L/C Workshop
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International Trade
Exchanging goods and services across international borders
Hazards in International Trade
Risks faced by importers and exporters
How banks help in dealing with these risks
Walking the thin line...
Problems for Exporter
Distance
Credit worthiness of buyer Disputes Restrictions imposed by governments
Trouble?
Problems for Importer
Late arrival
Damaged goods Goods not as per specification
More trouble?
Risk matrix from exporters angle
Financing risk / Credit Risk Commercial risk Contract risk
Country risk
Political risk ( Sovereign Risk & Force Majuere )
Economic risk Forex risk
Basic Questions
What are the three basic contracts in trade? Which contract dictates terms of the other two contracts?
- Sales contract, Contract of carriage, Payment contract
What are the four different payment methods?
Advance Payment Open Account Documentary Collections Letters of Credit
Can you list them in a risk matrix starting with the highest risk to the Seller ?
Methods of Payment
High Risk
Advance Payment
Confirmed Letter of Credit
IMPORTER
Letter of Credit
Documentary Collection
Open Account
Low Risk EXPORTER High Risk
Comparison
Method Seller's Viewing Point Payment undertaking by buyers bank Buyer's Viewing Point Must trust seller Payment only if documents are compliant
Advance Payment Totally secure Letter of Credit
Documentary Collections Open Account
Constructive Gets to see the control over goods documents Must trust buyer Totally Secure
Basic Questions
What are INCO Terms?
International Commercial Terms
What do they spell out?
Sharing of costs and risk in transportation
Are INCO Terms mandatory?
No
How many INCO Terms are there? Can you list all of them?
13. EXW, FAS, FOB, FCA, CFR, CPT, CIF, CIP, DAF, DES, DEQ, DDU, DDP
The Letter of Credit is based on a document which is rarely (if ever) viewed by the Issuing Bank. What is it?
Sales contract
Who are the parties to a letter of credit. However, the letter of credit itself involves only two parties. Who are they?
Applicant, Issuing bank, Advising bank, Second advising bank, Confirming Bank, Beneficiary,
Reimbursing bank, Nominated bank Issuing bank & Beneficiary
INCO Terms 2000 (ICC 560)
Components of Cost
Cost of Goods Pre-Carriage Export Duty Loading Main carriage Insurance Unloading Import Duty On-carriage
INCO Terms INTERNATIONAL COMMERCIAL TERMS Set of terms clearly defining the shipping arrangements to avoid misunderstandings and simplify communication between the seller and the buyer
ICC ? ? ? ?? ?
Removing doubts
Who will bear what cost?
INCO Term Groups
EXW
FCA
FAS
FOB
Incoterms specify: - point in the journey at which responsibility passes from the seller to the buyer - the various costs that are associated with every importexport transaction
Seller: Minimum Risk and Obligations
CFR CIF
CPT CIP
DAF
DES
DEQ
DDU & DDP
Buyer: Minimum Risk and Obligations
EXW
3. Loading
Used for any mode of transport
4. Freight 5. Unloading
1.Transport to dock / carrier
7.Transport from dock / carrier
2. Export duties & license Exporter 8. Insurance
6. Import duties & license Importer
Exporter: Make goods available at premises
Importer:(1-8) All arrangements for transport / insurance
FCA
3. Loading
Used for any mode of transport
4. Freight 5. Unloading
1.Transport to dock / carrier
7.Transport from dock / carrier
2. Export duties & license Exporter 8. Insurance
6. Import duties & license Importer
Exporter: (1-2)Deliver goods, export duty, evidence of delivery
Importer:(3-8) Specify carrier, arrange freight and insurance
FAS
3. Loading
Used for sea & inland waterway transport
4. Freight 5. Unloading
1.Transport to dock / carrier
7.Transport from dock / carrier
2. Export duties & license Exporter 8. Insurance
6. Import duties & license Importer
Exporter: (1-2) Deliver goods alongside ship, export duty, evidence of delivery
Importer:(3-8) Specify carrier, arrange freight and insurance
FOB
3. Loading
Used for sea & inland waterway transport
4. Freight 5. Unloading
1.Transport to dock / carrier
7.Transport from dock / carrier
2. Export duties & license Exporter 8. Insurance
6. Import duties & license Importer
Exporter: (1-3) Deliver goods on board, loading costs, export duty, evidence of delivery
Importer: (4-8) Specify carrier, arrange freight and insurance
