Trade Finance

Center

Compliance Verification and

Entry Department Authorization
Department Department

IRM-Inward Outward Capital Account

Import Export Letters of Credit
Remittance Remittance Team-

OTT-Outward Collection against

P-0103 Advance Bill Advising and
Telegraphic Bill Collection ECB
exports Transfer
Transfer

FIDB- Foreign
Foreign Bill Free of
Other remittances Import Direct Bill Issuing FDI
Payment (FBFP)
Payment

ARIMP- Advance
Remittance against ODI
Import Payments
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 LETTER OF CREDIT
Letter of
Credit

If you comply I will pay you

• Letter of credit is a payment method in international trade.

• Other payment methods in international trade are Cash in
Advance, Documentary Collections, Open Account and
Bank Payment Obligation.
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 LETTER OF CREDIT
/DOCUMENTARY CREDIT
Letter of Credit is an undertaking issued by a
Bank (Issuing Bank), on behalf of the buyer
(the importer), to the seller (exporter) to pay
for goods and services provided that the seller
presents documents which comply with the
terms and conditions of the Letter of Credit

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 Letter of Credit rules
• ICC, International Chamber of Commerce,
publishes the letter of credit rules.
• Letter of credit rules are called UCP,
Uniform Customs and Practice for
Documentary Credits.
• Letter of credit rules are regularly updated by
ICC.
• Latest set of letter of credit rules is called
UCP 600. 3
 LETTER OF CREDIT
UCPDC – 600 Edition effective from 1st
July 2007
Documentary Credit means any
arrangement that is irrevocable and thereby
constitutes a definite undertaking of the
issuing bank to honour a complying
presentation. (Article-2)

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Complying presentation (Article-2)

a presentation that is in accordance with

• the terms and conditions of the credit,

• the applicable provisions of these rules (UCP 600) and
• international standard banking practice.
Honour (Article-2)

a. to pay at sight if the credit is available by sight payment.

b. to incur a deferred payment undertaking and pay at maturity if

the credit is available by deferred payment.

c. to accept a bill of exchange ("draft") drawn by the beneficiary

and pay at maturity if the credit is available by acceptance.

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 LETTER OF CREDIT

• Three main contracts underlying LC

- Sale Contract between Buyer & Seller
- Application-cum-Guarantee between
Applicant(Buyer) and Issuing Bank
- LC itself (contract between Issuing
Bank and Beneficiary/Seller)
( LC independent of other two contracts)
UCP 600 - Article 4
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 Mechanics of Documentary Credit
CONTRACT

GOODS GOODS

IMPORTER DOCS EXPORTER

Letter of
Credit

Advising bank

DOCUMENTS
DOCUMENTS

Negotiating Bank/ PAYMENT

PAYMENT
Confirming Bank

Reimbursing Bank 9
 Parties to Letter of Credit
• Opener/Buyer
• Issuing Bank
• Advising Bank
• Beneficiary/Seller
• Nominated Bank/Negotiating Bank
• Confirming Bank
• Reimbursing Bank

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 UCP 600 - Article 5
Documents v. Goods, Services or Performance

• Banks deal with documents and not with goods,

services or performance to which the documents
may relate.

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 Types of credit
Security to beneficiary
 Confirmed
 Mode of settlement
 Payment/ deferred payment
 Acceptance
 Negotiation
Involving middlemen
 Transferable
 Back to back
Involving advances
 Red Clause Credit
 Green Clause Credit
Involving repeated transactions
 Revolving
 Stand by

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 Revolving Credits
• Credit is opened to cover a series of regular transactions over a
longer period
• Beneficiary will submit a series of documents
• Maximum value of each document will be fixed and is the
revolving limit
• LC amount is the maximum value of documents that can be
handled under the credit.
• The credit may be reinstated automatically or after payment of
earlier bill.
• It can be opened as cumulative or non cumulative.

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 Standby Letters of Credit
• Credit is issued for a particular amount and for a particular period
• Trade takes place on running account basis.
• Beneficiary does not submit documents to bank.
• If there is a default, he can claim funds from opening bank giving
a certificate of default
• No quibbling over discrepancies and documents
• Opening bank will pay on demand
• Works like a bank guarantee
• UCPDC is applicable if so declared in the credit

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 LC Regulations
• Foreign Trade Policy requirements.
• FEMA requirements.
• Credit norms of Central Bank.
• UCPDC 600 Provisions.
• Bank’s Internal Credit Policies/ procedures.
• Public notices issued by DGFT
• Uniform Rules for bank-to-bank
reimbursements 525
• Incoterms 2010
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 Sec 2(n) of FEMA 1999
• “Foreign Exchange” means foreign currency and
includes,—
• (i) deposits, credits and balances payable in any foreign
currency,
• (ii) drafts, travellers cheques, letters of credit or bills of
exchange, expressed or drawn in Indian currency but
payable in any foreign currency,
• (iii) drafts, travellers cheques, letters of credit or bills of
exchange drawn by banks, institutions or persons outside
India, but payable in Indian currency.

