International Trade Payment Methods & Risks Explained

ADVANCE PAYMENTS

*The seller does not want to take any risk on the

buyer.

*The political or economic environment in the

buyer’s country may be unstable.

The entire risk of the trade is on the buyer. The risks

include,

Non delivery of goods

Delayed delivery of goods

Defective quality and short supply

Blocking of capital in the form of advance

payment

1

OPEN ACCOUNTS SALES

•

By an arrangement between the buyer and the

supplier, manufactured goods will be delivered to

the buyer directly or to his order and the buyer

will pay at the end of the agreed period. This type

of payment term requires high degree of trust by

the seller on the buyer.

•

In case of International trade transaction the

buyer after receipt of goods submits to his bank

the documents along with proof of receipt of

goods (Bill of Entry) issued by the customs

department and arranges for the funds to be

transferred to the seller’s account abroad.

2

DOCUMENTS THROUGH BANK

Against payment i.e. DP

•

After the sale contract is entered into, the

seller dispatches the goods and prepares

the various documents as required by the

buyer and submits the same to his bank

with instructions to send the same to the

buyer’s bank. The documents include the

transport document, commercial invoice,

insurance document  and (most of the

times) a Bill of Exchange

3

•

The seller instructs his bank to advise the

buyer’s bank to hand over the documents

to the buyer only against payment of the

specified amount. (under this method

there is no credit period  involved

4

•

On receipt of the documents the buyer’s

bank informs the buyer about  the arrival

of the documents and advises  him to pay

the invoice amount and take delivery of

the documents

5

•

After the buyer makes payment, the

buyer’s bank hands over the documents

with necessary endorsements. The bill of

exchange is also handed to the buyer

acknowledging receipt of the payment

6

•

The funds are then remitted to the seller’s

bank for onward payment to the seller. The

buyer takes delivery of the goods from the

shipping agency/transport agency/airline,

as the case may be, by producing the duly

discharged transport document

7

•

In the event of non -payment by the buyer

the bank informs the seller’s bank

accordingly and seeks instructions

regarding disposal of the documents

8

•

If the bill continues to be unpaid, the

buyer’s bank will return the documents to

the seller’s bank from whom the

documents have been received

9

DOCUMENTS AGAINST ACCEPTANCE

•

In this method, the seller is ready to take an exposure

on the buyer and is willing to sell the goods to the

buyer and extend credit. This is akin to an open

account transaction except that the documents are

routed through the bank.

•

Thus the buyer’s bank is instructed to hand over the

documents to the buyer against his acceptance to pay

the amount on the specified due date

•

Accordingly, the buyer’s bank obtains the buyer’s

signature on the bill of exchange accepting that the bill

will be paid on the due date.

•

The documents are then handed over to the buyer

against his acceptance. The buyer pays the amount to

the bank on the due date. The buyer’s bank remits

these funds to the seller’s bank.

10

DOCUMENTS THROUGH BANK UNDER

LETTER OF CREDIT

•

There are many situations where the seller may not

know the credit worthiness of the buyer and does not

want to take any risk on the buyer. At the same time

the buyer may not be willing to pay the amount in

advance. However both the parties wish to conclude

the trade.

•

The seller would like to have some kind of a guarantee

or commitment from the buyer’s bank that the bill will

be paid by the bank whether the buyer pays or not.

The bank opens a letter of credit in favour of the seller

undertakes to pay the seller the bill amount provided

the stipulated documents are submitted by the seller.

•

Thus, the risk of non-payment by the buyer gets

mitigated through the letter of credit and the trade

gets concluded.

11

A LETTER OF CREDIT CAN BE DEFINED

AS

‘’ Any arrangement, however named or described whereby a

bank acting at the request and on the instructions of a

customer or its own behalf, 

•

Undertakes to make a payment to or to the order of a third

party (i.e. the seller) or undertakes to accept and pay Bill of

Exchange drawn by the Beneficiary,

                                                    Or

•

Authorizes another bank to effect such payment or to

accept and pay such bills of exchange, against the

stipulated documents provided that the terms and

conditions of the credit are complied with’’.

12

ARTICLE 2 OF UCP 600 DEFINES LC

AS

•

“Any arrangement, however named or

described, that is irrevocable and thereby

constitutes a definite undertaking of the

issuing bank to honor a complying

presentation”. 

13

ESSENCE OF A LETTER OF CREDIT

•

The bank issuing the Letter of Credit gives an

undertaking to the seller/supplier (beneficiary) of the

goods or services to pay a certain amount.

•

The undertaking is irrevocable and is normally given

on behalf of the buyer who will be the bank’s client.

•

This undertaking is conditional, the condition being

that the beneficiary has to submit the documents as

prescribed in the Letter of Credit.

•

The issuance of the Letter of Credit has to be backed

by a trade transaction.

•

The Letter of Credit confers certain rights on the

beneficiary of the LC.

14

•

The beneficiary of the LC becomes entitled for his right

(of getting paid by the bank) only if he submits

documents which are in conformity with the LC

conditions.

•

Banks deal with documents and not in goods, services

or performance to which the documents may relate.

