It is all about import finance

1. Chapter - 8

2.  Letter of credit is a conditional guarantee
whereby the issuing bank (importer's bank),
acting on behalf of the customer (the
importer or buyer), promises to make
payment to the beneficiary or exporter
against the receipt of complying documents.
 Letters of Credit are the most common
import financing methods, offering protection
to importers and exporters in cross-border
transactions.

3.  >L/C is used to minimize risks in
international trade where buyer and seller
may not know one another.
 >L/C is one of the secure instruments and
provides several benefits to both exporters
and importers.

4.  1. Applicant (Opener): Applicant which is also referred to as account
party is normally a buyer or customer of the goods on whose request the
letter of credit is issued.
 2. Issuing Bank (Opening Bank) : The issuing bank is the one which
create a letter of credit and takes the responsibility to make the
payments on the receipt of documents presented by the beneficiary or
their banker.
 3. Beneficiary : Beneficiary is normally stands for a seller of the goods in
whose favour the credit is issued to enable him or his agent to obtain
payment on surrender of stipulated document and comply with the term
and conditions of the L/c.
 4. Advising Bank : An Advising Bank provides advice to the beneficiary
and takes the responsibility for sending the documents to the issuing
bank and is normally located in the country of the beneficiary.

5.  5. Confirming Bank: When the exporter is not satisfied with the
undertaking of only the issuing bank because of its lower credit
rating or any other trust issues then the Confirming bank adds
its guarantee to the credit opened by the issuing bank.
 6. Negotiating/Nominated Bank: The negotiating bank negotiates
the documents related to the LC submitted by the exporter. It
makes payments to the exporter, subject to the completeness of
the documents, and claims reimbursement under the credit.
(Note:- Negotiating bank can either be a separate bank or an
advising bank depending upon whether the credit is unrestricted
or restricted)
 7. Reimbursing Bank: It is normally the bank with which issuing
bank has an account from which payment has to be made.The
reimbursing bank honors the claim that settles the
negotiation/acceptance/payment coming in through the
negotiating bank.

6.  In Article 2 UCP(Uniform Customs & Practice
for Documentary Credits) 600 the term
negotiation in case of L/C is denoted as the
purchase by the nominated bank of drafts
(drawn on a bank other than the nominated
bank) or documents under a complying
presentation, by advancing or agreeing to
advance funds to the beneficiary on or before
the banking day on which reimbursement is
due to the nominated bank.

7.  Step 1:After entering into a foreign trade contract, Importer contacts to the
issuing bank for the issuance of the negotiable letter of credit.
After receiving the request from the buyer, bank examines the following things:
i) Buyer's creditworthiness
ii) Import trade regulations
iii) Exchange Control Regulations
iv) Supplier's creditworthiness report
v) Marketability of goods.
Then the buyer must submit the following papers:
i) L/C application
ii) Import Licence/Import Authorisation form or Import Registration Certificate
iii) Indent/Proforma invoice
iv) Insurance Cover Note
v) IMP form and otger documents/papers etc.

8. Then the bank must also checks the credit rating of the exporter to ensure two things –
I) the exporter is a man of integrity
ii) the exporter has the capacity to supply the goods.
 Step 2: Issuing bank issues negotiable letter of credit in swift format and sends it to the
Advising bank
 Step 3: Advising bank advices the letter of credit to the exporter. Exporter checks the
following conditions:
i) L/C terms match with the original contract of sale terms.
ii) there is no derogatory terms in L/C
iii) Beneficiary or exporter is in a position to ship the consignment within the shipment
date stipulated in the L/C.
iv) whether the L/C ensures exporter's payment upin tendering of the export
documents.
If the conditions are acceptable to the exporter, he starts production of the goods.

9.  Step 4: Exporter ships the goods within the validity of the letter of credit and presents the documents to the
negotiating bank within the presentation period allowed under the letter of credit.
The shipping documents include:
i) Bill of Lading/Air Consignment Note/Post Parcel Receipt/Truck Receipt
ii) Bill of Exchange
iii) Commercial Invoice
iv) Certificate of Origin
v) Packing list
vi) Weight certificate
vii) Consular invoice, where necessary
viii) A copy of declaration of shipment made to the insurance company
ix) Pre-shipment inspection certificate from an internationally reputed surveyor.
x) Analysis certificate where specification of commodity is given
 Step 5: Negotiating bank checks the documents whether-
i) Documents are presented before expiry date.
ii) All documents are submitted and are in order.
iii) The invoice corresponds with the details of all other documents submitted under the bill.
iv) The insurance policy is properly stamped.
v) Reimbursement clause is clear and does not violate Exchange Control Regulation
vi) Other Exchange Control Regulations have been complied with.

