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PACKING CREDIT
Letter of Confirmation
Place, Date, Stamp, Name
Letter of Credit
Parties involved
Applicant The applicant is normally the buyer of the goods . i.e. the importer who request his bank to issue a letter of credit in favour of a named beneficiary against tendering of certain specified documents Beneficiary The beneficiary is normally the seller of goods who receives payment under documentary credit if he has complied with terms and conditions thereof A credit issued in favour of the beneficiary to enable him or his agent to obtain payment once he performed his part of contract and submitted stipulated documents showing compliance with the terms and conditions of letter of credit
Parties involved(cont.)
Issuing Bank The issuing bank or the opening bank is one which issue the credit , i.e. undertake , independent of the Undertaking of the applicant , to make payment provided the terms and conditions of the credit have been complied with. Advising Bank The advising bank advises the credit to the beneficiary thereby authenticating the genuineness of the credit Confirming Bank A confirming bank is the one which adds its guarantee to the credit . It undertakes the responsibility of payments / negotiation / acceptance under the credit in addition to that of the issuing bank
Parties involved(cont.)
Nominating Bank A Nominating bank is the bank nominated or authorized by issuing bank to pay , to incur a deferred payment liability , to accept drafts or to negotiate the credit. Reimbursing Bank A reimbursing bank is the bank authorized to honour the reimbursement claims in settlement of negotiation with the paying or accepting bank.
Characteristics
Negotiability Revocability Transfer and Assignment Sight and Time Drafts
Functions
Payment Instrument In absence of letter of credit, sight or time drafts used. No Guarantee of Payment. Letters of Credit Involves Bank in Transaction. Performance Guarantee In Documentary Transaction no guarantee of performance. Payment by bank would not be released until goods and document conforms to specifications on letter of credit. Financial Instrument Seller can use letter of credit as collateral to finance production and exportation of good
Advantages/benefits
EXPORTER
Credit risk eliminated Reduces exchange rate and
IMPORTER
Expert Examination of
Documents
Sources of Supply expand Financing No cash tied up Payment only after compliance
political risk
No Need for Credit Check Pre-shipment risk avoided Facilitates financing Immediate payment
Disadvantages
EXPORTER
IMPORTER
No protection to importer against exporter shipping inferior quality goods and/or a lesser quantity of goods
Risks Involved
1. Risk of Beneficiary not shipping goods persists 2. The Letter of Credit as a payment method is costlier than other methods of payment such as Open Account or Collection 3. The Beneficiarys documents must comply with the terms and conditions of the Letter of Credit for Issuing Bank to make the payment 4. The Beneficiary is exposed to the Commercial risk on Issuing Bank, Political risk on the Issuing Banks country and Foreign Exchange Risk in case of Usance Letter of Credits
Case Study
The steps mentioned in the example A business called the InCosmetika from time to time imports goods from a business called ACME, which banks with the ABC Bank. InCosmetika holds an account at the Commonwealth Bank. InCosmetika wants to buy $500,000 worth of merchandise from ACME, what steps should be taken to get a LC ?
Case Study
1. InCosmetika goes to The Commonwealth Bank and requests a $500,000 letter of credit, with ACME as the beneficiary.
2. The Commonwealth Bank can issue a letter of credit either on approval of a standard loan underwriting process or by InCosmetika funding it directly with a deposit of $500,000 plus fees which are typically between 1% and 8% of the face value of the letter of credit. 3. The Commonwealth Bank sends a copy of the letter of credit to the ABC Bank, which notifies ACME that payment is available and they can ship the merchandise InCosmetika has ordered with the full assurance of payment to them. 4. On presentation of the stipulated documents in the letter of credit and compliance with the terms and conditions of the letter of credit, the Commonwealth Bank transfers the $500,000 to the ABC Bank, which then credits the account of ACME for that amount.
Samples
Features of LC
There are three basic features of letters of credit
Types of Credit
Basic types of letters of credit 1.Revocable/Irrevocable 2.Confirmed/Unconfirmed 3. Revolving Credit
1.
Beneficiary Exporter/Seller
1.
2.
Application
6.
Documents
Applicant Importer/Buyer
4.
Confirmed Letter of Credit Confirming Bank
8.
Documents
3. Letter of 10.
Exporters Bank/ Advising Bank/ Confirming Bank Credit
2. 7. Documents 9.
Importers Bank/ Issuing Bank
Contract
1
Applicant
Beneficiary
Debit
Letter of Credit Application
7
Payment
6 5
Letter of Credit
Documents
Applicants Bank
Documents
3
Packing Credit
Packing Credit
Pre-shipment fund based credit facility for a specific period extended by the banks to those customers who have received a confirmed order or LC for export of merchandise, on the terms indicated.
It is provided for working capital needs like: Procure raw materials, carry out manufacturing process. carry out manufacturing process and pack goods Provide a secure warehouse for goods and raw materials. Ship the goods to the buyer.
Pre-shipment finance is extended in the following forms : Packing Credit in Indian Rupee Packing Credit in Foreign Currency (PCFC)
Eligibility for Getting Packing Credit An exporter should usually hold an export order or letter of
credit in his own name to perform an export contract. A ten digit importer exporter (IE) code number allotted by DGFT. Exporter should not be in the caution list of RBI. If the goods to be exported are not under OGL, the exporter should have the required license /quota permit to export the goods.
The RBI has permitted banks to grant packing credit advances even without production of L/C or firm order/ contract under this scheme Facility subject to the following conditions L/C or firm order is produced within a reasonable period of time. For commodities under selective credit control, banks should insist on production of L/Cs or firm orders within one month from the date of sanction. Packing credit may also be given under the Red Clause letter of credit
Documents Required :
DPN Letter of Continuing Security Pledge/hypothecation of goods Undertaking to adjust each PC drawdowns in a time frame by export proceeds
PCFC is available to exporters for domestic and imported inputs of goods to be exported at LIBOR related rates of interest as decided by RBI To qualify for this purpose, the exporters overdue bill should not exceed 5% of the average annual export realization during the preceding three years
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