•

Under the LC mechanism, the beneficiary of an LC

cannot be compelled to perform under the LC. If he so

chooses he is free not to utilize the LC.

•

A credit by its nature is a separate transaction from the

sale or other contract on which it may be based. Banks

are in no way concerned with or bound by such

contract, even if any reference to it is included in the

credit.

15

CASH COLLATERALS

•

Suppose the LC limit is Rs 100lakhs and the margin is 25%, the

customer can choose to keep a fixed deposit of Rs 25lakhs which will

be under lien to the bank. When the bill under LC is received the

customer pays the full amount of the bill and retires the bill. The

fixed deposit remains intact and will earn interest as applicable to

FD’s. The advantage here is the customer can continue to open LCs

up to Rs 100lakhs and save himself from the botheration of

depositing margin money every time an LC is opened. This method is

simpler from the accounting angle also. Most of the corporate that

regularly open LC’s follow this method

                                                              OR

the customer can chose to deposit 25% of the LC amount every time

an LC is opened. Suppose the LC limit is Rs 100lakhs and an LC has to

be opened for Rs 30lakhs with a margin of 25% the customer has to

deposit Rs 7.5lakhs in a margin account or in a short term deposit

account. When the bill for Rs 30lakhs is received under the LC the

customer has to pay Rs 22.5lakhs only. The bank will adjust the

balance from the margin money which is already with the bank

16

•

•

Specimen of a Bill of Exchange (Usance DA basis) drawn under a Letter of Credit - 

•

---------------------------------------------------------------------------------------------------------------------------------

BILL OF EXCHANGE

•

NO. 10165

•

For JY9,000,000. -

Nagoya 25

th

 February, 2012

•

•

At 

180 days from bill of Lading Date

 of this 

SECOND 

Bill of Exchange (First of the same tenor

and date being unpaid) Pay to 

THE CHUKYA BANK LIMITED

 or order the sum of

•

•

JAPANESE YEN NINE MILLION Only 

•

Value received and charge the same to account of 

XYZ, Shed No 4, Nadandyakama Halli, Tumkur

Road, Bangalore 562 123, India

•

•

Drawn under Citibank N.A. Bangalore Branch, Bangalore,

 India L/C No 5576131508 dated 5th

January  2012

•

•

TO

•

 Citibank N.A

UNITY

TRADING COMPANY

•

BANGALORE, INDIA

N. Nakiima

•

B/L Date: 25

th

  February  2012

(Managing Director)

•

•

----------------------------------------------------------------------------------------------------------------------

•

17

A B/E PERFORMS FOLLOWING

FUNCTIONS

•

Collecting Payment

•

Demanding Payment

•

Extending Credit

•

Promise of payment

•

Receipt for payment

18

COMMERCIAL DOCUMENTS

•

Commercial Invoice

•

Consular Invoice

•

Custom’s Invoice

•

Legalized Invoice

•

Certificate of Origin

•

Packing List

•

Weight Certificate

•

Certificate of Analysis and Quality

•

Certificate of Inspection

•

Health Certificate

19

AIRWAY BILL

•

Airway Bill (AWB) is an acknowledgement issued

by an airline company or their agents stating that

they have received the goods detailed therein for

dispatch by air to the named consignee and the

address stated therein.

•

Unlike a Bill of Lading, AWB is not a document of

title to goods because it is merely an

acknowledgement of goods. As such it is not a

negotiable document either. Consequently, it is

not necessary for a consignee to possess the AWB

for taking delivery of goods. The airlines will

normally deliver the goods to the consignee or

his order on proper identification.

20

HOUSE AIRWAY BILL

•

House Airway Bill is a receipt for goods issued on the

same lines as Airway Bill by cargo consolidating agents.

When Air cargo is shipped under consolidation, the

Airline company issues an Airway Bill called Master

Airway Bill to the consolidating cargo agent and he is

turn issues his own House Airway Bills to individual

shippers. Thus, House Airway Bill is a receipt for goods

issued not by the actual carriers or their agents but an

intermediary cargo consolidating agent. A House

Airway Bill is not as safe a document as an Airway Bill.

In case the consolidating agent fails to pay the freight,

the carriers will have the right over the goods and the

holder of House Airway Bill will not get his goods.

21

MULTIMODAL TRANSPORT

DOCUMENT

•

This document is issued when the movement

of goods involves more than one mode of

transport. It is also called as “Combined

Transport Documents”. In this document the

carriers take the liability for safe conduct of

transport of goods by various modes of

transport from the place of receipt of goods to

the place of delivery. In most respects it has

the characteristics of a Bill of Lading.

22

LORRY RECEIPTS AND RAILWAY

RECEIPTS

    The transport operator/railway department

issues receipts evidencing receipt of goods

and undertaking to transport the goods to the

specified destination. The surrender of LR’s or

RR’s is required for taking delivery of goods at

the destination.

    These receipts are documents of title to goods

and considered as ‘Quasi Negotiable’

instruments.

