A presentation for Retail Inland TF Training

RTC, New Delhi

By
Peter DJKM, New Delhi.
08.03.2014

Payment Methods in
International Trade
Open Account
Advance Payment
Documentary Collections
Documentary Credits / Letters of Credit

Open Account & Advance

Payment
Open Account. Goods supplied first. The Importer is

trusted to pay the Exporter after receipt of the goods.

Exporters risk
Advance Payment. Money paid first. Exporter is trusted to
ship the goods after receiving payment. Importers risk
Documentary Collections. Documents of title to goods
entrusted to a bank which will deliver them on payment.
Still risky for the Exporter
Documentary Credits. Bank acts as intermediary between
the buyer and the seller to address the concerns of both the
parties. Most preferred method

Documentary
Documents of title to goods entrusted to a bank
Collections
which will deliver them on payment. Still risky for the
Seller
Documentary Collections may be carried out in two
different ways:
1.Documents Against Payment (DP): Documents are
released to the Importer only against payment. Also
known as a Sight Collection or Cash Against
Documents
2.Documents Against Acceptance (DA): Documents are
released to the Importer only against acceptance
(usually of a draft). Also known as a Term Collection /
Usance

What is a Documentary
Credit or Letter of Credit

It is a Payment mechanism
Widely used in International Trade
Where Bank acts as intermediary
To address the concerns of both the
parties (Buyer & Seller)
And facilitates the trade transaction

Definition

UCP 600,Article 2,defines a documentary letter of

credit as Any arrangement ,however named or
described , that is irrevocable and thereby constitute a
definite undertaking of the issuing bank to honour a
complying presentation,

Hence, Issuing Bank acting at the request and in

accordance with the instructions of a customer
(applicant) undertakes to honour (pay, accept or incur
a deferred payment) the presentation by or on behalf
of Beneficiary, of stipulated documents, complying
with the terms and conditions of the LC.

Parties to a letter of credit

A.

Applicant - Applicant is normally the buyer of the

goods who has to make payment to the beneficiary
(seller). LC is initiated and issued at his request and
on the basis of his instructions.

B. Issuing Bank - Issuing bank is one which issues the

credit i.e. it is the bank which creates a letter of
credit and undertakes to make the payment.

C. Beneficiary - He is normally the seller of the goods

who has to receive payment from the Applicant. A
credit is issued in his favour to enable him or his
agent to obtain payment on surrender of stipulated
documents and comply with the terms and conditions
of the LC.

D. Advising Bank - Advising bank advises the

credit to the beneficiary, thereby assuring the
genuineness of the credit. It is normally located
in beneficiary's territory.
E. Confirming Bank - Confirming bank adds its
confirmation to the credit opened by another
bank, thereby, undertaking the responsibility to
honour or negotiate a complying presentation.
F. Nominated Bank - The bank with which credit
is available or any bank in the case of a freely
negotiable credit .

F. Reimbursing Bank - It is the bank, authorised

to honour the reimbursement claim in settlement
of negotiation acceptance / payment lodged with
it by the paying, negotiating or accepting bank.
It is normally the bank with which Issuing Bank
has account, from which payment is to be made.

TYPES OF LETTER OF CREDIT

A. Revocable Letter of Credit - It is an LC which
can be amended or cancelled by the issuing
bank at any time prior to its expiry without
notice to the beneficiary.
B. Irrevocable Letter of Credit - It is an LC
which cannot be cancelled or amended without
the consent of the parties to the credit.
C. Confirmed Letter of Credit - A confirmed
letter of credit is an irrevocable LC to which
another bank (usually the advising bank) has,
at the issuing bank's request. added its
confirmation. constituting a definite undertaking
of the former.

D. Revolving Letter of Credit - It is one where the

terms provide for an automatic renewal of the
amount for which the credit is opened.
E. Transferable Letter of Credit - A transferable LC
is a credit which the beneficiary has the right to give
instructions to the negotiating bank to make the
credit available in whole to third party or in part to
one or more third parties.
F. Back-to-back Credit - A Back-to-back credit is the
term given to an ancillary letter of credit which
arises when the beneficiary uses the letter of credit
opened in his favour to support another LC opened
by the seller's bank, favouring his supplier.

G. Payment Credit - It is a credit which will be

paid at sight basis against presentation of
requisite documents to the designated paying
bank.
H. Deferred Payment Credit - It is a usance
credit where payment will be made by
designated bank, on respective due dates.
determined in accordance with stipulations of
the credit, without the drawing of drafts.
I. Acceptance Credit - It is similar to deferred
credit except for the fact that in this credit
drawing of a usance draft is a must.

J. Negotiation Credit - It can either be sight

credit or a usance credit. A draft is usually drawn
in negotiation credit, as per credit terms. The
nomination can be restricted to a specific bank
or it may be freely available at the counters of
any bank.
K. Sight Credit - It states that payment will be
made by the bank at sight, on demand or on
presentation.
L. Usance Credit - It usually calls for drawing of
drafts at stated usance period requiring
acceptance and/or payment by drawee at the
end of the usance period. (Drafts are not
compulsory)

Documentary Credit
Mechanism.
CONTRACT

IMPORTER
(Applicant)

ISSUING
BANK

GOODS
DOCS

SHIPPING
COMPANY

GOODS
DOCS

OPEN CREDIT

ADVISING BANK

DOCUMENTS

NEGOTIATING
G

PAYMENT

CONFIRMIN

BANK
BANK

EXPORTER
(Beneficiary)

DOCUMENTS

PAYMENT

Compliance Requirements
Opening of letters of credit requires
compliance of the following
A. Trade Control Requirements
The applicant needs to ensure that goods
should be permitted to be imported into
India as per the current Foreign Trade
Policy. The item should be freely importable
or the customer should hold a valid license
for import of restricted items. The import of
prohibited items is not allowed.

