Itd 04 Ucp 600 Lc Mechanism

8/3/2019 Itd 04 Ucp 600 Lc Mechanism

1/28

Intl Trade Procedures & Documentation - UCP 600 & LC Mechanism

Intl Trade Procedures & Documentation

LC Mechanism

Compiled by V.V.S. Rao


2/28


Exporter Importer

1. Sale Contract sent

4.Submits

Documents for

Collection

Exporters Bank5. Documents forwarded

Importers Bank

6.Documents

Presented

International Trade Operational Cycle

3. Ships the Goods

2. Contract accepted

Goods Delivered against

Documents

7.Payment/

Acceptance

8. Payment Forwarded

Payment credited


3/28


Risks associated with trade

Seller Buyer

Payment made without

Receipt of Desired

quality/quantity of Goods

Possession of Goods given

up without Receipt of

Payment

Parties are located in different countries

Different legal systems Different Regulations and Restrictions

Different Currencies

Exchange rate Fluctuations

Political Instability

Unpredictable Natural Disasters

Unpredictable Financial Market Disasters


4/28


4

An arrangement by means of which a Bank(Issuing Bank)Acting at the request of a Customer (Applicant)Undertakes to pay / Accept & Pay (Honour)To the Beneficiary of LCA predetermined amount ( LC amount)Before a given date (LC Expiry date)According to stipulations (Terms) against presentation of stipulated documentsAll parties to a credit deal with documents and not with goods / services /performances

Definition of Letter of Credit


5/28


Exporter /

Beneficiary

Importer /

Applicant

Issuing Bank

Applies for LC

Advising Bank

Advises LC

Issues LC

through

Ship the goods

Negotiating /

Confirming Bank

Presents

documents

Negotiates &

Pay

Pay / Accept & Pay

Present documents

Present docs

and debit

Take delivery of

goods

Sales contract entered

LC Operation Cycle


6/28


Types of Documents

CommercialDocuments

Principal

Bill of Exchange

Commercial Invoice

Packing list

Bill of ladingInsurance Policy

Certificate of Inspection

Certificate of Origin

Shipment Advice

Auxiliary

Shipping instructions

Insurance declaration

Intimation for inspection

Shipping order

Mate's receipt etc

RegulatoryDocuments

Exchange Control Documents

Freight Payment CertificateGate Pass

Shipping Bill

ARE

Vehicle Pass etc


7/28


7

Applicant

Beneficiary

Issuing Bank

AdvisingBank

ConfirmingBank

NominatedBank

ReimbursingBank

NegotiatingBank

LC

Various parties to LC


8/28


8

Issuing Bank (Opening Bank) Issues (Opens) the LC based on the LC Application of applicant

Once the documents under LC are received from Negotiating /

Confirming Bank honour its commitments.

Or in case if discrepancies are found in documents communicate

the same to negotiating bank within 5 banking days

While communicating the discrepancies the same has to be done

in one lot and not in installments and should state that it is

holding documents at the disposal of Negotiating/ConfirmingBank awaiting further instructions

See Article 16 of UCP for waiver of discrepancies

Obligations of various parties to LC


9/28


9

Negotiating Bank

Receive the documents submitted by beneficiary

Examine the documents in terms of LC

If they appear on their face to be in accordance with LC

negotiate the same under LC (pay or agree to pay or accept)

Negotiation includes pre-purchase of draft, if the bills of

exchange are drawn on another Bank

Forward the documents to Issuing Bank

Claim reimbursement from the issuing bank or reimbursing bank(as per LC) on the due date



10/28


1

Confirming Bank

If requested by Issuing Bank, add its confirmation to LC

Step into the shoes of the Issuing Bank

Advise the confirmation (providing additional undertaking)

to Beneficiary of LC

Once the documents under LC are received from

Beneficiary honor the LC commitments.

In case if discrepancies are found in documents

Communicate the same within 5 Banking days in one lot stating that it is

holding documents at the disposal of Beneficiary awaiting further

instructions.



11/28


1

Nominated Bank

If a Bank is nominated by Issuing Bank for negotiation such

Bank is called Nominated Bank and negotiations / payments are

restricted to such nominated Bank.

Such Bank will become the Negotiating Bank

If no Bank is nominated, any Bank can be a Nominated Bank.



12/28


Reimbursing Bank:

If a credit states that reimbursement is to be obtained by a

nominated bank claiming on another party, such other Bank isreferred as ReimbursingBank

The credit must state that the reimbursement is subject to the

ICC rules for bank-to-bank reimbursements in effect on the date

of issuance of the credit.



13/28


13

Advising Bank

By advising an L/C, the advising bank signifies:

An advising bank that is not a confirming bank advises the creditand any amendment without any undertaking to honour or

negotiate.

By advising the credit or amendment, the advising bank signifiesthat it has satisfied itself as to the apparent authenticity of the

credit or amendment.



14/28


1

Beneficiary to LC (Seller / Exporter)

Ship the goods within the dates stipulated in the LC

Submit the documents as per LC terms to the Nominated Bankwithin the dates stipulated in the LC for presentation



15/28


1

Applicant to LC (Buyer / Importer)

Importer is responsible to make payment to Issuing Bank in

terms of LC application, if all the documents and terms of LC are

in compliance.