23

PARTIES TO LETTER OF CREDIT

TRANSACTION

•

Applicant 

•

Beneficiary

•

Issuing bank

•

Advising

bank 

•

Nominated bank

•

Confirming bank

•

Negotiating bank

•

Reimbursing bank

24

OPERATION OF A LETTER OF CREDIT

•

Stage 1: Establishing and advising a letter

of credit

•

Stage 2: Negotiation and payment of

documents under a letter of credit

25

ESTABLISHING A LETTER OF CREDIT

•

Buyer and seller conclude a contract of sale.

Buyer submits LC application to his bank along

with a copy of a sales contract or proforma invoice

or purchase order

•

Issuing bank issues a Letter of Credit and sends it

to the advising bank in the city/country of the

beneficiary. The LC is sent by SWIFT to the

advising bank

•

The advising bank on receipt of SWIFT message

advises the LC to the beneficiary by sending a

signed hard copy of the Letter of Credit

authenticating the genuineness of the credit

26

NEGOTIATION AND PAYMENT OF

DOCUMENT UNDER LETTER OF CREDIT

•

After shipping the goods in accordance

with the LC terms, the beneficiary receives

the transport documents evidencing the

shipment of goods

•

Beneficiary submits documents under the

LC to a negotiating bank (or confirming

bank).

•

After examining the documents and if

found in conformity with credit terms,

negotiating bank (or confirming bank)

effects payment to the beneficiary

27

•

If there are discrepancies in the document

the negotiating bank may still make

payment to the beneficiary say under

reserve etc (this depends on the

arrangement the exporter has with the

bank).

•

Negotiating bank then forwards

documents to LC issuing bank (or

confirming bank) claiming the amount

under UCP 600.

28

•

On receipt of documents the LC opening bank

examines the documents and decides whether

to take up the document or to refuse the same.

Simultaneously a DAN (Document Arrival

Notice) is sent to the LC applicant notifying

discrepancies, if any

•

If the documents are in order, the LC issuing

bank remits the money to the negotiating bank

and recovers the amount from the LC applicant

(If the LC applicant is unable or refuses to pay,

the bank will pay from its own funds and charges

it to the LC applicant’s account). If the

documents are discrepant, a discrepancy and

refusal note is sent to the negotiating bank.

29

•

If the applicant accepts the discrepant bill

and provides funds for the bill the LC

opening bank remits the funds to the

negotiating bank

•

Original set of documents is delivered to

the LC applicant duly endorsed in his

favour by the issuing bank. Applicant

submits these original documents to the

clearing agent at the port of destination

and obtains delivery of the goods.

30

FLOWCHART FOR PAYMENT UNDER

USANCE LC’S

•

After shipping the goods in accordance with the LC

terms, the beneficiary receives the transport

documents evidencing the shipment of goods.

•

Beneficiary submits documents under the LC to a

negotiating bank (or confirming bank).

•

After examining the documents and if found in

conformity with credit terms, negotiating bank may

affect payment to the beneficiary. Thereafter the

documents are sent either to the confirming bank (if

there is one) or to the LC issuing bank asking them to

convey that the bills are accepted and that payment

will be remitted to the negotiating bank on the due

date.

31

•

On receipt of documents the confirming bank or the

LC opening bank as the case may be examines the

documents and decides whether to take up the

document or to refuse the same. Simultaneously a

DAN (Document Arrival Notice) is sent to the LC

applicant notifying discrepancies, if any.

•

If the documents are in order, a message conveying

the acceptance of documents is sent to the negotiating

bank. Thereafter the documents received under the

LC are handed over to the LC applicant against his

acceptance. On the due date the funds are remitted to

the negotiating bank. The LC opening bank then

recovers the funds from the LC applicants. (If the LC

applicant is unable or refuses to pay, the bank will pay

from its own funds and charges the amount to the LC

applicant’s account.)

32

•

If the documents are discrepant, a discrepancy or

a refusal note is sent to the negotiating bank.  The

documents will be held with the LC opening bank

at the disposal of the negotiating bank.

•

If the discrepancies are accepted by the applicant

the LC issuing bank sends an acceptance note to

the negotiating bank confirming that the

documents have been accepted and that the funds

will be remitted on the due date. The documents

are handed over to the LC applicant. On the due

date funds are remitted to the negotiating bank

(which may be say 60 or 90 days from the date of

bill of lading).

33

DIFFERENT TYPES OF LETTER OF

CREDIT

•

 Irrevocable LC 

    As seen earlier this is a definite undertaking of

the issuing bank and cannot be amended or

cancelled without the agreement of the

issuing bank, the confirming bank(if any) and

the beneficiary (Article 7 & 8). It may be noted

that a credit is irrevocable even if there is no

indication to the effect on the LC (Article 3).

34

•

Confirmed LC  

    A credit which has been confirmed by

another bank (bank other than the issuing

bank) is referred to as Confirmed Credit. In a

confirmed credit, the beneficiary will have a

firm undertaking of not only the bank issuing

the credit, but also of another bank.

    Thus, there is a double undertaking in such

credit and it is more favorable to the

beneficiary. The bank which adds its

confirmation is called a confirming bank.

The beneficiary has following advantages in

receiving a confirmed LC.

35

•

He has an additional guarantee of a bank in his

country. Thus the credit and the other risks to

which he is exposed get eliminated.

