Trade without Financial Faith

• Ashutosh kr
sharma
• mba
 Possible Through L/C
• Through The Bank
• Usually provides an irrevocable payment
undertaking.
 Letter of Credit
• An undertaking issued by a bank at the request
of its customer to make a payment to the
beneficiary
• To accept a bill of exchange issued by the
beneficiary
• To honor a deferred payment undertaking,
provided that the terms and conditions laid
down in the letter of credit are complied with.
 Therefore a Letter of Credit is:
• An undertaking
• In writing
• Conditional
• Issued by a bank
• Must have an underlying transaction
• A binding document
• A mode of payment
 Why an L/C
• Settlement of transaction
• Payment guarantee for seller
• Goods or service guarantee for buyer
• Local rule
• Bridge a relation between buyer and seller
• Credit document
 Types of letter of Credit
• Revocable
• Irrevocable
• Confirmed
• Advised
• Straight
• Negotiation
• Sight
• Usance
 Types of letter of Credit
• Revocable
- Once an irrevocable letter of credit is open it
cannot be changed without the written
consent of all parties including the beneficiary.
• Irrevocable
- A revocable letter of credit can be change or
withdrawn without notifying the beneficiary.
 Types of letter of Credit
• Confirmed
- Confirmed is preferred, as the Confirming
Bank promises to pay.
• Advised
-Advised does not guarantee the
creditworthiness of the Opening Bank.
 Types of letter of Credit
• Straight
- A straight letter of credit can only be paid in
the country of the Paying Bank.
• Negotiation
- A negotiation letter of credit can be
presented to any bank.
 Types of letter of Credit
• Sight
- At sight means the Beneficiary is paid as soon
as the Paying Bank has determined that all
necessary documents are in order.
• Usance
- Usance time can be between 30 and 180 days
after the bill of landing date. This is a form of
delayed payment, and should be avoided.
How L/C Works?
 Parties under Letter of Credit
• Applicant (Buyer/ Importer)
• Issuing bank (Applicant’s or buyer’s bank)
• Advising bank
• Beneficiary (seller/supplier/exporter)
• Negotiating bank
• Confirming bank
• Reimbursing bank
 Applicant
• The party or a person who applies to the bank
for the establishment of letter of credit for the
import of goods or services.
 Issuing bank
• The bank which issues a letter of credit at the
request of its customer
• Payment undertaking
• Sends amendments to the letter of credit at the
request of its customer
• Receives and accepts bill of exchange drawn
by the beneficiary
• Honors deferred payment undertaking
• Finance the LC at buyers request
 Advising bank
• Advise LC at the request of issuing bank
• Authenticate the genuineness of message
• May ask for correction for misspelling or
ambiguity of clause, sentences or word
• Does not take any liability or responsibility for
payment
 Beneficiary
• Receives LC advised by the advising bank
• Ships the goods as per LC
• Prepares/ procures documents called on LC
• Presents documents to the negotiating bank for
payment
 Negotiating bank
• Receives documents presented by the
beneficiary
• Checks documents with LC
• Makes payments to the beneficiary
• Sends documents to the issuing bank
• Collects payments from the issuing bank
 Confirming bank
• Adds its undertaking for payment in addition
to the undertaking of issuing bank
• Collects charges as per the arrangement
• In case of default from issuing bank, makes
payment to the negotiating bank
 Reimbursing bank
• Makes payment to the negotiating bank as per
their claim
• Does not take any responsibility or liability for
conformity or correctness of documents
• Collects charges as per arrangement
 Process of Documentary Credit Operation
(summary)
• Contract between buyer and seller before
establishment of LC
• Issuance of proforma invoice or indent by the
seller which covers the product, price, payment
terms, period and terms and conditions if any
• Buyer requests the bank for establishment of LC
• LC is established and transmitted to the buyers
country by way of telecom or post
Cont……
 Process cont…..
• Advising bank advises the LC to the beneficiary after
authentication of message by way of post, courier or
hand delivery
• Beneficiary ships the goods as per LC and documents
are submitted to the negotiating bank for negotiation/
collection
• Negotiating bank examines documents and sends the
documents to the issuing bank after negotiation or
under collection basis for payment

Contd…….
 Process contd…..
• Upon receipt of documents by the issuing bank
the same is informed to the applicant for
retirement and payment is sent to the
negotiating bank
• Buyer releases the documents, makes
payment to the bank and retires the goods
 Risks during L/C
• Risks to the Applicant
• Risks to the Issuing Bank
• Risks to the Reimbursing Bank
• Risks to the Beneficiary
• Risks to the Advising Bank
• Risks to the Nominated Bank
• Risks to the Confirming Bank
• Other Risks in International Trade
 Risks to the Applicant
• Non-delivery of Goods
• Short Shipment
• Inferior Quality
• Early /Late Shipment
• Damaged in transit
• Foreign exchange
• Failure of Bank viz Issuing bank / Collecting
Bank
 Risks to the Issuing Bank
• Insolvency of the Applicant
• Fraud Risk, Sovereign and Regulatory Risk and
Legal Risks
 Risks to the Reimbursing Bank
• no obligation to reimburse the Claiming Bank
unless it has issued a reimbursement
undertaking.
 Risks to the Beneficiary
• Failure to Comply with Credit Conditions
• Failure of, or Delays in Payment from, the
Issuing Bank
• Credit Issued by Party other than Bank
 Risks to the Advising Bank
• The Advising Bank’s only obligation – if it
accepts the Issuing Bank’s instructions – is to
check the apparent authenticity of the Credit
and advising it to the Beneficiary
 Risks to the Nominated Bank
• Nominated Bank has made a payment to the
Beneficiary against documents that comply
with the terms and conditions of the Credit
and is unable to obtain reimbursement from
the Issuing Bank
 Risks to the Confirming Bank
• If Confirming Bank’s main risk is that, once
having paid the Beneficiary, it may not be able
to obtain reimbursement from the Issuing
Bank because of insolvency of the Issuing
Bank or refusal of the Issuing Bank to
reimburse because of a dispute as to whether
or not payment should have been made under
the Credit
 Other Risks in International Trade
• A Credit risk from change in the credit of an opposing
business.
• An Exchange risk is a risk from a change in the foreign
exchange rate.
• A Force majeure risk is
- a risk in trade incapability caused by a change in a country's
policy, and
- a risk caused by a natural disaster.
• Other risks are mainly risks caused by a difference in law,
language or culture. In these cases, the cargo might be found
late because of a dispute in import and export dealings.
 Financial Structure of L/C
• Trust Receipt Loan :- 90%
• RBI Refund :- 5%
• Self Payment :- 5 %
• Total Doc Value :- 100%
 Accounting Transaction of L/C
• All the expenses related to L/C purchase
Letter of Credit A/C Dr. Xxxx
To, Cash/Bank A/C xxxx

• Closing entries
-Purchase A/C Dr. Xxxx
To, Letter of Credit A/C Dr. Xxxx