10. If negotiating bank determines that they are compliant, advances cash to the
exporter. The “negotiation” is effectively the purchase of documents from the
exporter at a discount.
If there are discrepancies in the documents, the negotiating bank has got the
following three alternatives:
1) Reject the documents outright and send them on collection basis.
2) Send a cable to the opening bank pointing out discrepancies and seeking their
instructions to effect payment.
3) Take an independent decision to negotiate documents inspite of discrepancies
and the amount for the documents negotiated is held 'under reserve'. Normally it
is not allowed.
 Step 6: Negotiating bank presents the documents to the issuing bank and asks for
reimbursement in the following forms:
i)By claiming the amount from the issuing/opening bank
ii) By claiming the amount from confirming bank
iii) By claiming the amouny from any other bank so mentioned in the L/C.

11.  Step 7: Issuing bank checks the documents and, if
compliant, accepts them to be paid to the negotiating
bank at maturity.
 Step 8: The issuing bank then advises the buyer that
the shipment has been effected and that they are in
possession of all the documents.. The buyer then
arranges to pay the issuing bank the money that has
been paid by them to the receiving bank.
 Step 9: Upon receipt of these funds, the issuing bank
then endorses the bill of lading to the buyer so that
the cargo can be released to the buyer.

12.  Before a L/C is issued, it is necessary for the importer to obtain a
limit from the bank for opening L/C. For fixing L/C limit the bank
would require detailed information on the nature of the
organization, the nature, quantity and value of the good to be
imported, amount of the L/C limit required, terms of payment,
financial assistance required from the bank, Importer's current
liabilities with the bank as well as other banks.
 Definition: Import Financing includes financial transactions that are
destined to provide funding for the purchase of goods in one
country from another country.
To put it simply, Import finance is the funding of the gap between
receiving the goods and sending the payment. Furthermore, it is
deemed as a short term loan and provided by a Third Party.

13.  Import factoring works as a confirmed order from a good customer. The maximum
amount advanced for imports is up to 100% of the order's value. This type of working
capital has been designed specifically to assist overseas trade by supporting the cycle
from initial order to end-customer payment. The provider acts as an intermediary
between the importer, the manufacturer and the end-customer, financing the entire
transaction. In this way, suppliers get paid quickly which makes it easier for them to
accept new orders and as a direct result, the importer may be able to negotiate early
payment discounts. With a facility in place, the importer is in a stronger position to fulfil
orders and accept new ones.
 Importing and exporting are quite complex transactions. Due to all the logistics
involved, there's usually a long time between the purchase and delivery of the products,
which results in a considerable cash flow problem for small and mid-sized businesses
since they still need to function and cover their expenses while waiting for the payment
to arrive.
 There are multiple ways to get import financing. On one hand, traditional finance
institutions like banks, and credit unions offer many choices like asset backed loans,
regular loans, business credit cards, and overdrafts. The reality is that traditional
financing is not easy to get and these are often linked to long term contracts as well as
huge collaterals.
 Therefore, small importers might want to explore other options, such as invoice
factoring.

14.  1. Usance
 2. Standby Letter of Credit -->
i.) Financial SLOC,
ii.) Performance SLOC
 3. Bank Guarantees
 4. Invoice Finance
 5. Asset- backed facilities

15.  1. Usance: Usance is a Latin word meaning "Habit" or "Custom". A Usance letter of
credit allows payment from the buyer to be deferred. This gives the buyer more
time to inspect and in some cases sell the goods. The usance of a bill varies
between countries ranging from two weeks to two months and interest charged
on borrowed funds.
 2. Standby Letter of Credit (SLOC): It is a legal document that guarantees a bank's
commitment of payment to a seller in the event that the buyer/ bank's client
defaults an agreement. Used only in a worst case scenario. SLOC helps facilitate
International Trade between companies that don't know each other and have
different laws and regulations.
There are 2 types of SLOC.
i) A Financial SLOC guarantees payment for goods or services as specified by an
agreement.
ii) The Performance SLOC which is less common, guarantees that the client will
complete the project outlined in a contract. The Bank agrees to reimburse the
Third Party in the event that its client fails to complete the project.

