letter of credit presentation

8/9/2019 Letter of Credit Presentation

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Documentary Letter of Credit

BankConsult

18 August 2010 Mehboobur Rehman Lead Executive

Consultant - BANKCONSULT

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Human Resource Consultants providing services in Talent

and Performance Management, Recruitment and Skill Development

[email protected]

Training Course on

DOCUM ENTA RY LETTER OF CREDIT

STANDARD CHARTERED BANK

CREDIT AGRICOLE INDOSUEZ BANK

COMMERCIAL BA NK OF CEYLON LIMITED

TRANSCOM LIMITED

Currently –Lead Executive Consul tant / BANKCONSULT

mailto:[email protected]


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OBJECTIVE OF THIS TRA INING COURSE

1. To provide the participants through a transactional approach, with a clear understanding of the importance of international trade and payment system and the significance of Balance of Trade and Payment.

2. The course will bring into greater focus the various types of Documentary Letter of Credit and the generally accepted international standards of procedures adopted by the contracting parties.

3. Emphasis will also be made on how letters of credit are used to settle international trade transaction and examine in detail the role of the international banking system, dealing with both the crucial aspect of procedures and the wider management implication of the subject.

4. Two questions of paramount importance are applied, “ Is the Instrument workable ” and “ Are the Documents in order ” .


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MAJOR CONCERNS IN INTERNATIONAL TRADE

1. Unknown Market.

2. Un k nown Con tr ac ti ng Par ti es

3 . D is pu te Reso l ut io n and Ju r is d ic ti o n o f Laws .

4. Coun try Risk

a. Po li ti cal Ris k

b . Ec ono mic Ris k

c. Bank Risk

5. Ex ch an ge Rat e Vo lat il it y

6. Fo rc e Majeu re Si tu at io n


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THE TRADE MAP

Seller / Expor ter

Relat ive bargaining &

f inancial strength.

Credi t pol icy

considerat ion.

Prefered p ayment

mode.

Access to funds

Buyer / Importer

Relat ive bargaining &

f inancial strength.

Balance sheet

considerat ion.

Prefered paym ent

mode.

Access to funds

Seller’s Count ry

Political stability

Currency strength

Interest rate

Export subsidy

Buyer ’s Country

Political stability

Currency strength

Interest rate

Govt Incent ives

Govt Regulat ions

Internat ional Environment:

Economic Factors

Industry Trends

Market Practice

Goods:

Type

Annual volumes

Avg Transact ion size

Frequency

Payment

Currency

Tenor

Payment mode

Trade terms

Financing techniques


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NETWORK OF TRADE RELA TIONSHIP

Buyer

Importer

Seller

Exporter

Customer

Supplier Customer Supplier Customer

Suppl ier

Raw Materials

supplies Finished Goods


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SIMPLE CASH-TO-CASH CYCLE

Sale of Finished

Goods

Work in Process

Purchase of Raw

Materials and Supplies

Cash

Procurement

Product ion Marketing

Sales


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MOVEMENT OF GOODS FROM SELLER TO BUYER

Buyer

Importer

Seller

Exporter

S t o

r a g e

Shipment

Receipt

Transit

S t o

r a g e

S t o

r a g e

S t o

r a g e

Shipment

Receipt

Buyers Customers Sellers Suppliers

D e

l i v e r y


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NEEDS OF THE CONTRACTING PARTIES

IN AN INTERNATIONAL TRADE

BUYER Creates Demand

1. A ss ur an ce Of Timel y

Delivery

2. A ss ur an ce Of Qu alit y

3. Com petit i ve Pri cin g

4. Sel ler s c red ib il it y

SELLER Has Goods

1. A ss ur an ce O f Tim ely

Payment

2. Pay men t In His Ow n

Currency

3 . Exchange Rat e Vol at il it y

4. B uy er s Cr ed ib il ity


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What Precedes an Internation al Trade Transaction ?