•

The beneficiary can submit the documents to the

confirming bank in his own city/country and get

paid under the LC. This will save him all the

hassles associated with dealing with the LC

issuing bank which is located in another country.

36

•

Restricted Credit

    Means the credit issuing bank restricts negotiation of

documents under their credit to a particular nominated

bank. Beneficiary will be advised to negotiate the

documents through this bank with whom credit is

restricted.

    It should be noted that failure of the beneficiary to

seek “negotiation” from the nominated bank does not

affect the undertakings of the issuing bank and/or the

confirming bank. In this event, the beneficiary is still

entitled to claim payment from the issuing bank

provided he submits “complying documents” to the

issuing bank within the validity period of the LC.

37

TRANSFERABLE CREDIT

In this type of an LC, the original beneficiary will be given the right to

transfer the LC in favour of a second beneficiary or several second

beneficiaries.

Article 38 of UCP 600 deals with transferable credits. Some of the features

of transferable credits are as under:

•

An LC can be transferred only if it is specifically stated as “Transferable”

in the credit.

•

A credit can be transferred only once i.e. from first beneficiary to second

beneficiary. (and not from second beneficiary to third beneficiary etc).

•

A credit may be transferred in full or part to one or more second

beneficiaries.

•

The transferred credit must accurately reflect the terms and conditions

of the credit with the 

exception

 of

1.

Amount

2.

Unit price

3.

Expiry date

4.

Period for presentation

5.

Latest shipment date

38

OPERATION OF A TRANSFERABLE LC

•

The first beneficiary submits his request in writing to

the advising bank giving details of amount, name of

second beneficiaries etc.

•

The advising bank effects the transfer in favour of the

second beneficiaries and issues fresh LC’s with

necessary changes.

•

After the transfer is effected the details of transfer are

informed by the advising bank to the LC opening bank

•

The second beneficiary ships the goods and submits

the documents along with the transferred LC to the

advising bank

•

The second beneficiary will get the payment from the

advising bank if it is a negotiating bank or a confirming

bank also. This payment will be made to the second

beneficiary as per the stages involved in the flow chart

indicated earlier.

39

REVOLVING LC

•

Revolving credit is one where under the terms and conditions of the

credit the amount is revived or reinstated without requiring specific

amendment to the credit.  The amount under the credit can revolve

in relation to time or value. The basic principle of a revolving credit

is that “After a drawing is made, the credit reverts to its original

amount for re-use by beneficiary.”

•

There are two types of revolving credits. In the first type of

revolving credit, credit gets reinstated immediately after a drawing

is made. In the second type of revolving credit, the credit reverts to

original amount only after it is confirmed by the issuing bank (i.e.

after the documents reach the issuing bank and it pays for the

documents/or such fact is confirmed by the issuing bank).

•

Revolving credits suit the requirements of importers and exporters

when same material has to be imported/exported (say iron ore) at

regular intervals for a specified period.

40

•

ILLUSTRATION –

•

An importer in India wants to import coking coal of value

USD Three Million over a period of 12 months. His monthly

requirement is of USD 250,000/-. The overseas supplier

insists for entering into one year contract and also wants

the transaction to be covered under Letter of Credit.

Importers bank established a Letter of Credit for USD

250,000/- for a validity period of 12 months. At the same

time, it is also specified in the credit that this credit will be

available on monthly basis, twelve times during the validity

period and the total utilization under this credit should not

exceed USD 3,000,000/-.

•

The advantage here is the importer need not open a fresh

LC every month as USD 250,000/- gets reinstated soon after

one consignment is shipped and documents pertaining to

that shipment are paid under the LC. This saves a lot of

botheration for the exporter also

.

41

ILLUSTRATION –

•

An importer in India wants to import coking coal of

value USD Three Million over a period of 12 months.

His monthly requirement is of USD 250,000/-. The

overseas supplier insists for entering into one year

contract and also wants the transaction to be covered

under Letter of Credit. Importers bank established a

Letter of Credit for USD 250,000/- for a validity period

of 12 months. At the same time, it is also specified in

the credit that this credit will be available on monthly

basis, twelve times during the validity period and the

total utilization under this credit should not exceed USD

3,000,000/-.

    The advantage here is the importer need not open a

fresh LC every month as USD 250,000/- gets reinstated

soon after one consignment is shipped and documents

pertaining to that shipment are paid under the LC. This

saves a lot of botheration for the exporter also

.

42

STANDBY LC’S

•

Standby Letter of Credit is very similar in nature to a

bank guarantee.

•

Standby LC differs with traditional LC. In a traditional LC

the beneficiary is entitled for payment once he is able

to submit the documents prescribed in the LC within

the stipulated time. In Standby LC the beneficiary is

eligible for payment from the issuing bank when the

applicant fails to perform his obligation.

•

The distinction between a standby credit and a

commercial letter of credit can best be described as ‘An

irrevocable letter of credit is a payment mechanism for

a trade transaction whereas an irrevocable standby

letter of credit is merely a backup available to the

beneficiary (from issuing bank) in case the applicant

fails to pay or perform’.