16.  3. Bank guarantees: Guarantee from a bank that certifies the creditworthiness of a buyer.
The difference between a bank guarantee and L/C is the way in which they are used. Trader
who are involved in the regular import and export of goods more likely to use L/C. In
contrast, contractors involved in the meaning of infrastructure project, are more likely to
use bank guarantee.
 4. Invoice Finance: It is a method of financing which involves the selling of their account
receivables. Imagine, a company sells their goods to Consumer A. They grant 90 day
payment terms on the transaction, however by financing the outstanding invoices, it allows
access to this fund earlier. A third party will purchase or commit to the invoice paying a
discounted price for them or taking a fee from the transaction.
 5. Asset-backed Facilities: It is the financial tool of a business to secure a loan against their
collateral. That asset hacked loan is secured in the following ways:
-Inventory
-Account Receivables
-Equipment
-Building/ or other real assets on the balance sheet of the business.

17.  A financier will generally ask for these
following documents-
1. Audited Financial Statement
2. Future financial cash flow forecast
3. Credit Reports
4. Details and references for the director of
the company
5. Information surrounding the liabilities of
the company.

18.  Import bills: Import bill collection is a method
of doing an international trade transaction
given that the seller forwards the required
commercial documents to the importer,
against which the payment is done. Banks
facilitate documents movement and payments
to suppliers.
 Usually import bill includes these documents:
i) Commercial invoice
ii) Packaging list
iii) Bill of lading, etc

19.  Payment against Documents (PAD) is an arrangement
where an exporter instructs the presenting bank to
hand over the shipping documents and title documents
to the importer only if the importer fully pays the
accompanying bill of exchange or draft. PAD also
referred to” Cash against Documents.
Negotiating bank

20.  If the shipping documents are in order, the opening bank will
lodge the documents to their bank by converting the foreign
currency representing the bill and foreign correspondent
charges etc., and would respond to the debit entry originated
there against by the negotiating bank to the debit of "
Payment Against Documents(PAD) " account or "Bill of
Exchange (B/E)" account as the case may be and an intimation
is sent to the importee asking him/her to retire the import
bills immediately sending therewith a coat memo indicating
the amount payable by the importer under different heads.
 The importer can retrieve documents till the goods in transit
arrives. Usually it takes 21 days for adjustment for
outstanding PAD. When the documents are retrieved, the
transaction is completed and outstanding PAD is liquidated.

21.  Step 1: Exporter and importer agree on a contract of
sale.
 Step 2: Exporter arranges for the shipment to the
importer. The exporter must also hand over shipping
documents to the negotiating bank.
 Step3: The negotiating bank will send the documents
to the importer’s bank, also known as the presenter’s
bank.
 Step 4: The importer’s bank surrenders title
documents to the importer after payment is made.
 Step 5: The importer can take possession of the
goods.
 Step 6: The importer's bank makes the funds
available to the exporter through the exporter’s bank.

22.  When voucher is passed at the time of
opening of L/C:
Dr: Bank's liability on L/C
Cr: Customer's liability on L/C
 2. Retirement vouchers:
Dr: PAD
Cr: Balance with other bank
Cr: exchange account.

23.  This method of payment is advantageous
because it is easily put into use since it does not
require a credit line with the bank. Procedurally it
is easy for both the seller and the buyer. The
costs and administrative fees of using this
payment method is considerably lower than other
methods such as documentary credit.
 The biggest area of risk with using this method
of payment is that the buyer can choose to reject
the cargo for no good reason and not make
payment. This will result in a situation where the
seller never gets paid while having to manage
return of the cargo from the foreign port.

24.  Using letters of credit for payment is
considered to be a safer method of payment
than cash against documents. Hence letters
of credit should be used if both seller and
buyer do not have an existing relationship.
However, letters of credit will involve more
documentation and fees. Release of payment
will also be slower. If both buyer and seller
trust each other, cash against documents can
be considered instead.