Co n t ra c t c a n b e •F o rm a l

•I n f o r m a l

Sales

Contract


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Delivery

Warranty

Default

Liquidated damages

Force majeure

Transfer of r isk

Shipping documents

Dispute sett lement

INTERNATIONAL TRADE NEGOTIATIONSSales / Purchase Contracts

Which condit ions to apply

Definit ions of the terms

Conclusion of the con tract

Assignments

Trade terms –Incoterms

Quality and quantity

Pre-shipment inspectio ns

Price and payments

Patent r ights and indemnity

The fol lowing are most comm on clauses in an internat ional contract of sale




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DIFFERENT MODE OF INTERN TION LTR DE SETTLEMENT


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CASH IN ADVANCE

1. The buyer puts the funds at thedisposal of the seller prior to shipment of goods

2. The seller receives export value inadvance from the buyer

3. Sel ler :

a. No risk as far as the seller isconcerned as he has already got the money and he can use thefunds immediately

4. Buyer ;

a. High risk as far as the buyer isconcerned as he has not yet received the contracted goodsand has also tied up his capital

OPEN ACCOUNT

1. An arrangement between the buyer and the seller where the seller deliversthe goods before payment is made

2. The buyer receives the contracted goods before making payment

3. Buyer :

a. Advantageous for the buyer as he pays for the goods after satisfying himself about delivery time,quantity and quality

4. Seller :

a. The risk element for the seller isvery high. He must thereforecheck the credibility of the buyer before agreeing to open account terms

CASH IN ADVANCE AND OPEN ACCOUNT TRADE SETTLEMENT


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COLLECTION

COLLECTION

DOCUMENTARYCOLLECTION

CLEAN

COLLECTION

Document against

Payment

Document against

Acceptance

1. Sigh t draf t

2. Sh ip pin g d oc um ents

3. Del ivery o f documents to buyer

only against payment

1. Usance draf t

2. Sh ip pin g d oc um ents

3. Sh ip pin g d oc um ents released up on acceptance

of draf t

4. Dr af t ac cep ted an d

5. Paid o n m atu rity

1. T he seller dr aw s o nly a

draf t on the buyer for the

value of goods and

serv ices

2 . S el le r p res en ts h is d ra ft

to his banker

3 . T he b an k s en ds th e d raf t for col lect ion


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COLLECTION

( Operat ional mechanics )

Applicant

Drawee

Importer

Customer

Collecting and / or

Presenting Bank

Remiting Bank

Correspondent Bank

Beneficiary

Drawer

Exporter

Customer

FLOWOFMONEY-$$

$$$$$

FLOWOFMONEY-$$$$$$$

FLOW OF MONEY - $$$$$$$

FLOWOFDOCUMENT

FLOW OF DOCUMENT

F L OW OF D O C UME NT

CONTRACT OF SALE

Shipment of goods


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INCOTERMS

What Is An In-co-term ?

Who Needs The Incoterm s ?

What Is The Purpos e Of Incoterm s ?

Are There Any Regulat ions Governing The Incoterms ?


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INCOTERMS

( International Commercial Terms )

1. EXW Ex Wo rks (Named Place)

2. FCA Free Carr ier (Named Place)

3. FAS Free Alongs ide Sh ip ( Named po rt of sh ipment )

4. FOB Free On Board (Named po rt of sh ipment )

5. CFR Cos t And Freigh t ( Named Po rt o f Des t in at ion )

6. CIF Cos t In su rance and Freigh t ( Named Port o f Dest inat io n )

7. CPT Carr iage Paid to ( Named Place o f Des t ination )

8. CIP Carr iage And In su ran ce Paid To ( Nam ed Place of Dest inat ion )

9. DAF Del ivered At Fron t ier ( Named Place )

10. DES Del ivered Ex Sh ip ( Named Port o f Des t inat ion )

11. DEQ Del ivered Ex Quay ( Named Port o f Dest inat io n )

12. DDU Del ivered Du ty Unpaid ( Nam ed Place o f Des t inat ion )

13. DDP Del ivered Du ty Paid ( Named Place o f Des t in at ion )


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Categories Group Incoterms – Explanation