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 Bank’s Obligation & Responsibilities
• Issuing Bank (opening bank)
( UCP 600 Article 7)
-the prime obligator
-to ensure credit-worthiness and trust-worthiness
of the applicant
- Once credit is opened, the bank is placing itself
as a substitute for the buyer.

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 Bank’s Obligation & Responsibilities

• Advising Bank has the obligation to

authenticate the credit once it is received
and passing it promptly on to the beneficiary
( Art.9).
• Confirming Bank takes over the
responsibilities of the issuing bank as far as
the beneficiary is concerned though it has
got recourse to the Issuing Bank (Art 8).

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Bank’s Obligation & Responsibilities
Negotiating Bank
• to examine docs. Within 5 banking days
after receipt of the documents at their
counters(Art 14b).
• to ensure compliance of credit terms ( on
the basis of documents alone) as well as
consistency of docs with each other.

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 Protection to Banks
• Banks are not responsible :
for the genuineness or contents of any
documents submitted (Art. 34)
For losses etc. arising from transmission
problems (Art. 35)
Force Majeure ( Art. 36)
For the failings of their correspondent Banks
(Art. 37)

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 Protection to Banks

• Issuing Bank is responsible for all Bank

charges and other costs at home or abroad
even if they are supposed to be paid by other
party (Art. 37 c).

• Applicant is responsible for any adverse

consequences of foreign laws (Art. 37d).

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How Letter of Credit works

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 Discrepancies under LC
Discrepancy can be defined as an error or defect, according to
the issuing bank, in the presented documents compared with
the documentary credit, the UCP 600 rules or other
documents that have been presented under the same letter of
credit.
The complying presentation means is that the presentation
with zero discrepancies.
Under a discrepant presentation, the beneficiary can get the
payment, only if the applicant accepts the discrepant
documents.
According to ICC Trade Finance Surveys, on average, %70 of
letter of credit presentations are found to be discrepant on
first presentation.
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 15 MOST COMMON DISCREPANCIES

1.Letter of credit has expired

2. Late presentation of documents
3. Late shipment of goods
4. Inconsistent spelling of parties’ names in
documents
5. Terms of sale not complied with
6. Merchandise description not strictly as per L/C
term
 15 MOST COMMON DISCREPANCIES

7. Partial shipment or transshipment effected despite

L/C terms
8. Foreign language documents must be exactly as
per L/C
9. Documents are not consistent with one another
10. Ocean Bill of Lading issued by forwarding agent
unacceptable
11. Bills of Lading not clean
 15 MOST COMMON DISCREPANCIES

12. Insurance does not cover risks stipulated

in L/C
13. Insurance issued after shipment date
14. Bills of Lading and Drafts not properly
endorsed
15. Drafts not completed properly
 CORRECTABLE DISCRPANCIES

• 1. Draft not in accordance with L/C terms

• 2. Amount of draft does not agree with invoice total
• 3. Invoice incorrectly addressed to the account party
• 4. Description of goods in invoice does not correspond
with description in L/C
• 5. Invoice omits shipping terms
• 6. Commercial invoice not signed
 MAJOR DISCRPANCIES
• 1. Late shipment
• 2. Late presentation
• 3. L/C expired
• 4. Draft in excess of amount permitted in L/C
• 5. Bills of Lading incorrectly issued
• 6. Insurance policy bears a date later than the date
of shipment shown on Bill of Lading
 UCP 600 - Article 18

• 18 a(iv) Commercial Invoice need not be

signed.
• 18 c The description of the goods, services
or performance in a commercial invoice
must correspond with that appearing in the
credit.
 Transport Documents Article19-27
Artcile 20a. A bill of lading, however named, must appear to:
• i. indicate the name of the carrier and be signed by:
• - the carrier or a named agent for or on behalf of the
carrier, or
• - the master or a named agent for or on behalf of the
master.
• Any signature by the carrier, master or agent must be
identified as that of the carrier, master or agent.
 Transport Documents Article19-27

• Article 20a
ii. indicate that the goods have been shipped on board a
named vessel at the port of loading stated in the
credit by:
- pre-printed wording, or
- an on board notation indicating the date on which the
goods have been shipped on board.
 Certificate for Documentary Credit Specialists
(CDCS®)

• The Certificate for Documentary Credit Specialists (CDCS) is a

professional qualification that is recognised worldwide as a benchmark of
competence for international practitioners.
• The CDCS has been developed in consultation with industry experts to make
sure that the qualification reflects best practice. It was created by the
International Financial Services Association (IFSA) and The London
Institute of Banking & Finance and was first examined in 1999. CDCS is
now managed by The London Institute of Banking & Finance in partnership
with the International Chamber of Commerce (ICC).
•
510 GBPDescription of fee Costs in Pounds Sterling
Registration fee £580
Exam resit fee £347
Exam deferral fee £145