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Welcome To Our Presentation

Letter Of Credit(LC)

Document and undertaking issued by a bank

At the request of the applicant (buyer, importer)

In favor of a beneficiary (seller, exporter)

Substitutes the bank’s name and credit risk for that of the applicant (buyer, importer)

Guarantees payment of a customer’s draft up to astated amount for a specified periodif certain conditions are met

Parties Involved in a Letter of Credit

Parties Involved in a Letter of Credit Reimbursing Bank Confirming Bank Applicant Beneficiary Issuing Bank Advising
Reimbursing Bank
Reimbursing
Bank

Confirming

Bank

Applicant

Parties Involved in a Letter of Credit Reimbursing Bank Confirming Bank Applicant Beneficiary Issuing Bank Advising

Beneficiary

Issuing Bank

Parties Involved in a Letter of Credit Reimbursing Bank Confirming Bank Applicant Beneficiary Issuing Bank Advising

Advising

Bank

Parties Involved in a Letter of Credit Reimbursing Bank Confirming Bank Applicant Beneficiary Issuing Bank Advising

Nominated

Bank

Importance of LC

 

For Exporter

Dependence on credit worthiness of a bank instead of importer

If the credit is confirmed by a

bank in

the

exporter's country, the

exporter

is

neither

subject to commercial nor to country risk

 

If the credit is irrevocable, it can’t be cancelled without the exporter’s consent and notice of revocation can be rejected byte exporter if received after shipment

The documents and therefore the goodwill not be released until payment or commitment to payment is made (In terms of LC)

Where credit has been allowed the accepted

bill of exchange can be used finance

to obtain the

 

For Importer

Importer can negotiate better terms as the exporter is assured of payment

Importer is assured that no funds will be released unless title documents and received correct and in order

Protection is provided under UCP for documentary Credit

Types of Letter Of Credit

Revocable

Irrevocable

Confirmed

Unconfirmed

Transferable

Non-

transferable

• give issuer the amendment or cancellation right of the credit any time without prior notice
• give issuer the amendment or cancellation right of the credit any
time without prior notice to the beneficiary
• cannot be amended or cancelled without the agreement of the
credit parties
• another bank adds its additional confirmation (or guarantee) to honor a complying presentation at the
• another bank adds its additional confirmation (or guarantee) to
honor a complying presentation at the request or authorization of
the issuing bank
• does not acquire the other bank's confirmation
• exporter has the right to make the credit available to one or more subsequent beneficiaries
• exporter has the right to make the credit available to one or more
subsequent beneficiaries
• seller cannot give a part or completely right of assigned credit to somebody or to
• seller cannot give a part or completely right of assigned credit to
somebody or to the persons he wants

Types of Letter Of Credit(Cont’d)

Fixed

Revolving

Back to Back

Red Clause

• amount up to which one or more bills may be drawn by the beneficiary within
• amount up to which one or more bills may be drawn by the
beneficiary within the specified period of time is specified
• not the total amount up to which bills may be drawn but the total
amount up to which bills drawn may remain outstanding at a time is
specified
• consisted of two separated and different types of LC • seller before sending the products
• consisted of two separated and different types of LC
• seller before sending the products can take the pre-paid and parts
of the money from the bank

Opening Of A Letter Of Credit

Issuance of a letter of credit

Opening Of A Letter Of Credit Issuance of a letter of credit

Opening Of Letter Of Credit(Cont’d)

Opening Of Letter Of Credit(Cont’d)

Documents presented for payment

  • 1. Financial Documents : Bill of exchange, Co-accepted Draft

  • 2. Commercial Documents : Invoice, packing list

  • 3. Shipping Documents : Transport Document, Insurance Certificate, Commercial, Official or Legal Documents

  • 4. Official Documents : License, Embassy legalization, Origin Certificate, Inspection Certificate, Phytosanitary certificate

  • 5. Transport Documents : Bill of lading (ocean or multi-modal or Charter party), Airway bill, Lorry/truck receipt, railway receipt, CMC Other than Mate Receipt, Forwarder Cargo Receipt, Deliver Challan etc.

  • 6. Insurance documents : Insurance policy, or Certificate but not a cover note.

Fees and Reimbursements

Opening charges

This would comprise commitment charges and usance charged to be charged upfront for the period of the L/C. The fee charged by the L/C opening bank during the commitment period is referred to as commitment fees. Commitment period is the period from the opening of the letter

of credit until the last date of negotiation of documents under the L/c or the expiry of the L/c,

whichever is later. Usance is the credit period agreed between the buyer and the seller under the letter of credit. This may vary from 7 days usance (sight) to 90/180 days. The fee charged by bank for the usance period is referred to as usance charges.

Retirement Charges

  • 1. This would be payable at the time of retirement of LCs. LC opening bank scrutinizes the bills

under the LCs according to UCPDC guidelines , and levies charges based on value of goods.

  • 2. The advising bank charges an advising fee to the beneficiary unless stated otherwise the fees

could vary depending on the country of the beneficiary. The advising bank charges may be

eventually borne by the issuing bank or reimbursed from the applicant.