Point of Responsibilities – Exporter / Importer

DEPARTURE E EXW - Ex Works (Named Place)

MAIN CARRIAGE

UNPAID

F FCA - Fr ee Car rier (Nam ed Plac e)

FAS –Free Alongside Ship (Named Port of Shipment)

FOB –Free On Board (Named Port of Shipment)

MAIN CARRIAGE

PAID

C CFR –Co s t a nd Fr ei g ht (N amed p or t o f D es t in at io n )

CIF –Cost Insurance and Freight (Named port of Dest inat ion)

CPT –Carriage Paid To (Named place of Dest inat ion)

CIP –Carr iage and Insurance Paid to (Named place of Dest inat ion)

ARRIVAL D DAF –Delivered at Front ier Named Place)

DES –Del ivered Ex Ship (Named port of Dest inat ion)

DEQ - Del ivered Ex Quay (Named port of Dest inat ion)

DDU –Del ivered Duty Unpaid (Named place of Dest inat ion)

DDP –Del ivered Duty Paid (Named place of Dest inat ion)

INCOTERMS

( International Commercial Terms )


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FOR MARITIME AND INLAND WATERWAY TRANSPORT ONLY

Group –F FAS - F ree al ongsi de sh ip (named po r t o f sh ipmen t)

FOB - Free On Board (named por t of sh ipment)

G roup –C CFR - Cos t and Frei g ht (named po rt o f Des ti n at io n )

CIF - Cost Insurance and Freight (named port of

Dest inat ion)

G roup - D DES - Del iv er ed Ex sh ip (named po rt o f Des ti n at io n )

DEQ - Del ivered Ex Quay (named port of Dest inat ion)

INCOTERMS

( Internat ional Comm ercial Terms )


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EXW DDP

DDU

Port of

Loading

Port of

Dest inat ion

In land Transi t Inland Transi t

Transi t Risk Trans i t Risk

Factory Warehouse

INCOTERMSInternational Commercial Terms

Cost / Invoice Loading

FASFOBFCA

CIF

CFRCPT

CIP

SEA / MARINE JOURNEY

Transit nsurance)

Transit nsurance)

DAF

DES

DEQ

SAVAR

EPZ/ B’Desh

SHANGHAI

CHINA

Flow Of Goods And I ts Accompanying Costs

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DEFINITION - LETTER OF CREDIT –UCPDC-600 (Art -2)

In simple terms, a documentary credit is a co ndit ional bank

undertaking of payment .

Expressed more ful ly , i t is a cond it ional undertaking given

by a bank (Issuing Bank), at the request of the customer

(Appl icant) , or on its own behalf , to pay a s el ler

(Benefic iary), against st ipulated do cuments, pro vided al l the terms and cond it ions of the credit , are compl ied with.


“Credit means any arrangement , however named or descr ibed,

that is ir revocable and thereby const i tutes a def in i te undertaking

of the issuing bank to honor a comply ing p resentation”

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What Is the Major & Primary Purpos e of a

LETTER OF CREDIT

1. To d isab le the payment and del ivery mechan ism

from th e contro l of th e Buyer and the Sel ler .

2 . To enab le the Banks to take contro l o f the payment

and del ivery by means of contro l documents.

2 Fund amental purp ose


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SECONDARY PURPOSE OF A LETTER OF CREDIT

1. Documentary cred i t s are an ar rangement by banks , for

set t l ing internat ional commercial t ransact ions.

2 . Documen tary c red i ts p rov ide a fo rm o f secu r it y , f o r t he

part ies involved.

3 . Documentary cred i t s ensure payment , prov ided that the

st ipulated terms and co ndit ions o f the credits , are

compl ied wi th .

4 . Documen tary c red i ts mean, tha t paymen t by such means ,

is based on docum ents only, and not on merchandise or

serv ices involved.