43

IN A STANDBY LC

•

The issuer, usually a bank

•

At the request of its customer, applicant

•

Agrees that the beneficiary will be paid

•

Before the credit’s expiry

•

Upon the beneficiary’s presentment of:

i. its demand for payment and

ii. any documents evidencing the applicant’s non-

performance.

    This gives the applicant an opportunity to specify

in the credit the documents that are to be

presented by the beneficiary for claiming

payment.

44

A SPECIMEN OF A STANDBY LETTER OF

CREDIT

       We ………………….. Bank hereby establish in favour of XYZ Ltd, Bangalore – 02

(hereinafter called the ‘Beneficiary’) our irrevocable standby letter of credit

number (2528IGPER03209 dated 11.09.10 in the amount of Rs 2, 76, 00,000/-

(Rupees Two Crores Seventy Six Lakhs only). Each payment made under

standby credit of letter will be automatically reduced from the letter of credit

amount. 

       This standby letter of credit is available at our counter for payment

unconditionally on first demand against presentation of the Beneficiary’s

signed drawing certificate dated and signed by two authorized signatories

stating that the applicant has defaulted in the payment to yourselves.

      Partial drawings are permitted. The beneficiary may present any number of

drawing certificates under this irrevocable standby letter of credit provided

that our maximum aggregate liability hereunder shall not exceed Rs 2, 76, 00,

000/- (Rupees Two Crores Seventy Six Lakhs only). This standby letter of credit

expires on 10.02.2011 at our counter. After this date, it will become

automatically null and void and no claim will be taken into consideration. 

       We undertake to cover your as per your instructions upon receipt of

authenticated swift certifying that documents in full conformity with this

standby letter of credit have been couriered to us.

45

OTHER TYPES OF LETTER OF CREDIT

•

Payment Credit – 

Payment Credit is a sight credit

which will be paid at sight basis against

presentation of requisite documents to the

designated paying bank. In a payment credit,

beneficiary may or may not be called upon to

draw a draft (Bill of Exchange). Here credit issuing

bank will provide reimbursement instructions in

the credit itself and the negotiating bank may

claim reimbursement simultaneously while

forwarding the documents to the issuing bank.

46

•

Deferred Payment Credit – 

Deferred Payment

Credit is a usance credit where payment will

be made by designated bank on respective

due dates without the drawing of drafts.

•

Acceptance Credit – 

Acceptance Credit is

similar to Deferred Payment Credit except for

the fact that in this credit drawing of a usance

draft is a must.

•

Negotiation Credit – 

Negotiation Credit can

be a sight credit or a usance credit. Here the

nominated bank can be a specific bank or it

may allow free negotiation whereby any bank

who is willing to negotiate can do so.

47

•

Restricted Credit –

 Restricted Credit means the credit issuing bank

restricts negotiation of documents under their credit to a particular

nominated bank. Beneficiary will be advised to negotiate the

documents through this bank with whom credit is restricted.

•

Installment Credit – 

calls for full value of goods to be shipped but

stipulates that the shipments be made in specific quantities at

stated periods of intervals. Article 32 of UCP deals with this.

•

Reimbursement Credit – 

Generally credits issued are denominated

in the currency of either the applicant’s country or the beneficiary’s

country but when a credit is issued in the currency of a third

country it is referred to as Reimbursement Credit.

•

Back to Back Credit – 

When a second LC is issued on the basis of a

parent credit the second credit will be termed as a ‘Back to Back

Credit’.

48

•

Illustration –

•

Company A in Mumbai receives a LC for export of

silk fabric. Company A does not manufacture but

procures from party B in Mysore and exports in its

own name. Party B requests company A to open

an inland LC for supply of fabric. Company A

approaches its bank and produces the export LC

received by it and requests the bank to open the

inland LC on almost similar terms and conditions

of the parent LC. It offers the main LC issued in its

favour as a security and promises the bank that it

will be able to obtain payment by presenting the

documents received under back to back credit. To

some extent back to back credits serve the same

practical purpose as that of transferable credits.

This inland LC opened by company A in favour of

party B is referred to Back to Back LC. 

49

Costs of Non-cancellation of an LC for the LC

opener - 

•

His LC Limit will continue to be blocked till the LC

is cancelled and the liability reversed in the books

of the issuing bank.

•

The bank will not release the margin kept on the

LC until the LC is cancelled.

•

Possibility of losing the entire LC opening charges

paid to the LC opening bank.

•

As such, it is desirable for the buyer to take the

initiative and have the LC cancelled as soon as he

comes to know that the LC will not be utilized by

the buyer.

50

RECOMMENED PROCEDURE FOR

CANCELLATION OF AN LC

•

The beneficiary should be requested to

surrender the original LC to the advising bank

or the confirming bank, as the case maybe.

This should be done under a covering letter

by the beneficiary saying that he has not

utilized the LC so far and he is not going to

utilize the LC and that he has no objection in

the issuing bank cancelling the LC.  The

advising bank or confirming bank should be

requested to forward the original LC to the LC

issuing bank along with the beneficiaries

consent/no objection letter. The

communication should also indicate that the

LC advising/confirming bank is also

agreeable for the cancellation

51

•

The letter submitted by the beneficiary to the

advising/confirming bank duly acknowledged

should be sent to the LC applicant

•

The LC applicant should now request the LC

opening bank to cancel the LC. A copy of the

beneficiary’s letter should be enclosed.

