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 25th 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
TRADING COMPANY
BANGALORE, INDIA
N. Nakiima
B/L Date: 25th February 2012
UNITY
(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 nonperformance.
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.
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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.
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• 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.
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• 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).
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•
•
•
•
•
•
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.
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•
•
•
•
•
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.
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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.
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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
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discrepancy.
• 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.
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• 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 postpresentation document examination but also
for document preparation and prepresentation examination.
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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
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‘transferable’.
• 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.
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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
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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.
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• 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.
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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
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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.
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MODE OF TRANSPORT AND
APPROPRIATE INCOTERM
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Any mode of Transport Including Multimodal
EXW
FCA
CPT
CIP
DAF
DDU
DDP
Air Transport
FCA
Rail Transport
FCA
Sea and Inland Waterway Transport
FAS
FOB
CFR
CIF
DES
DEQ
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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.
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• “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.
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• “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.
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