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M&T Bank INTERNATIONAL TRADE SERVICES. Country Risk Risk of Doing Business in Buyers Country Risk of Doing Business in Buyers Country.

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Presentation on theme: "M&T Bank INTERNATIONAL TRADE SERVICES. Country Risk Risk of Doing Business in Buyers Country Risk of Doing Business in Buyers Country."— Presentation transcript:

1 M&T Bank INTERNATIONAL TRADE SERVICES

2 Country Risk Risk of Doing Business in Buyers Country Risk of Doing Business in Buyers Country

3 Commercial Risk Risk associated with the Individual or Institution responsible for Payment Risk associated with the Individual or Institution responsible for Payment

4 Parties to a Letter of Credit Buyer Seller Issuing Bank Advising Bank

5 Seller Exporter Exporter Beneficiary of letter of credit Beneficiary of letter of credit

6 Buyer Importer Applicant for letter of credit

7 Issuing Bank Opens or issues the letter of credit Opens or issues the letter of credit Substitutes its credit-worthiness for that of the buyer Substitutes its credit-worthiness for that of the buyer

8 Advising Bank Notifies seller: Notifies seller: letter of credit has been opened letter of credit has been opened seller is beneficiary seller is beneficiary Authenticates and forwards letter of credit to the beneficiary Authenticates and forwards letter of credit to the beneficiary May be a local bank chosen by beneficiary May be a local bank chosen by beneficiary May be a correspondent chosen by issuing bank May be a correspondent chosen by issuing bank

9 Confirming Bank Confirms letter of credit Confirms letter of credit Must pay beneficiary: Must pay beneficiary: if all conditions of letter of credit are satisfied if all conditions of letter of credit are satisfied whether or not issuing bank pays whether or not issuing bank pays Confirmation requested by beneficiary (if unsure of issuing bank or its country) Usually a local bank chosen by beneficiary

10 Negotiating Bank A bank, usually in the locale of the beneficiary, that chooses to advance funds to beneficiary against presentation of documents required by terms of L/C A bank, usually in the locale of the beneficiary, that chooses to advance funds to beneficiary against presentation of documents required by terms of L/C

11 Indirect Parties to an L/C Customs House Broker or Freight Forwarder Usually unnamed in the letter of credit Facilitates transaction: coordinates the transportation of merchandise

12 Trade Agreements: Underlying Sales Contract What merchandise will be purchased What merchandise will be purchased In what quantity In what quantity At what price At what price Shipping method (sea, air, rail, etc.) Shipping method (sea, air, rail, etc.) When it will be shipped When it will be shipped Who will insure it (buyer or seller) Who will insure it (buyer or seller) How and when payment will be made How and when payment will be made

13 Methods of Payments Cash in Letter of Documentary Open Advance Credit Collections Account Most Advantageous to the Exporter Most Advantageous to the Importer

14 To provide advice To provide advice Review transactions, country information, business customs Review transactions, country information, business customs To provide financing To provide financing Supporting sales, purchases and investments Supporting sales, purchases and investments To mitigate risk To mitigate risk Country Risk & Commercial Risk Country Risk & Commercial Risk What is the Banks Role?

15 The handling by banks, on instructions received, of documents in order to: Obtain acceptance and/or payment Obtain acceptance and/or payment Deliver commercial documents against acceptance and/or against payment Deliver commercial documents against acceptance and/or against payment Deliver documents on other terms and conditions Deliver documents on other terms and conditions DOCUMENTARY COLLECTION

16 Documentary Collections Advantages to the Exporter Seller retains title to goods until payment or acceptance Seller retains title to goods until payment or acceptance Relies on banks to collect payment from buyer Relies on banks to collect payment from buyer

17 Commercial - Used to provide for payment Commercial - Used to provide for payment by a bank to a named beneficiary against the delivery of documents. Standby - Used to assure performance by Standby - Used to assure performance by the applicant. It is not expected to be drawn upon by the beneficiary. Common Types Common Types of Letters of Credit of Letters of Credit

18 A definite undertaking issued by the bank of applicant to pay the beneficiary at sight or at maturity. A definite undertaking issued by the bank of applicant to pay the beneficiary at sight or at maturity. A letter of credit is a banks undertaking to pay the beneficiary even if the applicant cannot do so. A letter of credit is a banks undertaking to pay the beneficiary even if the applicant cannot do so. It is a primary payment mechanism. It is a primary payment mechanism. Failure to meet all terms and conditions can result in the loss of the bank(s) undertaking(s) to pay. Failure to meet all terms and conditions can result in the loss of the bank(s) undertaking(s) to pay. Commercial Letter of Credit

19 Commercial Letters of Credit Specifies documents the seller must produce Specifies documents the seller must produce Specifies amount of time seller has: Specifies amount of time seller has: to act to act to present proof of actions to present proof of actions Protects both parties Protects both parties

20 The letter of credit is available for payment after examination of conforming documents. The letter of credit is available for payment after examination of conforming documents. Sight Letter of Credit

21 Letter of credit with drafts that are payable at a fixed or determinable future date, normally within 180 days. This type of letter of credit generates bankers acceptances. Financing costs of the transaction can be borne by the buyer or seller. Letter of credit with drafts that are payable at a fixed or determinable future date, normally within 180 days. This type of letter of credit generates bankers acceptances. Financing costs of the transaction can be borne by the buyer or seller. Time Letter of Credit

