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LETTER OF CREDIT.pptx
- 1. UNIT – 3 LETTER OF CREDIT BY DESI PRIYA V ASSISTANT PROFESSOR ETHIRAJ COLLEGE FOR WOMEN
- 2. LETTER OF CREDIT Superior method of settlement of debt Documentary credit Undertaking by the importer’s bank Obligation of the importer Obligation of the importer’s bank Uniform Customs and Practice for Documentary Credit (UCP) – International Chamber of Commerce
- 3. MECHANISM OF LETTER OF CREDIT
- 4. FEATURES OF A LOC Operative Instrument Date Terms Extension of Dates Description of Period Value and Quantity of Goods Documents to be Tendered Shipments Instructions to the Nominated Bank
- 5. PARTIES TO A CREDIT Applicant Issuing / Opening Bank Beneficiary Intermediary Bank – Advising Bank and Negotiating Bank Article 2 of UCP Article 3 of UCP
- 6. ADVANTAGES OF LOC 1. TO THE EXPORTER: a) Sort of assurance b) Exchange of correspondence c) Protects exporter against importer failure d) Superior undertaking of a bank e) Seller expands business f) Exchange regulations in importer’s country g) Financial position of the exporter h) Raise loans
- 7. CONTI… 2. TO THE IMPORTER: a)Purchase materials without full advance payment b)Finalise contract c)Quality and quantity of goods d)Big credit
- 8. DISDAVANTAGES OF LOC 1.TO THE EXPORTER: Conditional Documents Credit 2. TO THE IMPORTER: Deals with documents and not in goods Reimburse the issuing bank Risk of falsification of documents
- 9. TYPES OF LETTERS OF CREDIT LOC Clean Credit Documentary Credit
- 10. TYPES OF LETTER OF CREDIT DOCUMENTARY CREDIT CLASSIFIED UNDER THE FOLLOWING TYPES: 1. Payment, Acceptance and Negotiation Credits 2. Revocable and Irrevocable Credits 3. Confirmed and Unconfirmed credits 4. With Recourse and Without Recourse Credits 5. Fixed and Revolving Credits 6. Transferable Credits 7. Back – to – Back Credits 8. Red Clause and Green Clause Credits 9. Standby Credits
- 11. PAYMENT, ACCEPTANCE & NEGOTIATION CREDITS Article 6 (b) Letter of credit may be: 1. Payment credit (sight payment credit) 2. Negotiation credit 3. Acceptance credit 4. Deferred payment credit
- 12. CONTI… PAYMENT CREDIT Payment will be provided to the beneficiary against the documents submitted Paying bank (agent of the issuing bank) Reimbursement from issuing bank NEGOTIATION CREDIT Documents accompanied by sight draft Bank which negotiates documents pays the amount Reimbursement from the issuing bank
- 13. CONTI….. Article 6 (a), credit may be (a) Restricted Credit and (b) Open Credit (a) Issuing bank may restrict the negotiation of documents under the LOC (b) Open invitation to bank to negotiate documents under LOC ACCEPTANCE CREDIT Usance bill of exchange Buyer need not pay immediately Seller gets payment immediately Duty of the issuing bank Accepting bank Banker’s acceptance
- 14. CONTI…. Trust Receipt Loan against pledge of goods DEFERRED PAYMENT CREDIT Undertaking by the issuing bank No drafts are drawn Inferior to Acceptance Credit Time given to importer to pay for the documents Finance import of plant and machinery, capital goods on deferred payment basis The exporter in such cases can ask the importer to
- 15. CONTI…. 1. Remit agreed advance payment and submit “Deferred Payment Guarantee” 2. Open deferred payment letter of credit
- 16. REVOCABLE & IRREVOCABLE CREDITS REVOCABLE CREDIT Cancelled or amended by the issuing bank (without consent of beneficiary) Not practiced IRREVOCABLE CREDIT Definite undertaking by the issuing bank Cancelled or amended (consent of beneficiary) All credits are irrevocable
- 17. CONFIRMED & UNCONFIRMED CREDIT CONFIRMED CREDIT Advising bank adds confirmation to the credit Confirmation – confirming bank and issuing bank Irrevocable credit UNCONFIRMED CREDIT Advising bank does not adds its confirmation LOC is genuine and no additional undertaking
- 18. WITH RECOURSE & WITHOUT RECOURSE CREDIT WITH RECOURSE CREDIT Risk of non payment - beneficiary WITHOUT RECOURSE CREDIT Risk of non payment - nominated bank Without recourse to the drawer Amount received earlier on negotiation of documents
- 19. FIXED & REVOLVING CREDIT FIXED CREDIT Non-revolving credit Limit is reduced permanently to the extent of bills drawn under LOC For example: INR 10 Lakhs only Non – automatic revolving credit – renewal of limit REVOLVING CREDIT Limit under the credit is renewed as and when bills drawn Repeated negotiation possible
- 20. CONTI… For example: Credit limit = INR 1,00,000 Bills drawn = INR 40,000 Limit for Negotiation = INR 60,000 If among the bills already drawn, one for INR 20,000 is paid, then the limit will be reinstated. Now the credit limit = INR 80,000 Automatic revolving credit – limits renewed at fixed interval Total drawings on the bill – expiry period ‘Cumulative’ or ‘Non-cumulative’
- 21. TRANSFERABLE CREDIT Credit available to third parties Exporter – intermediary Example A credit is transferred in the following ways: (exception to the following) (a) Amount of credit may be reduced. (Profit or commission) (b) The validity period and date of shipment may be curtailed (c) Insurance cover
- 22. BACK –TO – BACK CREDIT Beneficiary – intermediary Ancillary letter of credit (countervailing credit) Inland letter of credit Following points to be kept in mind by banks while opening this LOC: 1. Terms and conditions of the LOC (a) Amount of the credit (b) Validity and shipment dates 2. Intermediary bank also a negotiating bank 3. Original credit – irrevocable credit
