CHAPTER NINE

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CHAPTER NINE

• LETTER OF CREDIT VARIATIONS

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• One of the great strength of the letter of credit
  is its flexibility. The basic letter of credit
  can be changed according to the needs of buyers
  and sellers.
• Letters of credit can provide financing for the
  buyer, advance funds to the seller or permit a
  large international bank to provide financial
  support to smaller banks or to customers. This
  flexibility makes letters of credit the principle
  means of bank financing for international trade.
• Export Letters of Credit
• Every international letters of credit is both an
  export credit and an import credit. To the
  beneficiary and his bank, it is an export credit
  to the buyer and to the opening bank it is an
  import credit. All commercial L/Cs are opened at
  the request of the buyer (importer) to its local
  bank.

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• Confirmed Letters of Credit (Teyitli akreditif)
• If an unknown small bank in an unstable country,
  say in North Cyprus at the request of the buyer
  (importer) opens a letter of credit in favor of a
  seller, say in the US, the seller (exporter) may
  ask also that a US bank adds its confirmation in
  addition to the foreign bank. This is an
  irrevocable obligation of the US bank and this
  L/C is called confirmed L/C. The exporter now has
  a L/C that bears the promise of two banks.
• The draft in a confirmed L/C will usually be
  drawn on the confirming bank (US bank) so that
  you can pay the exporter immediately.
• When a reputable bank adds its confirmation to a
  L/C issued by a foreign bank, it charges a fee
  (commission) to the foreign bank that is
  ultimately passed on the foreign buyer.

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• Advised Credit Unconfirmed L/C (Teyitsiz
  akreditif)
• Many exporters are willing to accept L/C without
  an added confirmation of a second bank due to
  experience, trust and competition. In this case
  the exporter accepts the B/L as soon as is it
  advised by his bank at home. This type of L/C is
  called advised credit or unconfirmed L/C.
• L/Cs Available By Time Drafts
• 2. Sight L/C
• Drafts are drawn on the issuing bank and payment
  is made by the issuing bank as soon as the
  documents are received by this bank. The bank
  releases the documents to the importer after
  receiving the money. So, with a sight draft the
  seller surrenders title to the merchandise for a
  cash payment.

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• Time L/C
• The seller agrees to wait a period of time,
  before receiving full payment. The reason can be
  a highly competitive market or a tradition in the
  sector etc.
• In any event, the seller surrenders title to the
  merchandise in return for a promise of the
  issuing bank to pay for it at a future date
  (eg.90 days after sight). The issuing bank is
  responsible for payment therefore should find a
  way of guaranteeing itself from the nonpayment of
  the importer (collateral, trust etc). The bank
  stands in place of the buyer in both sight and
  time letters of credit until the drafts are paid
  in cash.
• The differences between the sight L/C and time
  L/C are
• The added credit risk assumed by the issuing bank
• The technical procedure of creating an
  acceptance liability

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• DEFERRED PAYMENT L/C
• If the seller wishes to extend credit to the
  buyer for a year or so he can do it. This
  deferred payment may be particularly suitable in
  sales of heavy equipment. To do this, the L/C may
  specify that sight draft to be presented not at
  the time of the shipment but, for example, one
  year later. All other shipping documents will be
  presented at the time of shipment takes place. A
  year later the shipper presents the sight draft
  to the bank bank pays it and looks to the buyer
  for reimbursement at that time. The actual
  financing is made by the seller, who is willing
  to wait a year before payment.
• 3. OTHER L/C
• The L/C is a flexible document. Clauses may be
  added to the basic L/C or may be changed to meet
  the special needs of banks customers.

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• Red Clause L/C
• The buyer of the goods makes cash advances to the
  seller before shipment. Usually the seller is the
  agent of the buyer and needs cash to buy a crop
  from farmers. When the crop is shipped the
  remaining money is paid to the seller on the
  presentation of the concerned documents. A Green
  Clause (Australian use) means an advance payment
  can be made to the seller providing the
  merchandise be stored under banks control until
  it is shipped.
• Transferable L/C
• A L/C is used only by the addressed party (the
  seller of the merchandise). In some cases, The
  L/C can be transferred to the third party
  (transferees). This is called transferable L/C.
  This transfer can be made partly or wholly. The
  name of the transferee should be given to the
  bank from whom documents will be accepted. This
  type L/C is useful for business representative
  making a buying trip.

