Description
This is a presentation explaining the import letter of credit.
Import Letter of Credit (LC)
Bank’s products:
• Import Letter of Import Credit
The Bank can assist in:
Letter Of • Bank Guarantee* Credit • Term Loans*
Providing payment behalf of the buyer
goods
• Providing payment assurance to seller on
• Providing assurance seller on assurance to for right quality of
behalf of the respect of the sale • Providing finance in buyer
• Effecting payment to the seller on behalf of the buyer • Handling documents covering the sale
1
What is a Letter of Credit?
• • • • • • • • A bank’s written guarantee Made on behalf of a buyer To pay a seller A given sum of money Provided that documents presented Meet the terms specified And are presented within a specified time And at a specified place
These elements are common to all LC.
2
Benefits for the Players
Buyer
• Reduces delivery risk • Bank oversees regulatory requirements • Importer can contract for better terms
Seller
• Reduces risk of nonpayment • Bank oversees regulatory requirements
3
Risks Involved
• Importer not able to pay • Document discrepancy are not identified • Issuing bank not able to pay • Forged documents • Inferior Quality of goods • Quantitiy of goods • Lost / Damage to goods
4
Click here for Case Stud
LC Process
Advising bank gives the shipping documents to Issuing bank 6 Issuing bank pays to advising bank
8
Buyer asks his bank to issue an LC against the sales contract Bank collects the money from buyer and gives him the proof of shipping docdocuments.
1
Buyer’s Bank
Issuing bank issues the LC to advising bank 2
Advising bank 3 notifies the seller about the LC Seller’s Bank (Advising Bank) Seller submits the proof of shipping to the advising bank 5
Buyer’s Bank (Issuing Bank)
7
Buyer
Seller
Shipper
Seller sends the goods through shipper and collects proof of shipping
Buyer gives the documents to the shipper and collects goods
4
9 5
LC Variations
LC Variations
SITUATION
• • • • Seller doesn’t trust issuing bank Issuing bank wants to have control Middlemen are involved Issuing bank doesn’t have an account with the specified bank • • Repetitive transactions Seller wants advance payment
7
LC VARIATION
• • • • • • • Confirmation Revocable LC Transferable / Back-toback LC Reimbursement Revolving LC Red Clause LC Standby LC
LC Variations: Confirmation
Issuing bank gives the LC to seller’s bank and requests for confirmation
ICICI Bank
(Issuing Bank)
Seller bank confirms the LC and notifies the seller
Seller’s Bank (Confirming Bank)
Buyer Shipper
Seller
8
LC Variations: Confirmation
LC Confirmation implies an undertaking by the confirming Bank in addition to that of issuing Bank to pay under the credit, in case of failure by the LC issuing Bank to pay, provided terms and conditions of LC are complied with.
9
LC Variations: Revocable / Irrevocable LC
Revocable LC: Issuing bank changes / cancels the LC at own will Irrevocable LC: Issuing bank needs permission of seller before changing LC conditions
Seller’s Bank (Advising Bank)
ICICI Bank (Issuing Bank)
Buyer
Seller
10
LC Variations: Transferable LC
Issuing bank gives the LC to seller’s bank
ICICI Bank
(Issuing Bank)
Seller’s Bank (Advising Bank)
On first beneficiary's request, Part of the LC will be transferred to the supplier, the second beneficiary Buyer
Seller bank advises the LC to the first beneficiary /Seller
First Beneficiary / Seller
Shipper
Supplier
11
LC Variations: Back to Back LC
Issuing bank gives the LC to seller’s bank
ICICI Bank
(Issuing Bank)
Seller’s Bank (Advising Bank)
On Seller’s request, an Inland LC will be opened by Seller’s Bank favouring the original supplier
Seller bank advises the LC to the Seller
Buyer Seller -Middleman
Shipper
Supplier
12
LC Variations: Reimbursement
Negotiating bank sends the documents
ICICI Bank
(Issuing Bank)
Issuing bank sends payment instructions to Reimbursing bank
Seller’s Bank (Advising Bank & Negotiating Bank)
Reimbursement bank makes the payment to Negotiating bank
Reimbursing Bank Buyer
13
LC Variations: Revolving
LC Value US $ 1,00,000
Documents worth US $ 1,00,000 Every month
ICICI Bank
(Issuing Bank)
Payment of US $ 1,00,000 Every month
Same LC is used for these transactions Seller
Seller’s Bank (Advising Bank)
Buyer
14
LC Variations: Red Clause LC
Issuing bank issues LC and sends it to advising bank 2 Advising bank advises LC & pays money to seller3 towards preshipment expenses.
1
ICICI Bank Advising bank gives the shipping (Issuing Bank) documents to Issuing bank 6
Buyer asks his bank to issue an LC against the sales contract Bank collects the money from buyer and gives him the proof of shipping
Seller’s Bank (Advising Bank)
Seller submits the proof of shipping to the advising bank 5
7
Buyer
Seller
Shipper
Buyer gives the documents to the shipper and collects goods
Seller sends the goods through shipper and collects proof of shipping
4
15
LC Variations: Red Clause LC
Under Red Clause LC the LC issuing bank authorizes the advising bank / Negotiating bank to give advance to seller towards production/purchase of materials. On giving such advance, the advising bank/Negotiating bank can claim money from LC issuing bank who in turn recovers the money from LC applicant/Buyer.