•

The LC opening bank will receive the original LC

along with the consent of the beneficiary and

confirming bank within a few days. The bank will

now be in a position to cancel the LC as it has the

consent of all the related parties for cancellation of

the LC

•

When once the LC is cancelled by the bank, that

part of the LC limit which was blocked will be

again available to the LC applicant. The blocked

LC margin will also be released by the bank.

52

OPENING OF AN LC BY AN IMPORTER

checklist

•

Exporter’s Standing

•

Excessive Details

•

Description of Goods

•

Requirements to be translated into documents

•

Credit Period

•

Certificates etc

•

Bank Charges

•

INCOTERMS:

•

Last shipment date and validity of the Credit

•

Date and place of expiry.

•

Time for submission of documents

•

Time for submission of documents

•

Forward Cover

•

Confirmation Instructions

•

Transferable LC’s 

•

Reimbursement Instructions

53

SCRUNITY OF IMPORT DOCUMENTS

UNDER LC

Some of the commonly observed discrepancies are,

•

Credit expired

•

Late shipment

•

Late presentation

•

Documents inconsistent with one another

•

Bill of Lading issued order but not endorsed

•

Insurance not covering from the date of shipment

•

Goods description not as per credit terms

•

Certificate not issued by the specified issuer

•

Port of shipment differs

The list can go and on.

54

SHIPPING GUARANTEE

     The cargo covered under a Bill of Lading will be

delivered by the carrier to the consignee named

in the Bill of Lading or to his order only against

surrender of an original Bill of Lading properly

endorsed.

•

1. The set of documents sent by the seller

through his bank to the buyer’s bank may have

been lost.

OR

•

2. The period of voyage may be short and the

original Bill of Lading may still be with the seller

or seller’s bank waiting to be dispatched.

55

AIR RELEASE

•

In case of air consignments very often the consignment

would have reached the destination but the documents

containing the airway bill might not have been received by

the buyer’s bank. The airway bill is not a document of title

to goods. As such, the air consignments are generally

consigned in the name of the buyer’s bank to ensure that

the buyer cannot take delivery of goods without bank’s

knowledge or consent. The airlines normally send a Cargo

Arrival Notice (CAN) to the buyer.

•

In situations where the buyer wants to take delivery of the

goods without a properly endorsed airway bill he can

approach his bank for a letter authorizing the airline to

release the Cargo. The conditions subject to which the bank

issues the ‘release order’ will be more or less same as

those applicable for issuance of a shipping guarantee.

56

UCP 600 and ISBP 681

Important articles of UCP 600 and its implications on LC transactions 

•

Article 3:

 “A credit is irrevocable even if there is no indication to

that effect”.

      Thus all LC’s are irrevocable by default. Nevertheless it is better to

mention that an LC is irrevocable to avoid any confusion. In fact

most of the LC’s do mention this.

•

Article 6: 

“A credit must not be issued available by a draft drawn on

the applicant”.

      In a LC transaction drafts must be drawn on LC issuing bank.

•

Article 8: 

      When a payment is made by a confirming bank the payment is

‘without recourse’ to the beneficiary. This means if, for any reason,

the confirming bank does not get reimbursed by the LC issuing

bank, the confirming bank cannot claim the money from the

beneficiary i.e. it has no recourse to the beneficiary in this matter.

57

•

Article 10f: 

“A provision in an amendment to the

effect that the amendment shall enter into force

unless rejected by the beneficiary within a certain

time shall be disregarded”.

•

Article 14: “

A nominated bank, a confirming bank

and the issuing bank shall each have a maximum

of 5 banking days following the day of

presentation to determine if a presentation is

complying”.

•

Article 14c:

 A presentation of documents which

includes one or more original documents must be

made not later than 21 calendar days after the

date of shipment but in any event not later than

expiry date of the credit.

58

•

Article 17: 

Atleast one original of each document

stipulated in the credit must be presented.

•

Article 18:

 A commercial invoice should be issued

by the beneficiary and made out in the name of

the applicant and should be in the same currency

of the LC.

•

Article 19c ii:

 “A transport document indicating

that transshipment will or may take place is

acceptable even if the credit prohibits

transshipment”.

     (Transshipment means unloading from one

means of conveyance and reloading to another

means of conveyance during the carriage).

59

•

Article 20: 

•

A Bill of Lading (B/L)

•

Must indicate the name of the carrier.

•

Should be signed by the carrier or a named agent.

•

Should indicate that goods have been shipped on board.

•

The date of issuance of B/L will be deemed to be the date

of shipment. If however, the ‘on board’ notation contains a

date of shipment that will be deemed to be the date of

shipment.

•

Air transport document

•

Similar guidelines as applicable to B/L are applicable to air

transport documents. 

•

Article 27: 

A bank will only accept a clean transport

document.

     (A clean transport document is one bearing no clause or

notation expressly declaring a defective condition of the

goods or their packaging.

60

     Article 28:

•

Insurance:

•

Cover notes will not be accepted.

