Programme onLetter of Credit Transactions

and UCP 600

SESSION I

Features of an International commercial contract

& terms of paymentA quick review…..

•Initial quote •confirmed order •contract

Features of a commercial contract -

Everything they have agreed between themselves Evidence of contract

Record of agreed goods Record of agreed time of delivery Record of agreed terms of delivery Record of agreed point of delivery Record of agreed method of payment

Design can vary but not the contents First document to bring parties together Any inaccuracy or inconsistency may have legal

repercussions if shipment is not as per contract

Essential details in a contract

Details of buyer / seller – with full address Manufacturer – Seller – buyer – end user…. Method of despatch Terms of delivery

Exact point at which risks and responsibilities pass from seller to buyer (INCO TERMS 2000)

Insurance freight

References / dates – terms to be avoided FAV (first available vessel) /ASAP

Appointment of freight forwarder Terms of payment Documentation Other instructions

Four main categories of charges / cost

Despatch, carriage, delivery Customs clearance for export /

import Service / assistance rendered in

addition Insurance

Responsibilities of the parties

Loading charges at sellers place Local transportation charges – Inland

freight in the sellers country Delivery to the carrier at notified place or at the

port Customs clearance in the exporting country Export charges – loading expenses

Any special equipment and accessories Main carriage expenses Transit insurance – cargo insurance

Responsibilities of the parties

Unloading expenses Customs clearance at importing

country Importing country’s taxes Local cartage – transportation

charges Unloading at buyers place

INCO TERMS 2000 EXWEX-WORKS (place)

Loading charges for buyer FCA FREE CARRIER (place) FAS FREE ALONGSIDE SHIP (port of

loading) FOB FREE ON BOARD (port of loading)

FCA/FAS/FOB – customs clearance in the exporting country for seller

CFR COST AND FREIGHT (port of discharge)

CIF COST INSURANCE FREIGHT (port of discharge)

INCOTERMS CONTD CPT CARRIAGE PAID TO (Place of destination) CIP CARRIAGE INSURANCE PAID TO

(place of destination) DAF DELIVERED AT FRONTIER (place of

delivery) DES DELIVERED EX SHIP (port of destination)

DAF / DES importing country’s customs clearance for buyer

DEQ DELIVERED EX QUAY(private port of buyer) Import clearance – customs clearance for seller

INCO TERMS CONTD

DDU DELIVERED DUTY UNPAID (place of destination)

DDP DELIVERED DUTY PAID (place of

destination)

In short…

Sea transport – FAS/FOB/CFR/CIF/DES/DEQ

Others – all other modes of transport EXW/FCA/CPT/CIP/DAF/DDU/DDP

Different types of trade transactions

Export / import of capital goods Export / import of accessories –

non capital goods Export / import of services

Terms of payment Documents on collection basis

Documentary collection At sight – DP basis On due date – DA basis

Direct collection Consignment basis Payment guarantees Documentary Credit / Letter of Credit Standby letter of credits Advance Payment

Establishing Letter of Credit

COMMERCIAL CONTRACT

Citi Bank,

ABC LTDSau PauloImporter

HPC L

Banco Bradesco, Sau Paulo

1

4

3

2

• Commercial contract insisting letter of credit

• LC application submitted by the applicant to the issuing bank

• LC established by issuing bank through their correspondent

bank with a request to pay on their behalf against submission of

prescribed documents by the beneficiary

• LC advised- with /without confirmation

NEGOTIATION OF DOCUMENTS UNDER CONFIRMED CREDIT

Banco Bradesco Citi Bank

1

3

4

5 6 2

ABC LTD HPC L

By

BENEFITS OF A CONFIRMED CREDIT

Since the credit is confirmed by confirming bank they have a commitment to pay to the beneficiary if the documents presented, represents ‘complying presentation’.

Their undertaking will be an additional undertaking in addition to the issuing bank’s undertaking

Beneficiary is more comfortable under this arrangement since he is assured of payment immediately on presentation of documents to the confirming bank

NEGOTIATION OF DOCUMENTS UNDER UNCONFIRMED CREDIT

Banco Bradesco BARCLAYS BANK

1

3

4

5 6 2

ABC LTD HPC L

UNCONFIRMED CREDIT PAYMENT BY A NEGOTIATING

BANK…

Even though Negotiating bank does not have any commitment to pay, they pay value against set of credit complied documents drawn under a letter of credit to the beneficiary.

Reimbursing Bank- JP MORGAN

LC Issuing Bank (BANCO BRADESCO)

CITI BANK / BARCLAYS BANK Confirming or Negotiating Bank

1 2

3

Reimbursement under LC transaction

4

1. Reimbursement authority from Issuing Bank to RB2. IB advising claiming bank 3. Claiming bank submits valid claim message4. RB debits the IB account and reimburses the claiming bank

DOCUMENTARY CREDIT….. An arrangement whereby a bank

acting at the request and on instructions of a customer i.e., the applicant

To make payment to a third party (the beneficiary) by themselves or authorize other bank to pay or negotiate

Against stipulated documents Provided The documents presented represents

‘complying presentation’.

