example:
SBP EFS Rate= 6.5% + Comm. Bank Spread = 1%
Markup Rate Charged to Customer = 7.5%
Markup SBP: 6 months weighted average T-Bill Rate
Sovereign Debt: State Debt / Borrowing by GoP

PRE-SHIPMENT FINANCE FACILITY

1. Transaction Based / Case to Case
2. Performance Based
Customers’ export performance judged through EE-Form / EF-
Form
Export Performance record prepared by concerned
commercial bank and statements (EE/EF Form) submitted to
SBP
Exporters can obtain loan from a single bank or multiple banks

Pre-Shipment Facility ERF-I, ERF-II

 ERF-Part-I: On Case to Case Basis (ERF-I)
 ERF-Part-II: Performance Based Regular Limit instead of
“case to case basis” (ERF-II)
More like a Running Finance Facility (RF)
 Loan amount under ERF-II is disbursed to customer’s
account
Customer utilizes the loan amount throughout the
year for export purpose
At the end of the year customer has to prove
minimum export performance of twice the ERF II limit
As a result of Covid-19, SBP has relaxed the
performance limit from 2 times to 1.5

Per Forma Invoice / Indent

Post-Shipment Facility
Shipped on Board (Consignment has been loaded on ship)
B/L (Bill of Lading) Airway Bill
R/R Railway Receipt Bill-T (BILTY)
ERF-II Limit Disbursement
Dr: Loan A/c Cr: Customer A/c
ERF-II Limit Adjustment
Dr: Customer A/c Cr: Loan A/c

Yield from Customer

1. Markup from ERF Loan (Max 1% Comm Bank)
2. Earning on Deposit (Export Proceeds)
3. Exchange Earning
4. Export Loan /Doc Processing Charges

USD 40,000/=Canada Textile Goods

Exchange Earning @ PKR 1 / USD (Assumption-flexible)
USD Buying Rate Rs 159
USD Selling Rate Rs 160
USD 40,000 @ 159 6,360,000
USD 40,000 @ 160 6,400,000
Exchange Earning PKR 40,000

Export Processing Fee

EPF of 0.1% Rs 6.4M x 0.1% = Rs 6,400
Courier Charges (DHL Charges) Rs 5,000
Actual Courier Charges Rs 4,000
Net Earning Rs 1,000

Earning on Deposit
Lending/placement Earning
Cost of Deposit??? Expense
Gross Profit
Varies from bank to bank
Volume of profit bearing deposit (low/medium/high)
Non-performing loan portfolio
General and Administrative Cost

POST SHIPMENT FINANCE

FAFB (Finance Against Foreign Bill)
Can be on case to case basis or on Limit basis
Single Indent/PerForma Invoice – Part Shipment
USD 100,000
Full & Final Shipment USD 100,000/=
Partial Shipments (4 parts)
USD 30,000
USD 40,000
USD 20,000
USD 10,000
Part Shipment / Partial Shipment
Contract b/w exporter and importer will explain whether Partial
Shipment is allowed or not
Tolerance Level (Let say) 5% of value of export contract
USD 95,000 – USD 105,000 will be considered to executed as pe
the terms of contract

FBP/IBP (Foreign Bill Purchased) (Inland Bill Purchased)

Discounting of Bill of Exchange
Say 10% Bill of Exchange
USD 40,000 10% Disc USD 4,000
USD 40,000 – USD 4,000 = USD 36,000
USD 36,000 @ 159 = 5,724,000/=
Assume Markup @ 10%. 2 Month
(5,724,000 x 10%) /12 x 2 Rs 95,400/=
Export Proceeds Realized USD 40,000
40,000 x 159 = Rs 6,360,000
Net Proceeds Credited to Customer
Rs 6,360,000 – 5,724,000 – 95,400 = Rs 540,600
Remaining amount of Rs 540,600 will be credited to customer’s
deposit account maintained with comm. bank
FAFB documents sent in collection
FBP/IBP Documents purchase
Avoid duplicate financing (Pre-shipment & Post-shipment
financing against same PerForma Invoice)
Pre-shipment and post-shipment limits can be simultaneously
allowed to same customer (but obviously against different sets
of documents)
NON-FUND FACILITIES
Assurances / Undertaking / Guarantee
PRODUCTS
LC Letter of Credit
LG Letter of Guarantee

