Import Letter of Credit LC

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Import Letter of Credit (LC)

• Banks products
• Import Letter of Credit
• Bank Guarantee
• Term Loans

• The ICICI Bank can assist in
• Providing payment assurance to seller on behalf
  of the buyer
• Providing assurance for right quality of goods
• Providing finance in respect of the sale
• Effecting payment to the seller on behalf of the
  buyer
• Handling documents covering the sale

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What is a Letter of Credit?

• A banks 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.

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Benefits for the Players

• Reduces risk of non-payment
• Bank oversees regulatory requirements

• Reduces delivery risk
• Bank oversees regulatory requirements
• Importer can contract for better terms

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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

Click here for Case Study on Risks
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LC Process
Sellers Bank (Advising Bank)
Buyers Bank (Issuing Bank)
Seller
Buyer
Shipper
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LC Variations

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LC Variations

• SITUATION
• Seller doesnt trust issuing bank
• Issuing bank wants to have control
• Middlemen are involved
• Issuing bank doesnt have an account with the
  specified bank
• Repetitive transactions
• Seller wants advance payment

• LC VARIATION
• Confirmation
• Revocable LC
• Transferable / Back-to-back LC
• Reimbursement
• Revolving LC
• Red Clause LC
• Standby LC

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LC Variations Confirmation
Issuing bank gives the LC to sellers bank and
requests for confirmation
Seller bank confirms the LC and notifies the
seller
(Issuing Bank)
Shipper
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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.
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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
(Issuing Bank)
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LC Variations Transferable LC
Issuing bank gives the LC to sellers bank
(Issuing Bank)
Seller bank advises the LC to the first
beneficiary /Seller
On first beneficiary's request, Part of the LC
will be transferred to the supplier, the second
beneficiary
First Beneficiary / Seller
Shipper
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LC Variations Back to Back LC
Issuing bank gives the LC to sellers bank
(Issuing Bank)
Seller bank advises the LC to the Seller
On Sellers request, an Inland LC will be opened
by Sellers Bank favouring the original supplier
Seller -Middleman
Shipper
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LC Variations Reimbursement
Negotiating bank sends the documents
Issuing bank sends payment instructions to
Reimbursing bank
(Issuing Bank)
Reimbursement bank makes the payment to
Negotiating bank
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LC Variations Revolving
LC Value US 1,00,000
Documents worth US 1,00,000 Every month
Payment of US 1,00,000 Every month
(Issuing Bank)
Same LC is used for these transactions
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LC Variations Red Clause LC
Issuing bank issues LC and sends it to advising
bank
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2
ICICI Bank (Issuing Bank)
Advising bank gives the shipping documents to
Issuing bank
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6
Sellers Bank (Advising Bank)
Buyer asks his bank to issue an LC against the
sales contract
Seller submits the proof of shipping to the
advising bank
Bank collects the money from buyer and gives him
the proof of shipping
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Seller
Buyer
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Seller sends the goods through shipper and
collects proof of shipping
Shipper
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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.
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LC Variations Standby
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ICICI Bank (Issuing Bank)
Sellers Bank (Advising Bank)
Issuing bank issues LC
2
1
Buyer asks his bank to issue an LC against the
sales contract
Seller submits the proof of default by the Buyer
to advising bank
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Seller provides the service and obtains proof of
delivery
Seller
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SLC is like a Bank Guarantee- It is towards
non-performance whereas LC is for performance.
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LC Stages
LC Issue Stages
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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
Issuing bank opens the LC sends it to advising
bank
Advising bank sends the shipping documents to
Issuing bank.
Sellers Bank (Advising Bank)
ICICI Bank (Issuing Bank)
Seller ships the goods advises to the documents
Bank collects the money from buyer and gives him
the proof of shipping documents.
Seller
Buyer
This sub process is called Lodgment of Bills
Under LC
This sub process is called Realization under LC
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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)

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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

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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

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Realisation under LC

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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