16/28


Types of Letters of Credit


17/28


Revolving Credit

Transferable Credit

Installment Credit

Deferred Credit (with undrawn balance)

Red clause Credit

Green clause Credit

Revocable Letter of Credit

Irrevocable Letter of Credit

Back-to-back Credit Sight Credit and Usance Credit

Standby Credit (ISBC of ICC)

Various types of Letters of credit

l d d & i & h i


18/28


Single L/C that covers multiple-shipments over a long period.

Instead of arranging a new L/C for each separate shipment,

the buyer establishes a L/C that revolves either

in value (a fixed amount is available which is

replenished when exhausted) or in time (an amount is available in fixedinstallments over a

period such as week, month, or year).

L/Cs revolving in time are of two types: in the cumulativetype,

the sum unutilized in a period is carried over to be utilized in the

next period; whereas in the non-cumulative type, it is not carried

over.

Revolving Credit

I l T d P d & D i UCP 600 & LC M h i


19/28


A transferable letter of credit allows the beneficiary to act as a

middleman and transfer his rights under a letter of credit to

another party or parties who may be suppliers of the goods.

Depending on whether the letter of credit permits partial

shipments, fractional amounts may be transferred to more thanone beneficiary.

The letter of credit however, can be transferred only once: the

secondary beneficiaries cannot transfer their rights to a thirdparty.

Transfer of a letter of credit can be made on specific application

by the original beneficiary to the authorized transferring bank

Transferable Letter of Credit

I l T d P d & D i UCP 600 & LC M h i


20/28


A red clause letter of credit incorporates a clause, traditionallywritten in red, which authorizes the bank acting as the

negotiating or paying bank to pay the beneficiary in advance of

shipment.

This enables the purchase and accumulation of goods from anumber of different suppliers, and the arrangement of shipment

in accordance with the letter of credit terms.

Such advances will be deducted from the amount due to be paid

when the documents called for are presented under the letter of

credit.

Red Clause Letter of Credit

I tl T d P d & D t ti UCP 600 & LC M h i


21/28


This type of letter of credit envisages grant of storage facilities at

port over and above the pre-shipment payment to the exporter.

In India opening of Green Clause LC covering import of goods inour country requires prior permission.

Green Clause Letter of Credit



22/28


A revocable letter of credit may be revoked or modified for anyreason, at any time by the issuing bank without notification.

It is rarely used in international trade and not considered

satisfactory for the exporters but has an advantage over that of

the importers and the issuing bank.

There is no provision for confirming revocable credits as per

terms of UCPDC, Hence they cannot be confirmed.

It should be indicated in LC that the credit is revocable.

If there is no such indication the credit will be deemed as

irrevocable.

Revocable Letter of Credit



23/28


In this case it is not possible to revoke or amend a credit without theagreement of:

Issuing bank

Confirming bank, and

Beneficiary

Form an exporters point of view it is believed to be more beneficial.

An irrevocable letter of credit from the issuing bank insures thebeneficiary that if the required documents are presented and the terms

and conditions are complied with, payment will be made.

Irrevocable Letter of Credit



24/28


Confirmed Letter of Credit is a special type of L/C in which another bankapart from the issuing bank has added its UNDERTAKING.

Although, the cost of confirming by two banks makes it costlier, this

type of L/C is more beneficial for the beneficiary as it doubles theassurance of payment, especially from a local bank which is better

known to beneficiary.

Confirmed Letter of Credit

Intl Trade Procedures & Documentation UCP 600 & LC Mechanism


25/28


Sight credit states that the payments would be made by theissuing bank at sight, on demand or on presentation.

In case of usance credit, draft are drawn on the issuing bank or

the correspondent bank for specified usance period.

The credit will indicate whether the usance draft are to be drawn

on the issuing bank or in the case of confirmed credit on the

confirming bank.

Sight Credit and Usance Credit



26/28


Although not recorded on a letter of credit, back-to-back is aterm used in transactions involving two irrevocable letters of

credit.

Such transactions originate when a seller receives a letter of

credit covering goods which must be obtained from a third party

who in turn requires a letter of credit.

The second issuing bank looks to the first issuing bank for

reimbursement after paying under the second letter of credit.

The difference between back-to-back letters of credit and

transferable letters of credit, is such that in a transferable letterof credit, the rights under the existing letter of credit are

transferred.

In a back-to-back transaction, different letters of credit are

actually issued.

Back to Back Letter of Credit



27/28

Int l Trade Procedures & Documentation - UCP 600 & LC Mechanism

Standby letters of credit may apply in general to transactions which are based

on the concept of default by the applicant in performance of a contract or

obligation.

In the event of default, the beneficiary is permitted to draw under the letter

of credit.

Standby letters of credit may be used as a substitute for performance

guarantees, or issued to guarantee loans granted by one firm to another,thereby securing payment to the creditor in the event the other party fails to

repay its obligation on the due date.

Even if the applicant claims to have performed, the bank issuing the letter of

credit is obliged to make payment provided the beneficiary produces

complying documents, usually a sight draft, and a written demand forpayment.

Standby Letters of Credit



28/28

Int l Trade Procedures & Documentation - UCP 600 & LC Mechanism

Itd 04 Ucp 600 Lc Mechanism

Documents

Transcript of Itd 04 Ucp 600 Lc Mechanism