|
CHAPTER 23 PROCEDURE OF L/C D/A
Explanation: A- The importer applies to a local bank for opening a L/C in favor of the exporter and provides a certain amount of deposit and formality fee.
B- The opening bank sends the L/C which is opened to the advising bank.
C- The advising bank transfers the L/C to the exporter.
D- After examining the L/C, the exporter delivers the goods according to the stipulation of L/C, the exporter makes out the draft and draw up the documents in accordance with the L/C and delivers them to the negotiating bank within its validity.
E- If the documents are in conformity with the L/C, the negotiating bank will advance the purchase price to the exporter. F- The negotiating bank transfers the draft and bank documents to the opening bank or negotiating bank appointed by the opening bank applying for payment. G- The opening bank will pay to the negotiating bank after examining the documents.
H- The opening bank informs the applicant of the same and asks him to make payment so as to get hold of the shipping documents.
I- The applicant makes the payment to get hold of shipping documents, and take delivery of goods against documents.
TWELVE KINDS OF LETTER OF CREDIT (L/C):
I- Revocable L/C:
The revocable L/C means that the opening bank may be amend or revoke the credit before negotiation, acceptance or payment without agreement of beneficiary.
II- Irrevocable L/C:
The irrevocable L/C means that once the L/C is opened, without agreement of the beneficiary, the opening bank cannot amend or revoke the L/C within its validity. As long as the beneficiary provides the documents in accordance with the stipulation in the L/C, the opening bank shall perform its duty of payment.
III- Documentary L/C:
The documentary L/C stipulates that the bill of exchange drawn by the seller should be accompanied with shipping documents. This third kind of L/C is most widely used in the International Trade.
IV- Clean L/C:
If the bill of exchange is a clean bill, the L/C is called Clean L/C.
V- Confirmed L/C:
The confirmed L/C should be an irrevocable L/C confirmed by another bank named by the opening bank. When the L/C is confirmed, the opening bank and the confirming bank must be responsible for payment. The confirmed L/C is popular in modern export because it reduces the credit risk caused by the importer.
VI- Unconfirmed L/C:
An unconfirmed L/C is a L/C advised by the advising bank being unwilling to hold any liability on the documents, merely advises the beneficiary that the credit has been opened and safeguards himself by adding some terms in the L/C. Therefore, an unconfirmed L/C doesn’t give the exporter any protection in the event of the buyer or the opening bank is unable to pay or refusing to do so.
VII- Sight L/C:
Sight L/C has the same meaning as “ L/C available by draft at sight “ or “ L/C by sight draft ”.
The seller can derive many advantages from sight L/C:
1- He can get the payment very quickly, therefore, it is advantageous to the turnover of funds.
2- It can reduce the risks of the fluctuation of exchange rate and non-receipt of payment.
VIII- Time or Usance L/C:
This kind of L/C stipulates that the beneficiary may collect the purchase price from the bank against an usance draft.
When the seller presents a time draft together with the shipping documents stipulated in the L/C to the negotiating bank, the latter doesn’t make payment immediately. He transmits the draft and the documents to the opening bank. The opening bank, however, doesn’t pay the money immediately either. He just accepts the draft and returns it to the seller. He makes payment only when the time draft comes due.
Under the time draft, the money is paid at a determinable future time, which can be determined in three ways:
1- When the draft is discounted, a certain percentage of fact value must be deducted, hence, the actual income of the seller decreases.
2- It is disadvantageous to the turnover of funds.
3- The seller runs the risks of fluctuation of exchange rate and non-receipt of payment.
IX- Transferable L/C:
This type of letter of credit allows the beneficiary to transfer the amount partly or wholly of L/C to one or more than one party … i.e the second beneficiary. This is because the original beneficiary is only a middleman or broker and has to transfer the L/C to the actual supplier of the goods, who will attend to the shipping procedures, while the first beneficiary will obtain a commission or a difference between the amount payable to him under the letter of credit and the actual amount payable to the second beneficiary.
Under the transferable L/C, the beneficiary has the right to instruct the advising bank or negotiating bank to transfer the right of issuing a draft for the total or part amount to another person. In this case, the transferee is called the second beneficiary. After the transfer, the second beneficiary makes shipment of the goods and get the payment, the first beneficiary, however, still bears the responsibility of the seller stipulated in the sale contract.
A transferable L/C can only be transferred ONCE, and the second beneficiary cannot transfer it again.
The word “transferable” doesn’t mean the L/C must be transferred. Having received a transferable L/C, the beneficiary can use it himself if he decides not to transfer it to a second beneficiary.
X- Non-Transferable L/C:
Under the non-transferable L/C, the beneficiary cannot transfer the right of the credit to another person. If the L/C has not the word “Transferable” or “Non-Transferable”, then it will be regarded as Non-Transferable L/C.
XI- Back To Back L/C:
The exporter sends the L/C established by the importer in his favor to a bank as sole security, requiring the local bank to reopen L/C in favor of the actual exporter, the L/C opened by the importer is called the original L/C, which the second L/C issued in favor of the actual exporter is called subsidiary L/C. This type L/C is suitable for the business through a middleman a broker or a commission man… etc.
XII- Standby L/C:
It is also called the commercial paper L/C, which is a guaranty issued by the opening bank on behalf of the applicant to declare that the bank will undertake certain obligation. It is a special L/C which Northern American countries usually use instead of a letter of guarantee. The roles assumed by the L/C not only include making payment, but also include guaranteeing to perform a contract, making repayment for loan, and fulfilling other agreed obligation.
Revolving L/C:
The revolving L/C can be divided into four kinds:
1- Automatic Revolving L/C:
When the amount has been used up in a certain period of time, it can be restored automatically to the original amount without the instruction of the opening bank.
