Letter of Credit Guarantees

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Letter of Credit Guarantees

  1. 1. Risks inInternational Trade
  2. 2. How to manage trade exposures Through appropriate instruments Through credit risk agencies
  3. 3. Appropriate instruments Letter of credit Standby credit Guarantees Bankers co-acceptance facility
  4. 4. Letter of Credit A Letter of Credit is an arrangement whereby, a bank agrees to make the payment on behalf of the buyer to the supplier, upon receipt of certain documents, provided that certain terms and conditions as specified in the Letter of Credit are satisfied
  5. 5. Elements Of A Letter Of CreditA payment undertaking given by a bank (issuing bank)On behalf of a buyer (applicant)To pay a seller (beneficiary) for a given amount of moneyOn presentation of specified documents representing the supply of goods
  6. 6. Elements Of A Letter Of CreditWithin specified time limitsDocuments must conform to terms and conditions set out in the letter of creditDocuments to be presented at a specified place
  7. 7. LC Mechanism Seller’s Bank Buyer’s Bank Seller Buyer CarrierNegotiation and finalisation of contract
  8. 8. LC Mechanism Seller’s Bank Buyer’s Bank Seller Buyer CarrierBuyers bank supplies a LC to seller
  9. 9. LC Mechanism Seller’s Bank Buyer’s Bank Seller Buyer CarrierSeller consigns the goods to a carrier in exchange for a bill of lading
  10. 10. LC Mechanism Seller’s Bank Buyer’s Bank Seller Buyer CarrierSeller provides bill of lading to bank in exchange for payment. Sellers bank exchanges bill of lading for
  11. 11. LC Mechanism Seller’s Bank Buyer’s Bank Seller Buyer CarrierBuyer provides bill of lading to carrier and takes delivery of goods
  12. 12. Types of Letters of credit Irrevocable Confirmed / unconfirmed Transferable Back to back Revolving Deferred Standby letter of credit
  13. 13. Advantages Of LCLC, also known as documentary credit, is among the most secured instruments available to international tradersAn LC is useful when reliable credit information about a foreign buyer is difficult to obtainAn LC also protects the buyer since no payment obligation arises until the goods have been shipped or delivered as contracted
  14. 14. 1 Goods consigned directly Payment demanded on due date and defaulted by importer 2 3 4 STANDBY CREDIT 8 7Submission Payment of Payment Documents made to Draft / made Presented Exporter Bill of Exchange 6 Payment made Documents forwarded Exporter’s Bank 5 Issuing Bank
  15. 15. Guarantees
  16. 16. 14.11.2011Larsen & Toubro Limited (L&T), the Mumbai-basedmultinational conglomerate company, is right on themoney these daysIt has apparently bagged orders, accumulating amassive $889 million from Thailand and the UAE.The first contract, which reads $189 million offered byAbu Dhabi Gas Industries Ltd., is meant for theHabshan-Ruwais-Shuweihat gas pipeline project.
  17. 17. GuaranteesA Bank Guarantee may be defined as a contract wherebythe bank guarantees to discharge the liability of a thirdperson in case of his default
  18. 18. Guarantees Enforceable only in case of default of the applicant / buyer / borrower Bank’s liability will be secondary not primary Can be for Performance of a contractual obligation or Financial obligation – loan repayment
  19. 19. GuaranteesIssuing bank buyer seller Stage 1- Contract
  20. 20. Invocation of payment under guaranteeIssuing bank buyer seller Stage 1- Non performance-Default
  21. 21. Types Of GuaranteesBank guarantees issued by the banker may be of thefollowing types:  Financial Guarantees  Performance Guarantees
  22. 22. Financial Guarantee Under a financial guarantee, a banker undertakes only financial liability He undertakes to pay the beneficiary an amount, not exceeding the sum stated in the guarantee, on default of promise by the customer
  23. 23. Financial GuaranteeThis type of guarantee is normally issued in lieu of payment of tender deposits, earnest money deposits, customs duty/ excise duty/ sales tax/ income tax etc.An exporter participating in a global tender has to furnish earnest money deposit. In lieu of it, a guarantee, known as bid bond guarantee or bid bond, is issued
  24. 24. Performance GuaranteeUnder the performance guarantee, a banker guarantees: A. that the customer will perform the contract undertaken B. On his failing to perform the same, the banker shall make good the loss caused limiting his liability equal to guarantee amount
  25. 25. Thank you

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