3.

The

applicant

is

bounded

and

liable

to

indemnify

responsibilities imposed by foreign laws and usage.

banks

against

all obligations and

  • 4. The confirming bank's fee depends on the credit of the issuing bank and would be borne by the

beneficiary or the issuing bank (applicant eventually) depending on the terms of contract.

Regulatory Requirements

Trade Control Requirements The movement of good in Bangladesh is guided by a predefined set of rules and regulation. So, the banker needs to assure that make certain is whether the goods concerned can be physically brought in to Bangladesh or not as per the current EXIM policy.

´

ISBP 2002 The widely acclaimed International Standard Banking Practice(ISBP) for the Examination of Documents under Documentary Credits was selected in 2007 by the ICC’s Banking Commission. First introduced in 2002, the ISBP contains a list of guidelines that an examiner needs to check the documents presented under the Letter of Credit. Its main objective is to reduce the number of documentary credits rejected by banks.

Exchange Control Requirements

The main objective of

a

bank

to

open an

Import

LC

is

to effect

settlement of payment due by the Indian importer to the overseas supplier, so opening of LC automatically comes under the policies of exchange control regulations.

BAFEDA Guidelines Bangladesh Foreign Exchange Dealers' Association was formed in a bankers’ meeting held on August 12, 1993 in the Board Room of Rupali Bank Ltd. to help the development of an orderly inter-bank foreign exchange market in Bangladesh. BAFEDA has issued rules for import LCs which is one of the important area of foreign currency exchanges. It has an advantage over that of the authorized dealers who are now allowed by the Bangladesh Bank to issue stand by letter of credits towards import of goods.

Regulatory Requirements(Cont’d)

UCP 600 is the latest version of the rules that govern letters of credit transactions worldwide. UCP 600 is prepared by International Chamber of Commerce’s (ICC) Commission on Banking Technique and Practice. Its full name is 2007 Revision of Uniform Customs and Practice for Documentary Credits, UCP 600, and (ICC Publication No. 600). The ICC Commission on Banking Technique and Practice approved UCP 600 on 25 October 2006. The rules have been effective since 1 July 2007. It contain a total of about 39 articles covering the following areas, which can be classified as 8 sections according to their functions and operational procedures.

Regulatory Requirements (Cont’d) • UCP 600 is the latest version of the rules that govern letters

Risk Situations

Fraud Risks

The payment will be obtained for nonexistent or worthless merchandise

against presentation by the beneficiary of forged or falsified documents. Credit itself may be forged

Sovereign and Regulatory Risks

Performance of the Documentary Credit may be prevented by government action outside the control of the parties

Legal Risks

Possibility that performance of a Documentary Credit may be disturbed by legal action relating directly to the parties and their rights and obligations under the Documentary Credit

Force Majeure and Frustration of Contract

Performance of a contract including an obligation under a Documentary Credit relationship is prevented by external factors such as natural disasters or armed conflicts

Risk To Parties

• • • • • • • Non-delivery of Goods Short shipment Inferior Quality Early /Late
Non-delivery of Goods
Short shipment
Inferior Quality
Early /Late Shipment
Damaged in transit
Foreign exchange
Failure of Bank via Issuing
bank / Collecting Ba
Applicant
• • Insolvency of the Applicant Fraud Risk, Sovereign and Regulatory Risk and Legal Risks Issuing
Insolvency of the
Applicant
Fraud Risk, Sovereign
and Regulatory Risk and
Legal Risks
Issuing Bank
Reimbursing Bank No obligation to reimburse the Claiming Bank unless it has issued a reimbursement undertaking.
Reimbursing
Bank
No obligation to reimburse
the Claiming Bank unless it
has issued a reimbursement
undertaking.
Beneficiary • • Failure to Comply with Credit Conditions Failure of, or Delays in Payment from,
Beneficiary
Failure to Comply with
Credit Conditions
Failure of, or Delays in
Payment from, the
Issuing Bank

Minimizing The Risks

  • 1. Prior to the issuance of the L/C, negotiate exactly what documents must be presented to the bank.

  • 2. Try to agree to present as few documents as possible and to have descriptions as simple as

possible.

  • 3. Always include your requirements for the L/C in the pro-forma invoice.

  • 4. Once issued, the L/C can only be altered or cancelled by consent of all parties.

  • 5. Remember that L/C is a bank-to-bank agreement and is not a substitute for the contract between you and the buyer.

  • 6. Be sure that you are in a position to provide the bank with all documents stipulated in the L/C in time.

  • 7. Always indicate L/C as "irrevocable".

  • 8. Check the Additional Conditions and be sure that you are able to meet them.

  • 9. If you have any doubts that the Issuing Bank, for any political or economic reason, can fail

to make a payment, the L/C must be confirmed by the Advising Bank or by any other bank,

whose confirmation will be accepted by the Advising Bank.

  • 10. If there are any discrepancies and the L/C has to be amended, do not ship goods before these amendments are made.

A Sample Of L/C

A Sample Of L/C