2 Country RiskRisk of Doing Business in Buyer’s Country
3 Commercial RiskRisk associated with the Individual or Institution responsible for Payment
4 Parties to a Letter of Credit SellerBuyerIssuing BankNOTES:Advising Bank
5 Beneficiary of letter of credit SellerExporterBeneficiary of letter of creditNOTES:
6 Applicant for letter of credit BuyerImporterApplicant for letter of creditNOTES:
7 Issuing Bank Opens or issues the letter of credit Substitutes its credit-worthiness for that of the buyer
8 Advising Bank Notifies seller: letter of credit has been opened seller is beneficiaryAuthenticates and forwards letter of credit to the beneficiaryMay be a local bank chosen by beneficiaryMay be a correspondent chosen by issuing bank
9 Confirming Bank Confirms letter of credit Must pay beneficiary: if all conditions of letter of credit are satisfiedwhether or not issuing bank paysConfirmation requested by beneficiary (if unsure of issuing bank or its country)Usually a local bank chosen by beneficiaryNOTES :
10 Negotiating BankA bank, usually in the locale of the beneficiary, that chooses to advance funds to beneficiary against presentation of documents required by terms of L/CNOTES:
11 Indirect Parties to an L/C Customs House Broker or Freight Forwarder Usually unnamed in the letter of creditFacilitates transaction:coordinates the transportation of merchandiseNOTES:
12 Trade Agreements: Underlying Sales Contract What merchandise will be purchasedIn what quantityAt what priceShipping method (sea, air, rail, etc.)When it will be shippedWho will insure it (buyer or seller)How and when payment will be madeNOTES:
13 Methods of Payments Cash in Letter of Documentary Open Advance Credit Collections AccountMost Advantageous to the ExporterMost Advantageous to the Importer
14 What is the Bank’s Role? To provide advice Review transactions, country information, business customsTo provide financingSupporting sales, purchases and investmentsTo mitigate riskCountry Risk & Commercial Risk
15 DOCUMENTARY COLLECTION The handling by banks, on instructions received, of documents in order to:Obtain acceptance and/or paymentDeliver commercial documents against acceptance and/or against paymentDeliver documents on other terms and conditions
16 Documentary Collections Advantages to the Exporter Seller retains title to goods until payment or acceptanceRelies on banks to collect payment from buyer
17 Common Types of Letters of Credit Commercial - Used to provide for paymentby a bank to a named beneficiary against thedelivery of documents.Standby - Used to assure performance bythe applicant. It is not expected to be drawnupon by the beneficiary.
18 Commercial Letter of Credit A definite undertaking issued by the bank of applicant to pay the beneficiary at sight or at maturity.A letter of credit is a bank’s undertaking to pay the beneficiary even if the applicant cannot do so.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.
19 Commercial Letters of Credit Specifies documents the seller must produceSpecifies amount of time seller has:to actto present proof of actionsProtects both partiesNOTES:
20 Sight Letter of CreditThe letter of credit is available for payment after examination of conforming documents.
21 Time Letter of CreditLetter 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.
22 Discount Letter of Credit 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.Costs are often paid for by the buyer.
24 Advised Irrevocable Letter of Credit 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.
25 Confirmed Irrevocable Letter of Credit The confirming bank (usually the seller’s 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.
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.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 supplier’s 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 GuaranteesFederal 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&T’s 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 buyerProvides third party to validate that stipulated terms have been metAssures seller of payment when he satisfies terms of letter of creditAssures buyer payment will be made only if terms of letter of credit are met.NOTES:
32 Limitations of Letters of Credit Banks deal in documents onlyDetailed merchandise description does not prevent fraudDocuments, Documents, Documents !!NOTES
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! What’s an Exporter to do?? 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.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 AdvantageCorrespondent 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.M&T Banks acts as the international for over 80 domestic banks.Provides discounting and financing of Chinese letters of credit.