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TF Important Issues
TF Important Issues
3. Whether payment in Foreign Currency Cash, 3. Payment in FCN / FCTC made by the overseas buyer
Foreign Currency Traveler’s Cheques can be accepted as during the personal visit to the exporter. Currency
payment towards exports during the personal visit of Declaration Form (CDF) to be taken by the exporter from
the overseas buyer? the overseas buyer wherever applicable.
FCN + FCTC exceeds USD 10,000 or equivalent, or
FCN exceeds USD 5000 or equivalent
2.
M/s. Supreme Traders is one of the Current account holders of your branch with
satisfactory transactions. Mr. Suraj, the proprietor of the firm, deals in Ready Made
garments. He has recently entered into export trade.
His brother, Mr. Gautham, who is a US citizen and has a retail unit in Boston, USA,
is one of the very good buyers of Ready Made Garments from M/s. Supreme
Traders
On a visit to India, Mr. Gautham, calls on your branch with Mr. Suraj, to deposit Rs.
100,000 towards payment of one of the pending export bills drawn by M/s.
Supreme Traders. He informs that the cash of Rs. 100,000/- is drawn out of your
Banks ATM buy using International debit card issued by CITI Bank New York. He also
deposits the ATM slip along with the cash.
Mr. Gautham also has a branch office in Mumbai. The Branch office in Mumbai
enjoys overdraft facilities with ABN Amro Bank Mumbai. Mr. Gautham desires to
pay advance amount of Rs. 500,000/- to M/s. Supreme Traders by way of a cheque
drawn on the overdraft account of the branch office drawn on ABN Amro Bank.
Answer
To provide a loan of Rs. 25, 00,000 against an export bill handled by you last week.
You have already sent the export bill to Citi Bank New York, your NOSTRO
Correspondent, for collection. The export bill is for USD 50,000 payable in USA.
1.What is the difference between “Rupee Advance “and “Purchase or Discount “of
Export Bill?
2. What is the exchange rate applicable when the Bank decides to provide Rupee
Advance against an export bill already handled on collection basis
3. Normally under what circumstances, an exporter may resort to taking ‘Rupee
Advance ‘instead of going in for Purchase or Discount?
4. Whether Rupee Advance can be treated as Export finance from the RBI’s point
of view?
5. Where a Bank has given ‘Rupee Advance’ to an exporter and if the export bill is
returned unpaid, what is the exchange rate applicable for recovery of the Rupee
Advance?
Answer:Rupee Advance/Loan against Foreign Bills sent on Collection Basis
1. Rupee Advance : Exporter has no obligation to the Bank in Foreign
Currency Purchase/Discount : Exporter has obligation to the bank in
Foreign Currency
2. No exchange rate is applicable. Only a reference rate is taken for
arriving at the loanable amount
3. If the exporter feels that the Exchange rate on the date of realization
of the bill will be more advantageous compared to Bill
Purchase/Discount rate, the exporter may decide to go in for ‘ Rupee
Advance
4. Yes
5. Exchange Rate not applicable since the exporter’s liability is only in
INR unlike in Purchase/Discount where the exporter’s liability is
essentially in Foreign Currency
Foreign Letter of credit (FLC)
M/S Mindgames are importers of Gaming Systems from Japan. They are
maintaining a satisfactory current account for last five years. The average
purchases of systems in the last 3 years is Rs. 340 lakhs, out of which import
from china is to the extent of Rs. 194 lakhs. The firm gets a credit period of 30
days and the lead time required is 30 days. The overseas supplier who was
supplying the goods and sending the documents on collection basis, is now
insisting on LC for supply of goods.
The CEO of the firm approaches you for FLC limit of Rs. 40 lakhs and submits all
the documents, projections, financial statements prescribed by you.
1. What do you understand by lead time?
2. Is the firm eligible to get a non fund based limit(FLC) of Rs.40 lacs?
3. What is the liability of the Bank under the FLC limits granted to a customer?
4. How does the bank secure its position in respect of FLC liability?
Answer
1. Lead Time: Period between placement of an order and receipt of the ordered
good(s).
2. Factors that are normally considered (other than the usual factors considered
for fixing credit limits) for fixing FLC limits are :
a)Lead period
b)Credit period given by the supplier of the goods
FLC limit required = [(Purchases under FLC / 365)*Lead time +credit period]
= (194/365)*(30+30)
= 31.89 say 32 lakhs
Customer is eligible for a credit limit of Rs.32 lacs and not Rs.40 lacs.
3. At the time of issue of the FLC, it is a contingent liability for the Bank. It
becomes a fund based liability as soon as the documents are submitted to the LC
Opening Bank and the payment is made by the opening Bank after finding the
documents fulfilling the terms of LC.
4. The bank takes adequate securities (Primary and Collateral) including Cash
Margin before opening the FLC.
UCPDC:Art-3
1. As per Article3 of UCPDC, ‘on or about’ is to be interpreted that an event is to occur during a period of 5
calender days before , until 5 calender days after the specified date, both start and end dates included.
Example: The LC terms include “The shipment is to be done on or about 31/10/2014.” The shipment was done on
4/11/2014 as per Bill of Lading. The documents are given to the negotiating bank for negotiation within the LC
period. Discuss whether the documents can be treated as clean and negotiated or to be treated as discrepant and
sent on collection basis. Answer:The document is in order. Can be negotiated if other terms of LC are satisfied.
2. The terms ‘beginning’ , ‘middle’ and ‘end’ of a month shall be construed respectively as the 1st to 10th, 11th to
20th , 21st to the last day of the month , all dates inclusive.
Example: “The shipment is to be done in the middle of October 2014.” The shipment was done on 19/10/2014 as
per Bill of Lading. Is this in order? Answer: Yes
3. “first half and second half” of a month shall be construed respectively as the 1st to 15th and 16th to last date
of the month, all dates inclusive.