LC – Letter of Credit
It is an authority issued by the Issuing Bank on behalf of
importer in favor of exporter with the undertaking that the
Drafts (Bill of Exchange)drawn there-under will be duly
honored provided the terms and conditions of the Credit are
duly complied with.
LC Established (open)
IMPORT EXPORT
1)Importer (Buyer) 4)Exporter (Seller)
2)Issuing Bank 3)Advising Bank
S.W.I.F.T (Society for Worldwide Interbank Financial
Telecommunication)
Swift Code HBL HABBPKKA0007
Additional Banking Channel in LC
1. Advising Bank (e.g. Deutsche Bank Frankfurt Germany)
2. Negotiating Bank
3. Confirming Bank
4. Corresponding Bank
GD Goods Declaration
H.S Code e.g. 1234.0001
2 sets of export/shipping document
1 set to UBL Pakistan Advising Bank
2nd set to Importer Exporter to Importer
2nd set is NON-NEGOTIABLE SET OF DOCUMENTS
Bill of Lading Endorsed in favor of IMPORTER so that customer
may received consignment from Port.
Attorney Holder
9 Documents will be handed over to Clearing and Forwarding Agent for deposit
of duty/taxes against imported consignment and get the consignment release
from (say) Karachi Port (Keamari / Port Qasim) Gawadar (Balochistan)

Realased consignment is transported to Importer’s premises for

processing/manufacturing and the resulting finished goods are prepared for sale
(local sale / export sale)
LC restricted for negotiation (Advising Bank OR the nominated bank is bound to
negotiate the LC)

1 Bank of China Advising Bank as well as Negotiating Bank

2 Industrial and Commercial is Nominated Bank / Negotiating Bank

Bank of China (ICBC)

3 LC is open / unrestricted for Negotiation

Exporter is at liberty to choose the bank of its own choice and submit
export document for negotiation

Types of LC
Sight LC – Amount payable as soon as the documents are
checked by bank and presented to customer for payment
D/A LC (Documents Against Acceptance)
Also known as Usance LC or Acceptance Credit
Time usage
Time cushion permitted to pay foreign exchange bill
60 Days from B/L Date (B/L Date 07-12-2020) 5-2-2021
Underlying BoE will be called Time Draft
7th Jan – Customer obtained possession of consignment
from Port Qasim Karachi, after payment of duties and
taxes.
Consignment is transported to production area (factory)
8-18 Jan: Consignment is processed and converted into
finished goods (let say) over the next 10 days.
22 Jan: Finished product is put up for sale (Cash / Credit
Sale)
(Lets assume) cash sale is realized in next 7 days (29/30
Jan)
1st week of Feb: Cash available for payment on due date
i.e. 5-2-2021

One off Facility OR Regular Limit

500M / Tons Edible Oil Import from Malaysia
@ USD 500 / M.Ton USD 225,000/- (PKR 36M)
1USD = PKR160
SECURITY
Cash Margin 10% (0% - 100%) (Rs 3.92million) Margin A/c

Lien on Import Documents

Tangible Property (Mortgage of
Residential/Commercial/Industrial/Agricultural Property)
LC Establishment Vouchering
Contingent Liability Off-Balance Activity/Liability
DR: Customer Liability L/C 39.245 M
CR: Bankers Liability L/C 39.245 M

DR: Customer Deposit A/c 4.03 M

CR: Customer LC Margin A/c 3.92M
CR: Income A/c LC Commission 0.10M
CR: SWIFT Chgs 0.01M
LC Transmission Mechanism
S.W.I.F.T (Society for Worldwide Interbank Financial
Telecommunication)
Example: SWIFT Code of HBL FX Br KHI HABBPKKA007
Banking Channel in LC
5. Advising Bank: LC is communicated to exporter(e.g.
Deutsche Bank Germany)
6. Negotiating Bank Can be same as Advising Bank or
different Bank
7. Confirming Bank
8. Correspondent Bank
Bankers’ Alamanac
GD stands for Goods Declaration
H. S Code Harmonized Serial Code written as two pairs of
4 digits, separate by a dot (example: 1234.0001)
Unique product indentity

2 sets of export/shipping document sent by exporter

1st set to exporter’s Bank Advising Bank
2nd set to Importer Importer
2nd set of export documents is NON-NEGOTIABLE
Bill of Lading Endorsed in favor of IMPORTER so that
importer may collect consignment from Port
Attorney Holder of the bank is authorized to Endorse B/L
Bank is the Consignee
Importer is the Notifying Party

LC Documents
1. Commercial Invoice
2. Bill of Exchange
3. Insurance Document
4. Transport Document (Bill of Lading)
5. Packing List
6. Certificate of Origin
7. Phytosanitary Certificate
8. Other (quality/inspection) Certificate
LC Documents Lodgement
Sight LC
Dr: PAD (Payment Against Documents)
Dr: Margin on LC
Cr: Nostro A/c (Our A/c with You (Citibank, AMEx)
Contingent Liability Reversal
 DR: Bankers Liability L/C 39.245M
CR: Customer Liability L/C 39.245M

D/A L/C Documents Lodgement

LC D/A Contingent Liability Reverse
DR: Bankers Liability L/C
CR: Customer Liability L/C
LC Acceptance Liability Creation
DR: Customer Liability Acceptance
CR: Banker’s Liability Acceptance