CFR
3. Loading
Used for sea & inland waterway transport
4. Freight 5. Unloading
1.Transport to dock / carrier
7.Transport from dock / carrier
2. Export duties & license Exporter 8. Insurance
6. Import duties & license Importer
Exporter: (1-4) Deliver goods on board, loading & freight costs, export duty, evidence of delivery
Importer: (5-8) Accept delivery, arrange insurance and unloading
CIF
3. Loading
Used for sea & inland waterway transport
4. Freight 5. Unloading
1.Transport to dock / carrier
7.Transport from dock / carrier
2. Export duties & license Exporter 8. Insurance
6. Import duties & license Importer
Exporter: (1-4,8) Deliver goods on board, loading, freight & insurance costs, export duty, evidence of delivery
Importer: (5-7) Accept delivery, arrange unloading
Typical documents: Commercial invoice, Transport document, Insurance
CPT
3. Loading
Used for all modes of transport. Common for multi-modal transport
4. Freight 5. Unloading
1.Transport to dock / carrier
7.Transport from dock / carrier
2. Export duties & license Exporter 8. Insurance
6. Import duties & license Importer
Exporter: (1-4) Deliver goods to carrier, loading & carriage costs, export duty, evidence of delivery
Importer: (5-8) Accept delivery, arrange insurance and unloading
CIP
3. Loading
Used for all modes of transport. Common for multi-modal transport
4. Freight 5. Unloading
1.Transport to dock / carrier
7.Transport from dock / carrier
2. Export duties & license Exporter 8. Insurance
6. Import duties & license Importer
Exporter: (1-4,8) Deliver goods to carrier, loading, carriage & insurance costs, export duty, evidence of delivery
Importer: (5-7) Accept delivery, arrange unloading
DAF
Can apply to all modes of transport. Designed for road & rail transport
1.Transport to frontier 3. Unloading / Loading 4.Transport from frontier
2. Export duties & license
5. Import duties & license 6. Insurance Importer
Exporter
Exporter: (1-3,6) Deliver goods at frontier, carriage & insurance, export duty, evidence of delivery
Importer: (3-5) Accept delivery, arrange on carriage
DES
3. Loading
Used for sea & inland waterway transport
4. Freight 5. Unloading
1.Transport to dock / carrier
7.Transport from dock / carrier
2. Export duties & license Exporter 8. Insurance
6. Import duties & license Importer
Exporter: (1-4,8) Deliver goods on board at destination, freight & insurance costs, export duty, evidence of delivery
Importer: (5-7) Accept delivery, arrange unloading
DEQ
3. Loading
Used for sea & inland waterway transport
4. Freight 5. Unloading
1.Transport to dock / carrier
7.Transport from dock / carrier
2. Export duties & license Exporter 8. Insurance
6. Import duties & license Importer
Exporter: (1-5,8) Deliver goods on quay at destination, freight & insurance costs, export duty, evidence of delivery
Importer: (6-7) Accept delivery
DDU
3. Loading
Can apply to all modes of transport
4. Freight 5. Unloading
1.Transport to dock / carrier
7.Transport from dock / carrier
2. Export duties & license Exporter 8. Insurance
6. Import duties & license Importer
Exporter: (1-5,7-8) Deliver goods at named place, provide required documents
Importer: (6) Accept delivery, pay import duty
Typical documents: Commercial invoice, Delivery order
DDP
3. Loading
Can apply to all modes of transport
4. Freight 5. Unloading
1.Transport to dock / carrier
7.Transport from dock / carrier
2. Export duties & license Exporter 8. Insurance
6. Import duties & license Importer
Exporter: (1-8) Deliver goods at named place, provide required documents
Importer: Accept delivery
Q&A
Letters of Credit
Letter of Credit
is an independent irrevocable undertaking of a bank to effect payment when
All the stipulated documents are presented All the terms and conditions of the credit are complied with
provides cover to the seller against
Credit risk of the buyer
Contract disputes
Currency inconvertibility Government legislation
L/C Cycle
Goods
Buyer/ Applicant
L/C Debit Application Documents
Contract L/C
Seller/ Beneficiary
Copy of L/C
Goods
Freight Forwarder
Advising Bank
Payment
Sellers Bank
L/C & Documents
Buyers/ Issuing Bank
Reimbursement Authorization
L/C Documents
Payment
Negotiating Bank
Reimbursing Bank
Reimbursement Claim Reimbursement
Letter of Credit - Confirmation
What is a Confirmed Letter of Credit?