•

The date of insurance document must be no later than the date of

shipment. (unless the document indicates that the cover is effective

from or earlier than the date of shipment)

•

If the credit does not indicate the amount of insurance cover

required, the coverage must be atleast 100% percent of the CIF or

CIP value of the goods.

•

When the insurance document indicates that it has been issued in

more than one original, all originals must be presented.

     Article 31:

“Partial drawings or shipments are allowed”.

      It may be noted that the UCP allows partial shipments and as such

the LC applicant has to examine his position in this regard and if

partial shipments are not to be allowed should expressly prohibit

the same by inserting a prohibition clause in the LC.

61

     Article 34: 

•

This article makes it clear that the banks assume

no liability or responsibility for the accuracy,

genuineness, falsification or legal effect of any

document.

    Article 35: 

•

This article proclaims a disclaimer on

transmission of the documents and makes it clear

that banks will not be responsible for the

consequences rising out of delay, loss in transit,

mutilation etc.

62

GENERAL PRINCIPLES

•

Abbreviations – 

       Use of generally accepted abbreviations will not make a document discrepant. E.g.

INTL instead of International. Slash marks should not be used as a substitute for a

word.

•

Corrections –

       Corrections in the document issued by the beneficiary himself, except draft, need

not be authenticated. Corrections and alterations in a document issued by third

parties must be authenticated.

•

Dates –

       Drafts /transport documents/insurance must be dated even if the credit does not

expressly require so. Any document may be dated after the date of shipment.

•

Misspelling or typing errors –

       Wrong spellings and small errors in typing were one of the main causes of

rejection before the ISBP was published in 2002. The ISBP makes it very clear that

any misspelling or typing error which do not affect the meaning of a word or the

sentence in which it occurs, do not make a document discrepant.

       For e.g. Description of a machine spelt as ‘ modle 160A’ instead of ‘model 160A’

will not be treated as discrepancy. However, if the description were to be ‘model

106A’, this error would not be regarded as typing error and would constitute a

discrepancy.

63

•

Originals and Copies –

      Documents issued in more than one original may be marked

‘Original’, ‘Duplicate’, ‘Triplicate’ etc. None of these markings

disqualify a document as Original.

•

Signatures –

      Even if not stated in the credit, drafts, certificates and declarations

by their nature require signatures. Transport documents, insurance

documents must be signed in accordance with provisions of UCP.

Signatures need not be hand written. Facsimile signatures,

perforated signatures or any electronic or mechanical means of

authentication are sufficient.

•

Combined Documents –

     Contents of the document must appear to fulfill the function of the

required document.

      E.g. If the credit calls for two different documents such as packing

list, weight list such requirement will be satisfied by presentation of

two separate documents or by presentation of two originals of

combined ‘packing and weight list’ provided such documents state

both packing and weight details. 

64

•

Conclusion – 

•

Thus the ISBP is a supplement to the UCP and

explains how LC practitioners around the

world can apply the practices articulated in it

in order to facilitate the trade cycle and global

trade business. The ISBP is both banker and

exporter friendly. At the same time it takes

care of the genuine interests of the importers

also. It is a check list not only for post-

presentation document examination but also

for document preparation and pre-

presentation examination.

65

SCRUNITY OF THE EXPORT LC

•

The first thing that is to be done is to verify whether the LC

has been authenticated by the advising bank. If not, the

matter has to be taken up with the advising bank till the

authenticity is confirmed

•

Check the credentials of the LC issuing bank if the bank is

not a well known bank. The advising bank will be able to

help the exporter in this regard (the banks dealing with

International Trade generally possess ‘Banker’s Almanac’

which contains details of all the banks in the world). 

•

If a confirmed LC has been sought, check whether the LC

has been confirmed by a bank with whom the exporter is

comfortable

•

If a transferable LC has been sought, check whether the LC

bears the clause that the LC is transferable. It may be

noted that article 38b of UCP 600 clearly states that

transferable credit means credit that specifically states it is

‘transferable’.

66

•

The terms and conditions of the LC should be in

accordance with the terms agreed as per the sales

contract or proforma invoice accepted by the LC

applicant as the case maybe (say unit price,

description, INCOTERMS etc).

•

The exporter also should look out for any clauses,

terms and conditions which, if fulfilled, will result in

violation of the laws of the land. For ex: In India the

exporter’s should keep in mind RBI guidelines

(FEMA provisions) while executing an export order. 

•

It should be ensured that the LC bears the notation

that it is issued subject to UCP 600.

67

CHECKLIST FOR CARE AND CAUTION

•

Assessment of risks 

•

Completion Time

•

Shipment 

•

Port of shipment and destination 

•

Declarations 

•

Consistency in documents

•

Documents to be signed by the LC applicant 

•

Other documents 

68

CHECKLIST FOR PREPARATIONOF

DOCUMENTS

•

Ensure that the correct number of copies of each document

are available, and that they carry the information called for

and the name of each document is correct. The document

name must match exactly what the letter of credit calls for.

•

The contents of the documents should be consistent with

each other. For e.g. there should be no conflict in the

contents of various documents that indicate the shipping

marks, quantities/weights, transport details etc.