PARTIES TO DOC. CREDIT

Applicant Beneficiary Issuing bank Advising bank Confirming bank Negotiating bank Reimbursing bank

Discounting of bills under Inland letter of credit

Issuing bank Sellers Bank

1

235

6 4buyer seller

TYPES OF CREDIT Irrevocable (from 1st July 2007 all credits

are irrevocable) Confirmed /unconfirmed Restricted/free Transferable Back to back Revolving Deferred Red clause Standby

Requirements…..

Name of the issuing bank Name of the confirming bank Value of LC Last date of shipment Expiry date If the shipment is completed on 1st

Dec what will be the expiry date for LC Documents required Type of LC

Confirmed Credit

Issuing Bank requests another Bank – can be in the exporter’s country or in the third country to pay to the beneficiary on their behalf against presentation of documents. Once this arrangement is agreed for, then this credit is known as confirmed credit.

Restricted Credit

•Issuing Bank, while issuing the letter of credit, nominates a specified bank to negotiate the documents under this credit.It means only the nominated Bank will be authorised to negotiate the documents.•Recent developments

Freely Negotiable credit..

In a freely negotiable letter of credit any bank can negotiate the documents and claim reimbursement. Beneficiary has got the choice of presenting the documents to his own bank and claim payment. This will be advantageous to the exporter.

1. Beneficiary approaches nominated bank to transfer this L/C in favour of 3 sub suppliers (A, B & C) at 50%, 25%, 25% retaining his profit margin of 10 % .Please note the same L/C is transferred in parts .

Transferable Credit

A LC is transferable only if the issuing bank designates it.

Beneficiary has the right to request the nominated bank to transfer credits in parts or in full in favour of one or more beneficiaries if partial shipment permitted.

Beneficiary Global Exports India Ltd.

is now becoming the Applicant and requests for opening fresh L/C’s

Back To Back L/C

Beneficiary’s BankBank of India

A KARNAL

BDELHI

CCHANDIGARH

At the request of Beneficiary, Bank of India has opened 3 fresh L/C’s

Back to Back The second set of LC opened

by a bank at the request of the exporter is known as Back to Back Credit. ( in case the exporter is not the actual manufacturer)

The beneficiary of the original LC becomes the applicant for the Back to Back LC.

Revolving Credit

The amount of drawing is reinstated and made available to the beneficiary again for the agreed period of time on notification of payment by the applicant or on submission of documents.

Deferred Payment Credits

The amount is payable by the Issuing Bank in installments on deferred payment basis.

Partial payment is done in advance and balance in agreed installments according to terms in LC.

STANDBY CREDITS

Promise to honour beneficiary’s presentation of a document indicating the default of the applicant

Act as a standby arrangement in case the obligation is not fulfilled by the applicant

Exporter’s Bank Issuing Bank

Submission of

Draft / Bill of

Exchange

Documents forwarded

Documents Presented

Payment made

Payment made

Payment made to Exporter

Goods consigned directly

Payment demanded on due date and defaulted by importer

3 Standby credit

31

2

4

6

5

78

Date of shipment 15th dec 2008 Expiry date 31th dec 2008 Payment terms:

10% advance payment 80% on 360th day from date of

shipment 10% on installation and satisfactory

commissioning of the equipments

STANDBY CREDITS

More useful in collection instruments On account – consignment sale. In respect of any debt, obligation or

any liability by the overseas party in connection with bonafide trade transaction

As a back up instrument for collection

STANDBY CREDITS..

To present a copy of commercial invoice & unpaid bill of exchange

ISP 98 issued by ICC is the governing guidelines for this transaction

Reserve bank of India has since permitted authorised dealers to open standby credits to cover import trade transactions….

TYPES OF STANDBY CREDITS..

Performance standby – to pay the losses arising out of default of the applicant

Advance payment standby Bid bond / tender Counter standby – separate standby by the

beneficiary Financial standby – obligation to repay the

borrowed money Commercial standby – applicant to pay for the

goods Insurance standby – to meet reinsurance

obligation

Presently used in case of

Export transactions: Advance payment of the overseas buyer to

the exporter can be secured by Standby credit

Direct dispatch of shipping documents to the overseas buyer can be secured by the exporter

Consignment sales Deferred payments …… if not paid on due

date

Import transactions...

Default of payment by the importer in case of suppliers credit and buyers credit

Risk factors: absence of evidence of shipment/

Insurance documents…..

Who can opt for Import Standbycredits..

Importers of crude oil & petroleum products

Independent power producers Status exporters / 100% EOUs Public Sector Undertakings / Public

Limited Companies with good track record

Private Ltd companies / non corporate bodies

Precautions...

Status report on the seller invocation of SBC only with

supportive documents declaration of importers default copy of invoice non-negotiable bill of lading*** Lloyds / SGS inspection certificate

Precautions...

Incorporation of an additional clause In the event of payment being made

earlier - provision to dishonor the claim

Subject to Intl.Standby Practices (ISP 98) certain highlights on ISP 98

ISP 98 1.02 - If local laws conflicting with SBC

operations, local law will prevail 3.14 - Expiration day - if closed for

transaction - extended to 30 calendar days

Reasonable time for refusal of documents by Issuing Bank / Confirming bank within 3 days - reasonable beyond 7 days - unreasonable…..?

END OF PART I