A bank other than the issuing bank provides an independent undertaking to pay the seller on behalf of the issuing bank The other bank may / may not be in the country of the beneficiary The issuing bank names the confirming bank in the LC The issuing bank is responsible to ensure that the LC is routed through the confirming bank
Protection for the L/C
Letter of Credit Role of confirming bank
Confirming bank may / may not add confirmation It should inform the issuing bank and the beneficiary if it elects NOT to add confirmation If it elects to confirm, the Confirming Bank assumes the same Risks responsibilities rights as if they had issued the letter of credit
Cannot shrug it off!
Letter of Credit - Confirmed vs Unconfirmed
Criteria Confirmed 1.Commercial risk 2.Country risk Unconfirmed
Risk coverage Recourse on settlement by confirming bank Without Cost High cost Primary obligation Confirming bank
Commercial risk
With Low cost Issuing bank
Confirmation depends on several factors
Letter of Credit - Documents
Classification (based on description)
describing commercial transaction as a whole - Sales contract - commercial invoice describing a specific aspect - transport documents - insurance documents - inspection certificate - weight note - packing list dealing with customs or duty considerations - Consular Invoice - Certificate of Origin - Certified Invoice
Documents represent goods and evidence various aspects of the transaction
Letter of Credit Presentation
Document presentation By the beneficiary To the issuing bank or nominated bank or his bank Within expiry date at the place of presentation
Compliant document vs non-compliant documents
Letter of Credit Non-compliant presentation
What is the bank required to do?
Return docs for correction Telex for authority Send on approval Rectify documents on behalf of client Purchase against beneficiary indemnity Request an amendment Beneficiary: Amendment Correct docs Instruct bank
Examining Bank:
Available bySettlement Methods
Various methods by which payment under an L/C is made available to the beneficiary
By Payment By Deferred Payment By Acceptance
By Negotiation
By Payment: Available with Issuing Bank
ISSUING BANK
PRESENTING BANK
Tenor: Sight docs docs BENEFICIARY
By Payment: Available with Nominated Bank
Issuing Bank has an account with the Nominated Bank or provides funds in advance.
ISSUING BANK
NOMINATED BANK
docs BENEFICIARY
Tenor: Sight docs
By Payment: Available with Nominated Bank
Claiming Reimbursement
ISSUING BANK
REIMBURSING BANK
NOMINATED BANK
Tenor: Sight docs docs BENEFICIARY
By Deferred Payment: Available with Issuing Bank
ISSUING BANK
PRESENTING BANK
Tenor: Usance docs docs BENEFICIARY
By Deferred Payment: Available with Nominated Bank
ISSUING BANK
NOMINATED BANK
Tenor: Usance docs docs BENEFICIARY
By Acceptance: Available with Issuing Bank
ISSUING BANK
PRESENTING BANK
Tenor: Usance docs docs BENEFICIARY
By Acceptance: Available with Nominated Bank
ISSUING BANK
NOMINATED BANK
Tenor: Usance docs docs BENEFICIARY
By Negotiation: Available with Nominated Bank
ISSUING BANK
NEGOTIATING BANK
Tenor: Sight & Usance
docs docs BENEFICIARY
Q&A
