Letter of Credit

1. Letter of Credit Ashit Hegde

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. Ashit Hegde

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). • 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. • 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. Ashit Hegde

4. 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. • 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. • 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. Ashit Hegde

5. 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. Ashit Hegde

6. 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. Ashit Hegde

7. 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.” Ashit Hegde

8. Specimen of a Bill of Exchange (Usance DA basis) drawn under a Letter of Credit - --------------------------------------------------------------------------------------------------------------------------------- BILL OF EXCHANGE NO. 10165 For JPY 9,000,000. - Nagoya 11th February, 2014 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 2014 TO Citibank N.A UNITY TRADING COMPANY BANGALORE, INDIA N. Nakiima B/L Date: 11th February 2014 (Managing Director) Ashit Hegde

9. Parties to Letter of Credit Transaction – • Applicant • Beneficiary • Issuing bank • Advising bank • Nominated bank • Confirming bank • Negotiating bank • Reimbursing bank Ashit Hegde

10. 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. Ashit Hegde

11. 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. Ashit Hegde

12. 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. Ashit Hegde

13. 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. Ashit Hegde

14. 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. Ashit Hegde

15. 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.) Ashit Hegde

16. 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). Ashit Hegde

17. 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. Ashit Hegde

18. 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. Ashit Hegde

19. 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. Ashit Hegde