Description
The presentation on facilities available under letter of credit. It also explains bank guarantee types and features.
? By and large there four kinds of methods by which an import transaction can be handled: a) Collection of Documentary Bills : No finance is involved. FCU is remitted only after the importer makes the payment to its banker. b) Advance payment : No finance is involved. FCU is remitted before the shipment is made. c) Direct payment : No finance is involved. Goods arrive first and FCU is remitted thereafter. d) Letter of Credit: a) It’s a Non-Funded facility to the importer. b) To the bank it’s a contingent liability. c) Under an LC three kinds of facilities are possible.
Three kinds of facility possible under L/C. 1) Seller’s Credit : i. where the seller gives the buyer a credit – say for 90 days. ii. The bank opens an Usance LC – available by acceptance. iii. Since under UCPDC a draft on buyer is not acceptable, the bank have a Trust Receipt executed by the buyer where it undertakes to pay on due date (after 90 days) and hand over the documents to it. iv. If the buyer does not pay up after 90 days, the bank has to fulfill its commitment under L/C and pay the seller and thus the non-funded facility turns into a funded facility under the nomenclature of „overdue import bill?.
Three kinds of facility possible under L/C. 2) Buyer’s Credit : i. Where the seller does not give the buyer a credit, but the buyer
arranges a credit with the help of the LC opening bank - say for 90 days. ii. The lender, mostly an off-shore unit of an international bank, takes the risk on the LC opening bank and not on the buyer. iii. The bank opens a sight LC so the seller gets immediate payment. iv. But, such payment is made by the lender as per the arrangement. v. As per the reimbursement clause of the LC, the negotiating bank (or the sellers bank) claims from the lender. vi. The LC opening bank stands liable to pay up the lender after 90 days. vii. This kind of credits attract interest based on LIBOR and RBI has specific guideline about the fixing of rate of interest for various periods of loan.
Three kinds of facility possible under L/C. 3) Sight LC : i. Where the seller does not give the credit and buyer is also not interested in a long term credit, yet can enjoy a short term credit under a sight letter of credit. ii. Under this sight LC, the negotiating bank can draw on the nostro account of the LC opening bank wit prior notice to the LC opening bank. iii. Seller gets paid abroad under foreign currency on day 1 and the LC opening bank is out of fund. iv. This is considered to be a funded credit to the buyer equivalent to cash credit and the cash credit rate of interest is applied. contd….
Three kinds of facility possible under L/C.
3) Sight LC :
v. Documents arrives in India few days later, say on day 5 and the importer or buyer is advised of the arrival. vi. On day 7 or 8 the buyer retires the document by paying INR equivalent to the value of the foreign currency import . vii. So if the payment is made on 8th day, buyer enjoys a credit of 7 days and the seller gets immediate payment. This credit is generally called „Bills Receivable?. viii. This facility is treated as a normal overdraft and is charged at cash credit rate.
Contd……..
Three kinds of facility possible under L/C. 3) Sight LC : FEDAI guidelines : Rule 3 : Crystallization “All foreign currency import bills drawn under letters of credit shall be crystallization into Rupee liability on the 10th day from the date of receipt of documents at the letter of credit opening branch of the bank in the case of demand bills and on the due date in the case of usance bills. In case the 10th day or the due date falls on a holiday or a Saturday, the importer?s liability shall be crystallized into Rupee liability on the next working day.”
Tender Guarantees or Bid Bonds ? Often called for in support of contract tenders, particularly in international trade situations. ? Provides the beneficiary with a financial remedy if the applicant fails to fulfil any of the tender conditions. ? Normally submitted with the other documents called for in the invitation to tender and remain valid during the period of tender, plus a grace period to allow the beneficiary to make demand. Performance Guarantee ?Most common form of guarantee, used in a variety of situations. ?Normally required at the time of commencement of the contract and will extend over the duration of the contract, plus a grace period to allow the beneficiary to make demand in the event of non-performance of the obligations covered by the guarantee. Payment Retention Guarantees ? With the supply of factory plant, machinery and other capital goods, it is often agreed that the buyer may withhold 5%-10% of the contract amount for a period, for example 12 months after the plant or machine(s) are up and running.