2- Non-Automatic Revolving L/C:
When the amount has been used up in a certain period of time, only under the instruction of the opening bank, the L/C can be used again.
3- Cumulative Revolving L/C:
For undelivered goods in a period of time, the L/C allows the seller to ship the goods in arrears in the next period of time. The seller can get the payment for this shipment together with that for next shipment.
4- Non-Cumulative Revolving L/C:
The L/C doesn’t allow the seller to ship the goods in arrears in the next period of time. However, he can still ship the goods which should be delivered in the next period of time and get the payment.
In the foreign trade activities, the seller should have a clear understanding of the risks in a sale contract, and should know well about the buyer’s credit and solvency, the political, economical and legal situation in the buyer’s country and the buyer’s liquidity. All this will help the seller to decide what kind of L/C he should choose.
APPLICATION FOR STANDBY LETTER OF CREDIT/LETTER OF GUARANTEE
GLOBAL COMMERCIAL BANK ______________ _____________ No. 337, Monivong Boulevard, Sangkat Orasey 4th, Khan 7 Makara, Place Date
Tel : (855-23) 364 258, 721 567-69 Fax: (855-23) 426 612 Telax: GCB KA 16146
Dear Sir, We request you to issue a standby Letter of Credit, Letter of Guarantee on the following terms and conditions by:
AVAILABLE BY DRAFTS AT (TENOR)…………………………..……….. ON YOU, YOUR BRANCH OR YOUR CORRESPONDENT AT YOUR OPTION OR YOU MAY WAIVE DRAFT REQUIREMENT.
COVERING: …………………………………………………………………………………………………………………………………………………………………… ……………………………………………………………………………………………………………………………………………………………………………………. DOCUMENTS REQUIRED: ………………………………………………………………………………………………………………………………………………… ……………………………………………………………………………………………………………………………………………………………………………………. ……………………………………………………………………………………………………………………………………………………………………………………. All Documents to be forwarded in one cover, by airmail, unless otherwise stated under Special Instructions: ………………………………………. ……………………………………………………………………………………………………………………………………………………………………………………. ……………………………………………………………………………………………………………………………………………………………………………………. EXCEPT SO FAR AS EXPRESSLY STATED HEREIN, THIS CREDIT IS SUBJECT TO THE UNIFORM CUSTOMS AND PRACTICE FOR DOCUMENTARY CREDITS (1993 REVISION), INTERNATIONAL CHAMBER OF COMMERCE, PARIS, FRANCE, PUBLICATION No. 500 (UCP). ________________________________ NAME OF APPLICANT
________________________________________________________ (AUTHORIZED SIGNATURE)
Letter of Guarantee (L/G):
The letter of guarantee is a written document issued by the bank on behalf of the importer or exporter in favor of the latter or former guaranteeing to undertake payment, conclusion or performance of a contract… etc. It is divided into two kinds:
I- L/G for Bid and Loan:
It is a kind of guarantee issued by the bank to the invitor for tender on behalf of the bidder which guarantees that the bidder will not withdraw the bid halfway or amend the bidding condition, and will not refuse to sign a contract and pay performance bond after winning the bid. Otherwise the bank shall be responsible for making compensation for losses sustained by the invitor for tender.
The difference between Standby Letter of Credit and L/G: The opening bank of L/G usually acts as the subsidiary payer. It undertakes the duty of payment only in the case of non- performance by the principle. The Standby L/C is opened by the opening bank in favor of the beneficiary. As long as the beneficiary’s written statements or evidences are in conformity with the stipulations in the Standby L/C, he can get the agreed amount from the bank even if the applicant fails to fulfil his duty.
II- L/G for Performance of an Import and Export Contract:
L/G for performance of import contract is a guarantee issued by the bank (guarantor) on behalf of the importer to the beneficiary, which stipulates that if the importer fails to pay duly after delivery of goods by the exporter. The bank shall be responsible for the payment. It can be subdivided into the following kinds:
1- L/G opened for import of equipment. 2- L/G opened for compensation trade. 3- L/G opened for assembly and processing trade. 4- L/G opened for credit purchasing. It is a kind of guaranty issued by the bank on behalf of the exporter which stipulates that if the exporter fails to deliver the goods in time, the bank should be responsible for making compensation for the losses incurred by the importer.
Combination of Different Modes of Payment:
In import and export business, it is very important for us to choose different modes of payment.
1- Combination of Remittance and L/C: In this case, the capital amount is paid by L/C, the balance is settled by remittance. For examples; as to the business of ore, the two parties may agree that the buyer will pay the partial amount by L/C against the shipping documents. The balance will be settled after the goods arrive the port of destination.
2- Combination of L/C and Collection:
In this case, the partial amount is paid by L/C, the balance is settled by collection. The exporter will draw two drafts, the amount under the L/C will be paid against a clean draft, while the full set of shipping documents will be attached to the sight draft under the collection. In most case, the major part of value of goods will be payable by irrevocable L/C and the remaining amount will be settled on collection basis.
D/P at sight, the full set of shipping documents are to accompany the collection item. All the documents are not to be delivered to the buyer until the full payment of the invoice value. In case of non-payment of the balance from the collection item, the documents shall be held by issuing bank at the entire disposal at the seller.
3- Combination of Remittance and L/G:
As for full sets of equipment, big machinery, vessel, airplane… etc., the purchase, according to the procedure of production and delivery, usually adopts the combined modes of remittance and L/G to pay periodically. In the import business, we should deposit 5% - 10% by remittance, the remaining amount is to be settled through progressive payment or deferred payment against the L/C issued by our bank.
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