25. LIM is the short term loan provided by the bank to
the importer against the pledge of imported goods.
 It is used as security, if the importer fails to retire the
bills within the stipulated time.
 Commonly, LIM is provided to the Importer who has a
fund constraint to retire the bills as well as clear the
goods from the port authority. In most of the cases,
banks extend the credit facility to the importer for
retirement and clearance of consignment.
 At the time of opening the Letter of Credit, the bank
obtains an agreement from the importer on a
stamped paper which provides for financing, and if
necessary clearance and storage of goods by debiting
the importer's account at his risk and responsibility.

26.  When the imported merchandise are released
from the port authority, the possession of the
goods remains with the bank i.e. under the
bank's lock and key.
 If the importer does not come to negotiate the
shipping documents from the issuing bank, then
the bank clears the goods from the port through
LIM and holds the goods in the warehouse as
well; also making payment to the exporter in the
case the importer fails to do so. And later on the
importer may take over the delivery of the goods
partly or fully upon repaying the amount due on
the LIM account.

27.  Accounting Procedure:
The liabilities under PAD B/E Account are converted into "Loan
against Imported Merchandise" Account and the overdue interest
from the date of accompanying bill of exchange on negotiation
date to the date of transfer to LIM account is charged and
incorporated to LIM liability.
 Journal on banks books:
LIM account (in the name of importer) Dr.
PAD Account Cr.
Interest and Commission etc Cr.
The advances against merchandise account is a loan account and
only amounts for clearance charges, such as customs duty, sales
tax or VAT etc. are allowed to be debited to LIM account.

28. There are 3 types of LIM provided by banks -
1. One off LIM
2. Forced LIM
3. Arranged LIM
 1. One off LIM: This facility is extended to the customers when the bank authority finds
the customer has adequate working capital to retire the L/C documents. Usually, this
facility is extended for 120days.
 2. Forced LIM: The customers may default at the eve of retirement of L/C documents
due to financial constraints and may show his inability to meet his obligation. This
situation may arise due to insolvency, legal wrangling and other unavoidable
circumstances on the domestic and International level.
 3. Arranged LIM: Precautionary steps are taken by banks to safeguard the exposure i.e.
necessary collaterals are obtained so that provided funding could be realized. The
tenure of the loan would be up to 120days and the customer can adjust the amount
either in instalments or at a time at the expiry of the loan.
The imported merchandise is kept under the custodianship of the bank's deputed
guards. The customer deposits the due amount on the bank's counter and collects the
Delivery Order (D.O.). The D.O. is subsequently shown to the bank officials to get the
delivery of goods.

29.  Demand Promissory Note
A demand promissory note is a legally binding document between a borrower
and a lender. With this agreement, the borrower promises to repay a debt at any
time that is "demanded" by the lender. Once a lender has demanded repayment,
the borrower must repay the debt or loan immediately.
It is the bank or lender who issues a demand promissory note. A demand
promissory note is different from a standard promissory note because the
borrower is not on a specific timeline for repayment. Instead, the borrower
waits to repay the debt or loan until the lender demands repayment.
 Letter of Continuity
A legal document signed by the borrower before the disbursement of loan
amount is known as the letter of continuity. It is a form of acknowledgement
given by the borrower that the balance loan amount would continue until it is
completely paid off.

30.  Letter of agreement for opening L/C
Letter of Agreement is a formal agreement between
issuing bank and customer. The purpose of this
agreement is to define the scope of work or schedule of
payments agreed upon each other.
 Letter of Lien
A document specifying a claim or legal rights against
assets that are typically used as a collateral to satisfy a
debt.
A creditor or a legal judgment could establish a lien. A lien
serves to guarantee an underlying obligation, such as the
repayment of a loan. If the underlying obligation is not
satisfied, the creditor may be able to seize the asset that is
the subject of the lien.

31.  Letter of Indemnity
A letter of indemnity (LOI) is a contractual document guaranteeing that
specific provisions will be met between two parties in the event of a
mishap leading to financial loss or damage to goods. An LOI is drafted
by third-party institutions such as banks or insurance companies. These
external organizations agree to give financial compensation to one of
the parties if the other party does not fulfill its obligations.
It states that any damages caused by the first party to the second party,
or to the second party's belongings, are the responsibility of and are
facilitated by the third party, as per the contractual agreement.
 Letter of Guarantee
A letter of guarantee is a type of contract issued by a bank on behalf of a
customer who has entered a contract to purchase goods from a supplier.
The letter of guarantee lets the supplier know that they will be paid,
even if the customer of the bank defaults."