Advance Payment Guarantees
? Used where the applicant calls for the provision of a sum of money at an early stage of the contract. The beneficiary can recover the amount paid in advance, or a part thereof, if the applicant fails to fulfil their underlying contractual obligations. ? May provide for pro rata reductions to the guarantee amount on presentation of certain documents or on a specified date or dates. ? Duration will depend on the underlying contract, but many run up to the anticipated date of the final delivery, plus a grace period to allow the beneficiary to make demand in the event of nonperformance of the obligations covered by the guarantee.
Shipping Guarantees [an indemnity in lieu of Bill of Lading]
? Issued when the Bill of Lading is missing or misplaced. ? Issued in favour of shipping company comforting them from any loss or dammage caused by future presentation of original bill of lading. ? Importer can release the goods by virtue of this guarantee.
?Bank undertakes unconditional commitment to pay the beneficiary upon receipt of the claim, which formally called the invocation of guarantee. ?Bank cannot withheld payment at the behest of the customer unless there is a court case pending directing to maintain status quo. ?Bank must inspect the underlying contract or terms and conditions before issuing the guarantee and a reference to such document should form a part of the contents of a guarantee. ?Guarantee must clearly mention the amount which the beneficiary may claim without any qualification or condition attached to it. ?Guarantee must not be an open ended commitment. It should have a specific date of expiry after which the bank?s liability to pay will cease. ?However, a guarantee may have two expiry dates viz. one for the guarantee (say 31/3) and the other for lodging the claim (say 30/4). Hence the beneficiary must invoke, if it had to, within 30/4.
Contd…………
?Bank must wait even after 30/4 and not cancel the guarantee because if the beneficiary dates its invocation letter on 30/4 and mail it on the same day and it reaches the bank on, say 10th May, bank still has to honor it. ?Commission on guarantee is mutually fixed and normally recovered upfront for the whole tenor of the guarantee. ?Guarantee falls under law of contract and have to be issued under proper stamp paper. ?The applicable Stamp Act is under the jurisdiction of the states and hence the amount of stamp might differ from that of Maharashtra to Assam. ?Guarantee is a non-funded facility to the customers. ?It is a contingent liability to the banks. In case of invocation, it is converted into a funded facility. ?It attracts the Capital Adequacy Norms.
doc_536107374.ppt
The presentation on facilities available under letter of credit. It also explains bank guarantee types and features.
? By and large there four kinds of methods by which an import transaction can be handled: a) Collection of Documentary Bills : No finance is involved. FCU is remitted only after the importer makes the payment to its banker. b) Advance payment : No finance is involved. FCU is remitted before the shipment is made. c) Direct payment : No finance is involved. Goods arrive first and FCU is remitted thereafter. d) Letter of Credit: a) It’s a Non-Funded facility to the importer. b) To the bank it’s a contingent liability. c) Under an LC three kinds of facilities are possible.
Three kinds of facility possible under L/C. 1) Seller’s Credit : i. where the seller gives the buyer a credit – say for 90 days. ii. The bank opens an Usance LC – available by acceptance. iii. Since under UCPDC a draft on buyer is not acceptable, the bank have a Trust Receipt executed by the buyer where it undertakes to pay on due date (after 90 days) and hand over the documents to it. iv. If the buyer does not pay up after 90 days, the bank has to fulfill its commitment under L/C and pay the seller and thus the non-funded facility turns into a funded facility under the nomenclature of „overdue import bill?.
Three kinds of facility possible under L/C. 2) Buyer’s Credit : i. Where the seller does not give the buyer a credit, but the buyer
arranges a credit with the help of the LC opening bank - say for 90 days. ii. The lender, mostly an off-shore unit of an international bank, takes the risk on the LC opening bank and not on the buyer. iii. The bank opens a sight LC so the seller gets immediate payment. iv. But, such payment is made by the lender as per the arrangement. v. As per the reimbursement clause of the LC, the negotiating bank (or the sellers bank) claims from the lender. vi. The LC opening bank stands liable to pay up the lender after 90 days. vii. This kind of credits attract interest based on LIBOR and RBI has specific guideline about the fixing of rate of interest for various periods of loan.
Three kinds of facility possible under L/C. 3) Sight LC : i. Where the seller does not give the credit and buyer is also not interested in a long term credit, yet can enjoy a short term credit under a sight letter of credit. ii. Under this sight LC, the negotiating bank can draw on the nostro account of the LC opening bank wit prior notice to the LC opening bank. iii. Seller gets paid abroad under foreign currency on day 1 and the LC opening bank is out of fund. iv. This is considered to be a funded credit to the buyer equivalent to cash credit and the cash credit rate of interest is applied. contd….