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R ISK FAC ING THE MAJ OR PART I ES I N I NTERNAT IONALTRADE TRANSACT ION

THE BUY ER Non d e l iv e r y

TH E SELLER N o n p a ym e n t

T H E B ANK S N o n c om p l i an c e


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RISK FACING THE MAJOR PARTIES IN INTERNATIONA L TRADE TRANSA CTION

RISK IMPACT ON SELLER /

EXPORTER

IMPACT ON BUYER / IMPORTER

PERFORMANCE:

The seller will fail to deliver the

goods as specified

Potential damage to business

reputation; potential financial

loss

Adversely affect abilit y to perform

under sales contract with own

customer. Potential financial l oss.

TRANSACTION:

The goods will fail to arrive at the

destination

Financial loss for the value of the

goods

Same.

PAYMENT:

The seller will fail to receive

payment due to;

1.Non-Acceptance

2.Commercial

3.Political

4.Foreign Exchange transfer

5.Foreign Exchange fluctuation

1.Seller stuck with goods

overseas.

2.Financial loss for value of

goods.

3.Financial loss for value of

goods.

4.Payment delay requiring

additional financing.

5.Financial loss if payment

received in foreign currency

1.Potential damage to reputation.

2.Potential damage to reputation.

Affect ability to draw in future

3.Same.

4.Same.

5.Financial loss if payment is

made in foreign currency


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The primary part ies are the fol lowing:

• THE ISSUING BANK

• THE CONFIRMING BANK (if any)

• THE BENEFICIARY

Other part ies which faci l i tate the documentary credit operat ions are

• THE APPLICANT

• THE ADVISING BANK / THE NOMINATED PAYING / ACCEPTING / NEGOTIATING BANK an d

• THE TRANSFERING BANK (if any)

PARTIES TO A LETTER OF CREDIT


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ROLE OF PARTIES IN A L ETTER OF CREDIT TRANSACTION

The Buyer

The Seller

Issuing Bank

Adv is ing Bank

Paying Bank

Accept ing Bank

Negot iat ing Bank

Conf i rm ing Bank

Transport Companies

Insurance Companies

Other Involved Companies


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1 . Des c ri p ti o n Of The Goods / Mer chand i se

2. Pr ic e Spec if ic at io n

3. Term s O f Sal e – (In co term s)

4. Insurance

5. Pac kag in g An d Mar kin gs

6 . Inspec t ion , War ran t ies And Guaran tees

7. Paym en t Term s

SALES CONTRACT Banks Interest in the Sales Contract(The following are the integral part of the Letter of Credit)


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BANK L ETTER OF CREDIT

Contractu al Relationship

Appl icant

Importer

Customer

Issuing Bank

Opening Bank

Advis ing Bank

Correspondent

Bank

Beneficiary

Exporter

Customer

Contract of Sale

LetterofCreditcontract

LetterofCreditcontract

Contract of Agency


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BANK LETTER OF CREDIT

( Basic Mechanics of Let ter of Credit Operat ions )

Applicant

IMPORTER

Customer

ISSUING BANK

Opening Bank

ADVISING BANK

Correspondent

Bank

Beneficiary

EXPORTER

Customer

Contract of sale

Contract of Agency

Import Customer

applies for LC

Opening Bank opens LC

Favoring Beneficiary

Advising Bank

advises LC to

Beneficiary after Authentication

Export

Customer

receives LC

Issuing Bank transmits LC to Advising Bank

E x p or t er s u b mi t s s t i p ul a t e d d o c um e

n t s

Paying, Accepting or Negotiating Bank forwards stipulated documents

IssuingBankadvisesImporteruponreceipt

ofstipulatedDocuments

B a n k m a k e s p a y m e n t t o E x p o r t e r

Issuing Bank remits payment to Paying, Accepting or NegotiatingBank

I m p o

r t e r m a k e s p

a y m e n t t o I s

s u i n g B a n k

O r

I s s