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• Assignment of Proceeds
• A beneficiary of a L/C may seek financing from
  another supplier or third party in order to
  prepare the shipment. As a collateral the
  beneficiary agree to pledge to the supplier the
  proceeds of the draft drawn under the L/C. This
  is done by instructing the bank to pay a portion
  or sell of the L/C payments to the third party.
  Called an assignment of proceeds it is of value
  only if the beneficiary presents documents in
  compliance with the L/C.
• Back to Back L/C
• Back to back L/Cs are two L/Cs with identical
  documentary requirements except for a
  differences in the price of the merchandise and
  perhaps expiration date. This is appropriate when
  an agents acts between a buyer and a seller.
• Ultimate buyer - L/C - Agent - L/C - Seller.
• The agent agrees to purchase the goods against a
  L/C. The agent may prefer to use a back to back
  L/C instead of a transferable L/C in order to
  keep the identity of seller secret.

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• Revolving L/C
• When a series of identical shipments for the same
  amount with the parties involved are to be made
  over a period of time, and the total value is
  greater than the amount the bank or the buyer is
  willing to have outstanding at any time, a L/C
  may be issued for a smaller amount with the
  provision that, after a shipment takes place and
  an amount is drawn the credit will be
  automatically received.

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Straight and Negotiation Credits

• In straight credits, documents are presented to
  the confirming bank. If some other bank
  negotiates the documents, there is no legal
  commitment to the bank.
• It is appropriate if the beneficiary is in the
  same city.
• In negotiation credits, documents are presented
  to banks other than the confirming bank. It is
  appropriate if the beneficiary is in another area
  and will need to negotiate the draft through
  another bank.

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• Revocable L/C
• If a letter can be cancelled by the buyer or the
  opening bank without the agreement of the seller
  is called a revocable L/C.
• Authority to Pay (yetki mektuplari)
• It is an advice to pay but carries no banks
  obligation. Not really a L/C.
• Authority to Purchase
• Asian L/C. It can be either revocable or
  irrevocable.
• Reimbursement Arrangements
• In some instances a bank will issue its L/C in
  favor of a beneficiary where it does not have a
  correspondent bank. The paying bank is authorized
  to draw on another bank to reimburse itself for
  the payment it makes. Usually this third bank
  (reimburse bank) will be correspondent of both,
  the other two banks. This is a reimbursement
  arrangement, which is basically a paying
  mechanism.

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• 4. DOMESTIC L/C
• The L/C is applicable in financing of merchandise
  within a country. Time can be saved and many
  troublesome credit problems eliminated by the use
  of the L/C domestically.
• STANDBY L/C
• Recently, request to banks to provide credit to
  support a borrowers commitment to pay a third
  party or to perform certain contracting
  obligations have tremendously increased. This can
  be done with a stand by L/C. It is available only
  if another business transaction is not performed.
  If the account party does not pay or perform,
  then the issuing bank should pay.

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• Using the Series of a Correspondent Bank
• The beneficiary of a standby L/C looks just to
  the account party for the payment before seeking
  payment from the bank. In Contrast, in a
  commercial L/C the beneficiary obtains payment
  from the issuing bank without looking to the
  buyer for payment even in the first place.
• Standby L/C has also been used to borrow from
  private and institutional lenders at lower rates
  than their own bank. Especially if the issuing
  bank has a strong credit rating in bond or
  commercial paper market.
• Accounting
• The L/Cs are reflected in a banks financial
  statement as contingent accounts.
• The financial standby letters have a credit
  conversion factor of 100. They back repayment of
  financial obligations (such as commercial paper
  or individual loans). Standby letters of credit
  that back the performance of non financial
  commercial contracts such as construction bids
  are called performance standby L/Cs that have a
  credit conversion factor of 50.