22 When a Time Letter of Credit is used you may have a desire to get paid sooner than the maturity. This can be done through the use of a Discount Letter of Credit. You get paid at document presentment and the Bank waits the term. When a Time Letter of Credit is used you may have a desire to get paid sooner than the maturity. This can be done through the use of a Discount Letter of Credit. You get paid at document presentment and the Bank waits the term. Sales Advantage: Now you can provide your buyer with short term financing solution. Now you can provide your buyer with short term financing solution. Costs are often paid for by the buyer. Costs are often paid for by the buyer. Discount Letter of Credit

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24 Most import letters of credit fall into this category. Undertaking by issuing bank to pay the seller. Exporter looks at the credit standing of the issuing bank and assumes the political risk of the issuing bank. Most import letters of credit fall into this category. Undertaking by issuing bank to pay the seller. Exporter looks at the credit standing of the issuing bank and assumes the political risk of the issuing bank. Advised Irrevocable Letter of Credit

25 The confirming bank (usually the sellers bank) adds its undertaking to the credit. Confirmation costs are added and are often borne by the buyer. The exporter looks at the credit standing of the confirming bank which assumes the commercial and political risk of the issuing bank. The confirming bank (usually the sellers bank) adds its undertaking to the credit. Confirmation costs are added and are often borne by the buyer. The exporter looks at the credit standing of the confirming bank which assumes the commercial and political risk of the issuing bank. Confirmed Irrevocable Letter of Credit

26 Standby Letter of Credit Standby letter of credit – a documentary letter of credit that is used to undertake to pay if the applicant does not meet or fails to perform an obligation. It is generally not a primary payment mechanism and is not intended to be drawn upon. Standby letter of credit – a documentary letter of credit that is used to undertake to pay if the applicant does not meet or fails to perform an obligation. It is generally not a primary payment mechanism and is not intended to be drawn upon. Uses: Uses: - Bid Bonds- Performance Bonds - Advance payment - Assuring payment - Loan warranty

27 Advance Payment Standby Standby Letters of Credit can by used when a buyer is required to make an up-front payment to the supplier, in advance of the actual supply of goods or construction of a facility. In such circumstances, the buyer may require a separate assurance, issued by the suppliers bank, that the advance payment will be refunded in the event that the supplier fails to perform under the contract.

28 Invoice Support Standby Standby letters of credit can be issued in conjunction with open account payment terms. A supplier may be willing to ship on open account terms, but only if it has received a separate assurance, from a bank, that the buyer will pay those invoices. The Invoice Support Standby serves that purpose, and provides the buyer with a bank undertaking that the invoices will be promptly paid.

29 Guarantees Federal Reserve Regulations prevent nationally chartered banks in the United States from issuing Guarantees. That is the reason why US banks generally issue Standby Letters of Credit in lieu of Guarantees.

30 Counter Standby Guarantees Some international contracts require that a Standby Letter of Credit or Guarantee be issued in a specific foreign country and under the laws, or in the language of that foreign country. When we cannot issue our own Standby or Guarantee under the required terms, our bank will instead issue a Counter Standby to a correspondent bank in the foreign country. The correspondent bank will then use M&Ts standby guarantee as security for its issuance of the local Guarantee in the required format.

31 Protection Offered by Letters of Credit Substitutes credit-worthiness of bank for that of buyer Substitutes credit-worthiness of bank for that of buyer Provides third party to validate that stipulated terms have been met Provides third party to validate that stipulated terms have been met Assures seller of payment when he satisfies terms of letter of credit Assures seller of payment when he satisfies terms of letter of credit Assures buyer payment will be made only if terms of letter of credit are met. Assures buyer payment will be made only if terms of letter of credit are met.

32 Limitations of Letters of Credit Banks deal in documents only Banks deal in documents only Detailed merchandise description does not prevent fraud Detailed merchandise description does not prevent fraud Documents, Documents, Documents !! Documents, Documents, Documents !!

33 Letter of Credit Discrepancies A discrepancy occurs when documents presented do not conform with the terms and conditions of the letter of credit. Common Discrepancies - Late Shipment - Incorrect Consignment of Goods - Late Presentation of Documents - Incorrect Description of Goods

34 Discrepant Documents! Discrepant Documents! Whats an Exporter Whats an Exporter to do?? to do?? Ask Negotiating Bank to return documents for corrections and resubmit them. Ask Negotiating Bank to return documents for corrections and resubmit them. Ask Negotiating Bank to contact Issuing Bank for permission to pay or accept documents with discrepancies. Ask Negotiating Bank to contact Issuing Bank for permission to pay or accept documents with discrepancies. Instruct the Negotiating Bank to forward the documents on approval. Instruct the Negotiating Bank to forward the documents on approval.

35 The Rules Governing Letters of Credit U.C.P. - The International Chamber of Commerce (I.C.C.) Publication, Uniform Customs and Practice for Documentary Credits Comprehensive record of customs and usage. ISP 98 – The International Standby Practices reflects generally accepted practice, custom, and usage of standby letters of credit (including performance, financial, and direct pay)

36 The M&T Advantage Correspondent banking relationship with over 2000 banks in over 3000 locations worldwide. Correspondent banking relationship with over 2000 banks in over 3000 locations worldwide. Web-based letter of credit generation and reporting system for our customers – free of charge. Web-based letter of credit generation and reporting system for our customers – free of charge. M&T Banks acts as the international for over 80 domestic banks. M&T Banks acts as the international for over 80 domestic banks. Provides discounting and financing of Chinese letters of credit. Provides discounting and financing of Chinese letters of credit.

37 QUESTIONS ?

38 Contact Information: John Vilardo Vice President International Trade Finance One Fountain Plaza – 12 th Floor Buffalo, New York 14203-1495 (716) 848-7344 jvilardo@mandtbank.com jvilardo@mandtbank.com


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