16
LC Variations: Standby
3
1
ICICI Bank (Issuing Bank)
Issuing bank issues LC
2
Advising bank Seller’s Bank notifies the seller (Advising Bank) about the LC
Buyer asks his bank to issue an LC against the sales contract
Seller submits the proof of default by the Buyer to advising bank 5 Seller provides the service and obtains proof of delivery
Buyer
Seller
4
SLC is like a Bank Guarantee- It is towards non-performance whereas LC is for performance.
17
LC Stages
LC Issue Stages
18
LC Stages for Issuing Bank
This sub process is called Issue of LC
Issuing bank scrutinizes the documents, makes system entry & sends presentation memo to the buyer ICICI Bank
Issuing bank opens the LC & sends it to advising bank Advising bank sends the shipping documents to Issuing Seller’s Bank bank. (Advising Bank) ICICI Bank (Issuing Bank)
Bank collects the money from buyer and gives him the proof of shipping documents. Seller ships the goods & advises to the documents
Buyer asks his bank to issue an LC against the sales contract
Seller
This sub process is called Lodgment of Bills Under LC
Buyer
This sub process is called Realization under LC
19
Amendments to LC
• During the course of business, buyer and seller may agree to change terms and conditions of contract
•
If these changes are related to LC already opened, then changes need to be made to LC. This process is called Amendment under LC
•
The process is similar to LC Issue. However, amendment has to be linked to original LC
•
In the case of Irrevocable Credits, any amendment to LC requires concurrence of the Beneficiary ( Seller)
20
Cancellation of LC
• In case the LC is unutilised beyond the expiry date, the LC cancellation process would be started by the bank
•
Seller/ Buyer may also initiate cancellation, provided the other party gives its consent
21
Delivery Order
• Sometimes the goods reach before the documents specially when the goods are coming via air. • To avoid demurrage, customer takes a delivery order from the bank to receive the goods before the documents reach. • For this he provides indemnity letter to the bank. • 110% Margin may also be insisted upon
22
Realisation under LC
Realisation under LC : Types of bills -Usance & Sight
Payment could be mainly of two types: • Delivery on payment - Sight Bills • Delivery on acceptance - Usance Bills
24
doc_311763828.ppt
This is a presentation explaining the import letter of credit.
Import Letter of Credit (LC)
Bank’s products:
• Import Letter of Import Credit
The Bank can assist in:
Letter Of • Bank Guarantee* Credit • Term Loans*
Providing payment behalf of the buyer
goods
• Providing payment assurance to seller on
• Providing assurance seller on assurance to for right quality of
behalf of the respect of the sale • Providing finance in buyer
• Effecting payment to the seller on behalf of the buyer • Handling documents covering the sale
1
What is a Letter of Credit?
• • • • • • • • A bank’s written guarantee Made on behalf of a buyer To pay a seller A given sum of money Provided that documents presented Meet the terms specified And are presented within a specified time And at a specified place
These elements are common to all LC.
2
Benefits for the Players
Buyer
• Reduces delivery risk • Bank oversees regulatory requirements • Importer can contract for better terms
Seller
• Reduces risk of nonpayment • Bank oversees regulatory requirements
3
Risks Involved
• Importer not able to pay • Document discrepancy are not identified • Issuing bank not able to pay • Forged documents • Inferior Quality of goods • Quantitiy of goods • Lost / Damage to goods
4
Click here for Case Stud
LC Process
Advising bank gives the shipping documents to Issuing bank 6 Issuing bank pays to advising bank
8
Buyer asks his bank to issue an LC against the sales contract Bank collects the money from buyer and gives him the proof of shipping docdocuments.
1
Buyer’s Bank
Issuing bank issues the LC to advising bank 2
Advising bank 3 notifies the seller about the LC Seller’s Bank (Advising Bank) Seller submits the proof of shipping to the advising bank 5
Buyer’s Bank (Issuing Bank)
7
Buyer
Seller
Shipper
Seller sends the goods through shipper and collects proof of shipping
Buyer gives the documents to the shipper and collects goods
4
9 5
LC Variations
LC Variations
SITUATION
• • • • Seller doesn’t trust issuing bank Issuing bank wants to have control Middlemen are involved Issuing bank doesn’t have an account with the specified bank • • Repetitive transactions Seller wants advance payment
7
LC VARIATION
• • • • • • • Confirmation Revocable LC Transferable / Back-toback LC Reimbursement Revolving LC Red Clause LC Standby LC
LC Variations: Confirmation
Issuing bank gives the LC to seller’s bank and requests for confirmation
ICICI Bank
(Issuing Bank)
Seller bank confirms the LC and notifies the seller
Seller’s Bank (Confirming Bank)
Buyer Shipper
Seller
8
LC Variations: Confirmation
LC Confirmation implies an undertaking by the confirming Bank in addition to that of issuing Bank to pay under the credit, in case of failure by the LC issuing Bank to pay, provided terms and conditions of LC are complied with.