•

Data in a document, when read in context with the credit,

the document itself and International Standard Banking

Practice, need not be identical to, but must not conflict

with, data in that document, any other stipulated

document or the credit(article 14d of UCP).

•

The description of goods in the invoice should match with

the description given in the LC. In all other documents, this

description can be in general terms but should be

consistent with the credit.

69

•

Alterations and corrections should be avoided. Wherever

corrections and alterations are there, they should be authenticated

by the issuer of the document.

•

When the LC is a restricted LC, it should be ensured that sufficient

time is available to the exporter’s bankers to present the

documents to the bank to whom negotiation is restricted since

presentation at the latter’s counters within validity will only amount

to valid presentation.

•

Most of the LCs contain a condition that all documents should

contain LC number and date. If such a condition exists in the LC,

then LC number and date should be written on each and every

document.

•

The original Letter of Credit along with all amendments thereto

should also be presented to the negotiating bank along with a set of

documents under LC.

70

IMPACT OF DISCREPANT DOCUMENTS

UNDER LC TRANSACTION

•

The safety of payment given by the LC to the exporter is totally dependent on the

exporter presenting complying documents. When once the documents are found

to be discrepant by the negotiating bank/confirming bank/LC issuing bank, as the

case maybe, the exporter loses the benefits conferred on him by an LC. He will no

more be entitled to claim payment under the LC as a matter of right.

•

When once the documents are found to be discrepant by the negotiating bank the

following possibilities arise.

–

The bank nominated for negotiation to whom the documents are presented

may refuse to negotiate the documents and return the same to the exporter.

       If the exporter is having a banking relationship and sanctioned credit facilities with

this bank, then the bank may agree to negotiate the documents ‘UNDER RESERVE’.

This means the negotiating bank will pay the amount to the exporter subject to

the condition that it will recall/recover the amount from the exporter, should the

documents be refused by the LC issuing bank and the negotiating bank does not

receive the funds from the LC issuing bank. Here, even though the exporter is

funded for the time being, the payment has been made to him as an

accommodation and not as settlement of his claim under the LC. Thus, the

exporter is open to the payment risk from the importer as though there was no LC

71

   The negotiating bank may send the documents to

the LC issuing bank on ‘collection basis’. The

payment if and when received from the LC issuing

bank will be made over to the exporter. This

requires that the discrepancies have to be

accepted by the LC issuing bank as well as LC

applicant which means the exporter is at the

mercy of both these parties.

   Thus, in all these situations the payment is bound

to be delayed or refused putting the exporter’s

interests in jeopardy.

72

MODE OF TRANSPORT AND

APPROPRIATE INCOTERM

Any mode of Transport Including Multimodal

•

EXW

•

FCA

•

CPT

•

CIP

•

DAF

•

DDU

•

DDP

        Air Transpor

t

•

FCA

       Rail Transport

•

FCA

       Sea and Inland Waterway Transport

•

FAS

•

FOB

•

CFR

•

CIF

•

DES

•

DEQ

73

INCOTERMS

•

“EXW” {Ex-works (..... named place)}

      The seller will place the goods at the disposal of the buyer at

seller’s own premises packed but not loaded into the carrier.

Delivering the goods at the named point into the custody of the

carrier fulfills seller’s obligations. All costs and risks thereafter are

for the buyer to bear.

•

“FAS” {Free Alongside ship (….. named port of shipment)}

     This means that the seller fulfills his obligations to deliver when the

goods have been placed alongside the vessel on the quay at the

named port of shipment.

     FAS term requires the seller to clear the goods for export obligation.

This term can only be used for sea or inland waterway transport.

•

“FCA” {Free Carrier (….. named place)

      Sellers deliver the goods to the buyer’s carrier at the named place

cleared for export. If the chosen place is seller’s premises, seller is

responsible for loading.

74

•

“FOB {Free on Board (…. named port of shipment)}

     The seller clears the goods for export and places it on board the

ship. This term is now intended to be used for ocean transport only.

•

“CFR” {Cost and Freight (….. named port of destination)}

      Cost and Freight necessary to bring the goods to the named port of

destination will be paid by the seller. Insurance cost will be borne by

the buyer.

•

“CIF” {Cost, Insurance and Freight (….. named port of destination)}

      Seller pays all transport and documentation charges up to arrival at

named port of destination plus marine insurance for the journey.

•

“

CPT” {Carriage paid to (….. named place of destination)}

      Seller pays freight and charges to the named destination. Includes

the additional freight from port of arrival to named destination.

75

•

“CIP” {Carriage and Insurance paid to (…… named place of

destination)}

     As for CPT but with the addition that seller has to procure

and pay for cargo insurance.

•

“DAF” {Delivered at Frontier (….. named place)}

     “Frontier” may be any frontier including that of the country

of export.

•

“DDU” {Delivered Duty unpaid (…. Named placed of

destination)}

     Seller is responsible for all charges up to delivery at the

nominated place of destination but excluding duty and

taxes.

•

“DDP” {Delivered Duty Paid (….. named place of

destination)}

     As for DDU but also including payment of import duty.

76