B. Exchange Control Requirements

The scope of exchange control is to oversee the
payments and receipts by residents to nonresidents and vice-versa. Since import letter of
credit seeks to effect settlement of payment, hence
it falls under the purview of exchange control and
payment authorised must be within the scope of
exchange control guidelines

FOR OPENING AN IMPORT LC CUSTOMER

HAS TO PROVIDE THE FOLLOWING
DETAILS
1. IE code copy - handling for the first time for the
customer
2. FEMA Declaration form 1 in Companys Letter
Head
3. Stamped LC application form.
4. Purchase order / Contract.
5. Proforma invoice.
6. Board resolution
a) for availing the LC limit with our bank
b) persons who are authorised to sign the
documents for the request of issuance of LC etc.
7. In case shipment other than by CIF, insurance
cover copies from the applicant.

Following documents are normally called for under

LC
1.
2.
3.
4.
5.
6.
7.

Invoices
Packing List
BL/AWB
Insurance (in case of CIF) or beneficiary giving
details to applicant for covering insurance.
Lloyds Certificate in case of shipment by Sea
Test / Inspection Certificate
Certificate of origin etc.

The following non obtention of Mandatory

documents
require
approval
from
appropriate authorities.
a) Lloyds Certificate
b) Test/Inspection Certificate
c) D&B Report (where the FLC value is more
than USD 3 lakh) etc.

Variance mentioned below also

approval

require

a) Commitment / usance period more than 6

months.
b) BL/AWB consigned directly to the applicant

Acceptance of the following

Documents/Clauses requires approval:
(a) Chartered

Party Bill of Lading,

(b) Third Party documents
(c) Carrying goods on deck,
(d)
Shipment
by
Non-conference
vessel
(independent carrier)
(e) Consigning goods directly to the applicant etc.
(f) Ex works
(g) Transferable Import LC
(h) Revolving letter of credit (both Inland & Foreign)
(i) Standby LCs.
(j) Capital Goods import

UCP , ISBP, URR

UCP - Commercial letters of credit (The most

current publication is the UCP 600 w e f
01.07.2007)
ISBP - This is actually a supplement to the UCP
which attempts to standardize banking
practices worldwide by providing clarity to
various articles of UCPDC.
URR 525: Uniform Rule for Bank-to Bank
Reimbursement.

Pricing

Charges are levied at two stages :

I : LC issuing : Comn + P&T
II : Bills Retirement : Comn + P&T
III. Amendment

Two Components of LC Comn

Commitment Charges :
These are charges for the period for which Bank is
committed under the LC ie from the date of LC
opening till the expiry of the LC
Usance Charges
These are charges levied as per the tenor of the bill ie

The standby letter of credit ( SBLC) developed by banks in

United States after world war II as an alternative to guarantee
bonds because of legal restrictions on US banks from issuing
guarantee & bonds.
Japanese banks also issued standby credits for similar reason.
Differes from traditional LC where beneficiary is entitled for
payment once he is able to submit documents prescribed in the
LC. In SBLC, beneficiary is eligible for payment from the
issuing bank when the applicant fails to perform.
LC is a payment mechanism and SBLC is merely an back up.

A simple
understanding

In standby LC
1.The issuer, usually a bank
2.At the request of its customer, applicant
3.Agrees that the beneficiary will be paid
4.Before the credits expiry
5.Upon the beneficiarys presentation of:
( i )Its demand for payment and
(ii) any documents evidencing the
applicants non performance.

Similarities with the guarantee

Like the guarantee, the standby letter of credit
is of an abstract nature, i.e. legally separated
from the underlying transaction
The documents stipulated in the SBLC must be
submitted within the specified period
evidencing that applicant has not met or
insufficiently fulfilled his or her performance
obligations or the debtor has not met a
payment on time.
Basically fulfils the same purpose as a
guarantee: it is payable upon first demand and
without objections or defences

Standby Letter Of Credit.

Principles
On 1 January 1998, the ICC introduced the
ISP 98 (International Standby Practices), new
guidelines which were drawn up especially for
standby letter of credit business.
In practice, however, standbys are generally still
subject to the Uniform Customs and Practice for
Documentary Credits, publication no. 600.
IN India FEDAI has , in consultation with RBI
issued guideline for issuance under ISP 98 ICC
publication no 590 or UCPDC 600 as per

Usage of standby LCs

1.As document of promise in respect of nonperformance as a substitute of guarantee.

2.For all permissible cases as per FEMA where
guarantee is issued in respect of any debt,
obligation or other liability incurred byAn exporter on account of export from india.
3.For any bonafide trade transactions
Exporters may receive SBLC in respect of
export from india.
4. For IMPORTS in to india ( AP dir 84 Dtd
03.03.2003)

Facility to be extended to..

1.
2.
3.
4.
5.
6.

Selectively due to risk involved

Independent power producers/ importers of
crude oils and petroleum products.
Export houses/trading houses/ star trading
houses/ super star trading houses/100% EOUs.
Public sector units/public limited companies with
good track record.
Satisfactory credit report on over seas party to
be held.
Bill of entry to be produced as evidence of
import.

Contd
7. Sanctioning authority zonal office / HO
8.Separate limit for SBLC instead of under
regular LC limit.
9.No document of title to goods available. Hence
clean exposure.
10.Invocation to be reported to RBI
11.Applicant to undertake not to dispute payment
if invoked.
12.To be careful if ISP 98 governs the issuance.

Thank You