9
LC Variations: Revocable / Irrevocable LC
Revocable LC: Issuing bank changes / cancels the LC at own will Irrevocable LC: Issuing bank needs permission of seller before changing LC conditions
Seller’s Bank (Advising Bank)
ICICI Bank (Issuing Bank)
Buyer
Seller
10
LC Variations: Transferable LC
Issuing bank gives the LC to seller’s bank
ICICI Bank
(Issuing Bank)
Seller’s Bank (Advising Bank)
On first beneficiary's request, Part of the LC will be transferred to the supplier, the second beneficiary Buyer
Seller bank advises the LC to the first beneficiary /Seller
First Beneficiary / Seller
Shipper
Supplier
11
LC Variations: Back to Back LC
Issuing bank gives the LC to seller’s bank
ICICI Bank
(Issuing Bank)
Seller’s Bank (Advising Bank)
On Seller’s request, an Inland LC will be opened by Seller’s Bank favouring the original supplier
Seller bank advises the LC to the Seller
Buyer Seller -Middleman
Shipper
Supplier
12
LC Variations: Reimbursement
Negotiating bank sends the documents
ICICI Bank
(Issuing Bank)
Issuing bank sends payment instructions to Reimbursing bank
Seller’s Bank (Advising Bank & Negotiating Bank)
Reimbursement bank makes the payment to Negotiating bank
Reimbursing Bank Buyer
13
LC Variations: Revolving
LC Value US $ 1,00,000
Documents worth US $ 1,00,000 Every month
ICICI Bank
(Issuing Bank)
Payment of US $ 1,00,000 Every month
Same LC is used for these transactions Seller
Seller’s Bank (Advising Bank)
Buyer
14
LC Variations: Red Clause LC
Issuing bank issues LC and sends it to advising bank 2 Advising bank advises LC & pays money to seller3 towards preshipment expenses.
1
ICICI Bank Advising bank gives the shipping (Issuing Bank) documents to Issuing bank 6
Buyer asks his bank to issue an LC against the sales contract Bank collects the money from buyer and gives him the proof of shipping
Seller’s Bank (Advising Bank)
Seller submits the proof of shipping to the advising bank 5
7
Buyer
Seller
Shipper
Buyer gives the documents to the shipper and collects goods
Seller sends the goods through shipper and collects proof of shipping
4
15
LC Variations: Red Clause LC
Under Red Clause LC the LC issuing bank authorizes the advising bank / Negotiating bank to give advance to seller towards production/purchase of materials. On giving such advance, the advising bank/Negotiating bank can claim money from LC issuing bank who in turn recovers the money from LC applicant/Buyer.
16
LC Variations: Standby
3
1
ICICI Bank (Issuing Bank)
Issuing bank issues LC
2
Advising bank Seller’s Bank notifies the seller (Advising Bank) about the LC
Buyer asks his bank to issue an LC against the sales contract
Seller submits the proof of default by the Buyer to advising bank 5 Seller provides the service and obtains proof of delivery
Buyer
Seller
4
SLC is like a Bank Guarantee- It is towards non-performance whereas LC is for performance.
17
LC Stages
LC Issue Stages
18
LC Stages for Issuing Bank
This sub process is called Issue of LC
Issuing bank scrutinizes the documents, makes system entry & sends presentation memo to the buyer ICICI Bank
Issuing bank opens the LC & sends it to advising bank Advising bank sends the shipping documents to Issuing Seller’s Bank bank. (Advising Bank) ICICI Bank (Issuing Bank)
Bank collects the money from buyer and gives him the proof of shipping documents. Seller ships the goods & advises to the documents
Buyer asks his bank to issue an LC against the sales contract
Seller
This sub process is called Lodgment of Bills Under LC
Buyer
This sub process is called Realization under LC
19
Amendments to LC
• During the course of business, buyer and seller may agree to change terms and conditions of contract
•
If these changes are related to LC already opened, then changes need to be made to LC. This process is called Amendment under LC
•
The process is similar to LC Issue. However, amendment has to be linked to original LC
•
In the case of Irrevocable Credits, any amendment to LC requires concurrence of the Beneficiary ( Seller)
20
Cancellation of LC
• In case the LC is unutilised beyond the expiry date, the LC cancellation process would be started by the bank
•
Seller/ Buyer may also initiate cancellation, provided the other party gives its consent
21
Delivery Order
• Sometimes the goods reach before the documents specially when the goods are coming via air. • To avoid demurrage, customer takes a delivery order from the bank to receive the goods before the documents reach. • For this he provides indemnity letter to the bank. • 110% Margin may also be insisted upon
22
Realisation under LC
Realisation under LC : Types of bills -Usance & Sight
Payment could be mainly of two types: • Delivery on payment - Sight Bills • Delivery on acceptance - Usance Bills
24
doc_311763828.ppt