Three kinds of facility possible under L/C.
3) Sight LC :
v. Documents arrives in India few days later, say on day 5 and the importer or buyer is advised of the arrival. vi. On day 7 or 8 the buyer retires the document by paying INR equivalent to the value of the foreign currency import . vii. So if the payment is made on 8th day, buyer enjoys a credit of 7 days and the seller gets immediate payment. This credit is generally called „Bills Receivable?. viii. This facility is treated as a normal overdraft and is charged at cash credit rate.
Contd……..
Three kinds of facility possible under L/C. 3) Sight LC : FEDAI guidelines : Rule 3 : Crystallization “All foreign currency import bills drawn under letters of credit shall be crystallization into Rupee liability on the 10th day from the date of receipt of documents at the letter of credit opening branch of the bank in the case of demand bills and on the due date in the case of usance bills. In case the 10th day or the due date falls on a holiday or a Saturday, the importer?s liability shall be crystallized into Rupee liability on the next working day.”
Tender Guarantees or Bid Bonds ? Often called for in support of contract tenders, particularly in international trade situations. ? Provides the beneficiary with a financial remedy if the applicant fails to fulfil any of the tender conditions. ? Normally submitted with the other documents called for in the invitation to tender and remain valid during the period of tender, plus a grace period to allow the beneficiary to make demand. Performance Guarantee ?Most common form of guarantee, used in a variety of situations. ?Normally required at the time of commencement of the contract and will extend over the duration of the contract, plus a grace period to allow the beneficiary to make demand in the event of non-performance of the obligations covered by the guarantee. Payment Retention Guarantees ? With the supply of factory plant, machinery and other capital goods, it is often agreed that the buyer may withhold 5%-10% of the contract amount for a period, for example 12 months after the plant or machine(s) are up and running.
Advance Payment Guarantees
? Used where the applicant calls for the provision of a sum of money at an early stage of the contract. The beneficiary can recover the amount paid in advance, or a part thereof, if the applicant fails to fulfil their underlying contractual obligations. ? May provide for pro rata reductions to the guarantee amount on presentation of certain documents or on a specified date or dates. ? Duration will depend on the underlying contract, but many run up to the anticipated date of the final delivery, plus a grace period to allow the beneficiary to make demand in the event of nonperformance of the obligations covered by the guarantee.
Shipping Guarantees [an indemnity in lieu of Bill of Lading]
? Issued when the Bill of Lading is missing or misplaced. ? Issued in favour of shipping company comforting them from any loss or dammage caused by future presentation of original bill of lading. ? Importer can release the goods by virtue of this guarantee.
?Bank undertakes unconditional commitment to pay the beneficiary upon receipt of the claim, which formally called the invocation of guarantee. ?Bank cannot withheld payment at the behest of the customer unless there is a court case pending directing to maintain status quo. ?Bank must inspect the underlying contract or terms and conditions before issuing the guarantee and a reference to such document should form a part of the contents of a guarantee. ?Guarantee must clearly mention the amount which the beneficiary may claim without any qualification or condition attached to it. ?Guarantee must not be an open ended commitment. It should have a specific date of expiry after which the bank?s liability to pay will cease. ?However, a guarantee may have two expiry dates viz. one for the guarantee (say 31/3) and the other for lodging the claim (say 30/4). Hence the beneficiary must invoke, if it had to, within 30/4.
Contd…………
?Bank must wait even after 30/4 and not cancel the guarantee because if the beneficiary dates its invocation letter on 30/4 and mail it on the same day and it reaches the bank on, say 10th May, bank still has to honor it. ?Commission on guarantee is mutually fixed and normally recovered upfront for the whole tenor of the guarantee. ?Guarantee falls under law of contract and have to be issued under proper stamp paper. ?The applicable Stamp Act is under the jurisdiction of the states and hence the amount of stamp might differ from that of Maharashtra to Assam. ?Guarantee is a non-funded facility to the customers. ?It is a contingent liability to the banks. In case of invocation, it is converted into a funded facility. ?It attracts the Capital Adequacy Norms.
doc_536107374.ppt