Example:The shipment was done on 15/02/2014 as per Bill of Lading. The documents are given to the negotiating
bank for negotiation within the LC period. The desk officer negotiated the bill, but the LC opening bank rejected the
document stating there is discrepancy in the document. Discuss. Answer: LC opening banks rejection is in order.
UCPDC-Art 4,5
Article 4 – On Credits Vs Contracts – A credit by its nature is a separate
transaction from the sale or other contract on which it may be based.
Banks are in no way concerned with or bound by such contract, even if
any reference of whatsoever to it is included in the credit. Hence, the
overseas buyer cannot stop payment under the LC by making a
reference to the sale agreement.
Article 5 – Banks deal with documents and not with goods, services or
performance to which the documents may relate.
UCPDC-Art 4,5 Case Study
M/s Natwar Singh & Brothers, Ludiana entered into a sale agreement with M/s
Anderson and Inc, USA for export of a particular quality of basmati rice to M/s
Anderson and Inc. One of the conditions in the said agreement stipulate that the
goods will be returned, at the cost of the exporter , by the overseas buyer in case
the quality of goods do not confirm to the one mentioned in the sale agreement.
The usance LC is opened by the overseas bank on behalf of M/s Anderson and Inc
in-favour of M/s. Natwar Singh & Brothers. Before the payment is due under the
LC, the overseas buyer approached the bank with a request that payment should
not be made against the bills negotiated, on the ground that the quality of rice do
not confirm to the agreement. Discuss.
Solution:No, the LC opening bank cannot accept the customer’s request.Article 4 –
The overseas buyer cannot stop payment under the LC by making a reference to
the sale agreement.Article 5 – Banks deal with documents and not with goods,
services or performance to which the documents may relate. Hence it’s clear as per
this article also that the LC opening bank can’t reject the payment on the ground of
inferior quality of goods.
UCPDC – Art-29:expiry date of LC and last day for presentation.
Article 29 (a) – If the expiry date of credit or the last day for presentation falls on a day
when the bank to which presentation is to be made is closed for reasons other than Force
Majeure, the expiry date or the last date for presentation, as the case may be, will be
extended to the first following banking day.
Case Study: M/s Rama and Company from Delhi is exporting green pepper to an overseas
buyer in Germany. The LC expires on 21st October 2014. Due to Diwali banks in India
have holidays on 21st, 22nd and 23rd October 2018. M/s Rama and Company shipped the
goods on 22nd October 2018 and submitted the documents for negotiation on 24th
October. The negotiating bank negotiated the documents. But the LC opening bank
rejected the claim quoting discrepancy- “1)LC expired and 2)Late shipment”
a) Whether LC opening bank is in order in rejecting the documents submitted by M/s.
Rama and Company?
b) What steps should have been taken by the exporter to avoid this situation?
c) What advice should have been given by the negotiating bank to M/s Rama and
Company when documents are presented for negotiation?
Solution:Art-29:expiry date of LC and last day for presentation.
a) The first reason is not in order as per Article 29 (a) – If the expiry date of credit or
the last day for presentation falls on a day when the bank to which presentation is to be
made is closed for reasons other than Force Majeure, the expiry date or the last date for
presentation, as the case may be, will be extended to the first following banking day.
The Bank should have given a certificate in the bill covering schedule stating that Oct. 21,
22, 23, were bank holidays – Documents submitted within the validity of LC
The second reason is in order as per Article 29 (c ) – The latest date for shipment will not
be extended.
b) The exporter should have asked for amendment in LC terms well in time to
extend the date of shipment.
c) As the bank is supposed to know the implications of Article 29 ( c), the exporter’s
bank should have advised the exporter to send the documents on collection basis.
1.UCPDC - Transferable Letter of Credits
2.UCPDC – description of goods in Commercial Invoice
1.As per Article 38 (d) – A transferable credit can be transferred to number of
second beneficiaries but can not be transferred at the request of a second
beneficiary to any subsequent beneficiary.
Article 38 (k), Presentation of documents by or on behalf of a second beneficiary
must be done to the transferring bank.
2.UCPDC – Description of goods in Commercial Invoice
As per UCP-600 , the description of goods, services or performance in a
commercial invoice must correspond with that appearing in the credit.
Example: LC indicates the goods as Basumati Rice but the invoice submitted by
the exporter to the Bank reads the description as Basmati Rice: In this case the
description differs. (The invoice shall be prepared giving the description as
appearing in the LC and there after any additional description can be given.)
Issuing Bank can treat it as a discrepancy.
UCPDC - Bill of Lading & airway bill – Date of Shipment and
transhipment
M/s Surajmal Metha & Co., the diamond exporter from Surat, has an order for export
of diamond valued USD100000, to be shipped through Air. LC is explicit that
transhipment not allowed. The shipment is to be done during first half of October
2014. The Air Way Bill indicates the date as 16/10/2014 as date of issuance of Airway
Bill. (Printed at the top). However the flight number and date box shows AW2017
flight dated 15/10/2014.
Besides the Airway bill has a printed clause indicating the transhipment will or may
take place.
The negotiating bank negotiated the documents. But LC opening bank rejected the
same citing the following discrepancies:
As per UCP600, the issuing bank shall have a maximum of 5 banking days
following the day of presentation to determine if a presentation is complying.
A nominated bank or issuing bank will have to examine documents within five
banking days. As per Article 14(b) A nominated bank acting on its nomination, a
confirming bank, if any, and the issuing bank shall each have a maximum of five
banking days following the day of presentation to determine if a presentation is
complying. This period is not curtailed or otherwise affected by the occurrence
on or after the date of presentation of any expiry date or last day for
presentation.