- 23. CONTI…. Features common with a transferable credit Credit transferred to a third party Documents substituted by first beneficiary Possibility of knowing the real supplier
- 24. RED CLAUSE & GREEN CLAUSE CREDIT RED CLAUSE CREDIT Packing or anticipatory credit Clause printed in red, authorizing the negotiating bank to grant advances to the exporter Amount of advance < amount of the letter of credit Negotiating bank – utilisation of advances Precautions to be taken by banks: 1. Credit rating of the issuing bank 2. Documentation
- 25. CONTI…. 3. Identification of the borrower 4. Exchange fluctuations 5. Undertaking to tender documents GREEN CLAUSE CREDIT Extension of the red clause Permits pre – shipment advances and covers storage in the name of bank Used in Australian wool trade
- 26. STANDBY OR GUARANTEE CREDIT Article 2 of UCP US Comptroller of Currency defines a Standby Credit, “A standby letter of credit is any letter of credit, or similar arrangement, however, named or described, which represents an obligation to the beneficiary on the part of the issuer: (a) Repay money borrowed (b) Indebtedness (c) Default”. Issuing bank assures beneficiary Substitute for bank guarantee
- 27. CONTI….. Amount outstanding under standby credit have far exceeded than under commercial credit International Chamber of Commerce has issued in 1998 its publication no 590 under “International Standby Priorities (ISP98)” In India, FEDAI has adopted ISB98
- 28. RESPONSIBILITIES & LIABILITIES OF PARTIES APPLICANT (IMPORTER) BENEFICIARY (EXPORTER) ISSUING BANK (OPENING BANK) NOMINATED BANK (INTERMEDIARY BANK) 1. ADVISING BANK 2. CONFIRMING BANK 3. PAYING BANK 4. ACCEPTING BANK 5. NEGOTIATING BANK 6. REIMBURSING BANK
- 29. APPLICANT Sale contract LC as absolute payment Obligations between the importer and the issuing bank Article 37 (a) and (b) Liable to pay charges Liable to indemnify Stand charged to the bank
- 30. BENEFICIARY Export goods as per the contract and produce the documents as required by the credit He cannot avail himself of the contractual relationship [Article 4] Documents found to be defective one Transferable credit – transfer charges
- 31. ADVISING BANK Advising bank signifies the Authenticity of the credit [Article 9 (b)] Advising bank satisfies itself of the authenticity of the credit: Advising bank informs the issuing bank [Article 9 ( e )] Advising bank informs the beneficiary [Article 9 (f)]
- 32. CONFIRMING BANK Bank in the exporter country adds confirmation to the credit – additional undertaking to the beneficiary Relationship of the confirming bank with the beneficiary Relationship between confirming bank and issuing bank – negotiating bank
- 33. PAYING BANK Bank in the beneficiary country Accepts nomination – liable to pay against documents Payment is without recourse to the drawer Responsibility – scrutiny of documents Position – similar to negotiating bank
- 34. ACCEPTING BANK Accept usance bills drawn under the credit Responsibility – accepts draft drawn and make payment on their due dates
- 35. NEGOTIATING BANK Open credit – bank on its own can accept the nomination as negotiating bank Otherwise – paying bank or confirming bank No other banks can be compelled Examine all the documents – terms and conditions of the credit Compliance of the stipulated documents – International Standard Banking Practice Documentary credit – all parties deal in documents and not in goods Discrepancy in the documents tendered
- 36. ISSUING BANK Primarily responsible for payment under the credit [Article 7 (a)] Credits and any amendments issued by the bank must be complete and clear [Article 4 (b)] Issuing bank should nominate banks – to pay or accept drafts or to negotiate [Article 12 (b)] Bank uses the service of an advising bank to have credit advised to the beneficiary must also use for any amendments [Article 9 (d)] Documents lost in transit [Article 35] Appearing on the face of the document as issuing bank – issuing bank determines [Article 14 (a)]
- 37. CONTI….. When issuing bank determines that a presentation is complying it must honour [Article 15 (a)] Issuing bank refuse to take up the documents – documents appears on their face not in compliance with the terms and conditions [Article 16 (a)] Issuing bank has 5 banking day for compliance of documents [Article 14 (b)] Waiver of the discrepancies by the applicant however it does not extend the period of seven days for scrutiny and communicating the decision [Article 16 (b)] Refuse to accepts the documents due to discrepancies [Article 16]
- 38. REIMBURSING BANK Issuing bank indicate in the credit the name of a bank from who the paying or negotiating bank can obtain reimbursement Documents are sent to the bank Issuing bank maintains account with reimbursing bank Article 13 governs the relationship between issuing bank and reimbursing bank: a. Credit must state reimbursement subject to ICC rules for bank-to-bank reimbursements b. If bank does not state ICC rules for bank-to-bank reimbursements, the following apply: i) Issuing bank provides reimbursing bank, reimbursing authorization (without expiry date)
- 39. CONTI…. ii) Claiming bank shall not be required to supply a reimbursing bank with a certificate of compliance iii) Issuing bank responsible for any loss of interest – reimbursement not provided on first demand by reimbursement bank iv) Reimbursing bank charges c. Issuing bank is not relived of any of its obligation towards reimbursement bank.