Lc Presentation 415366

LETTER OF CREDIT

Basic Understanding

Letter of Credit (L/C)  Introduction: What is a Letter of Credit?

 Basic Facts:  Revocable & Irrevocable Letter of Credit  Sight & Usance Letter of Credit  Confirmed Letter of Credit

 Mechanics: How does a Letter of Credit transaction work?

 Risk Analysis: Advantages & Disadvantages

1

What is L/C ?  document issued by a financial institution  Written Undertaking on behalf of Buyer  promising to effect payment in favour of the Beneficiary  up to a stated sum of money  within a prescribed time limit and against stipulated documents

 In Simple Words,

provides an irrevocable payment undertaking to a beneficiary subject to complying  documents as stated in the credit  Adhering to as mentioned in the L/C

2

What is L/C - Key Principle

 banks deal only in documents and not in goods  decision to pay under a Letter of Credit will be based entirely on  documents presented to the bank accordance with the and conditions

of the LC

 It is prohibitive for the banks to physically check whether all merchandise has been shipped

exactly as per each letter of Credit

3

Why L/C  Allows supplier to access credit even before the goods can reach the buyer

 Secured payment

 Discount at better rates and take money upfront

4

L/C Vs. Bank Guarantee (BG)

5

L/C

BG

Opener

Purchaser

Seller

Purpose

Secure payment (performance)

Secure obligation (non performance)

Payment mode

Presentation

Invocation

Payment trigerred by

Supplier

Purchaser

Parties to L/C  Opener / Applicant

-

Purchaser

 Beneficiary

-

Seller

 Confirming Bank

-

Optional

 Negotiating Bank

-

Optional

 Applicant’s Banker  Beneficiary’s Banker  Advising Bank

6

used in LC  Payment  Sight : Payable upon receipt of documents by the Buyers Bank  Usance : Payable on the due date I.e. after credit period

 Type of LC  Revocable : LC can be cancelled on request of Buyers  Irrevocable : LC can be cancelled only on request of Seller  (Recovcable LCs are not to be opened – RBI Guideliens)  Revolving : Amount of LC is reinstated after every presentation without amendment

for a specific period  Milestones  Latest Shipment Date  Latest Negotiation Date / Presentation period  Expiry Date

7

Other General in LC  Transhipment

 Partial / Full Shipment

 Bank Charges

 Documents required (not exhaustive)  Invoice

 Transport Document  Insurance certificate  Packing List  Other documents

8

How does LC operate  The mechanics of a Letter of Credit are easily understood when separated into the

following three steps

 Issuance of LC  Flow of Goods  Flow of Documents & Payment

9

LC Issuance Buyer/ Applicant

Buyer applies for LC

Issuing Bank

10

Sales contract

Seller/ Beneficiary

Seller’s bank authenticates LC and sends to seller

Buyer’s bank issues LC and sends to seller’s bank

Advising Bank

How LC operates Buyer/ Applicant The issuing bank debits the buyers for the payment and releases the original documents Step 4

Shipment

Seller/ Beneficiary

Seller presents documents under the LC to its bank

Step 1

On receiving the payment Seller’s is credited Step 5

After scrutinizing the documents negotiating bank forwards them to the issuing bank Step 2

Issuing Bank

11

On checking for compliance with LC the issuing bank reimburses the negotiating bank by debiting the buyer’s (immediate if sight LC / due date if usance LC) Step 3

Negotiating Bank

How LC operates – Full Flow 

Buyer’s Bank

Seller’s Bank

Seller

Despatch Goods

Lodge documents with Bank

Documents scrutiny and send to LC opening Bank

Buyer

Buyer’s Bank

Collect goods

12

Bank handover docs for delivery

Inform docs arrival to Buyer

Buyer Collect docs from bank after payment/confirming payment

General Rules relating to LC  Operational only upon happening of event for which LC is opened

 Will not allow direct shipments of goods to Buyer

 Can be encashed only if all conditions of the LC have been met

 Governed by Uniform Customs and Practices for Documentary Credit under ICC 500

13

Seller

ADVANTAGES

 Confirmed Payment – Shift Credit risk from Buyer to the Bank

 Confirmed Order execution

 Can be discounted and payment obtained upfront

DIS-ADVANTAGES  Discrepancy can hold / Delay the payment

 LC Opening Bank going bankrupt

14

Buyer

ADVANTAGES  For Seller to be paid, all and conditions have to be met  Can negotiate better as the payment to seller is secured

DIS-ADVANTAGES

 Quality / Quantity of goods cannot be ascertained

 Bank deals only with documents and not with goods  Additional Cost  Blocks Credit Lines

15

Understanding for correct negotiation  Understanding the Intricacies of LC

 Understanding all the Inco – CIF, FOB, EX-WORKS, C&F, FAS etc

 Cost – Monetary and Non-Monetary

16

LC Operations at Hansen  Opening of LC  Justification note as per Format  Approved by HOD  Fix ability

 Documents required  Purchase Order duly signed by relevant authority and accepted by

Seller or  Proforma Invoice

17

LC Operations at Hansen  Amendment to LC  Justification note for Amendment  Approved by HOD  Fix ability  Clarity on Bank Charges

 Other Inputs

 LC Requirement to be forecasted  Tentative Shipment date and payment date be informed  Timelines as per LC be met

18

 THANK YOU

19