Role of LC in International Trade Finance

ROLE OF LETTER OF CREDIT

IN INTERNATIONAL TRADE FINANCE

Prepared By

Muhammad Yasir

MTO (HR)

National Bank of Pakistan

What is a Letter of Credit?What is a Letter of Credit?

• Document and undertaking issued by a bank

• At the request of the applicant (buyer, importer)

• In favor of a beneficiary (seller, exporter)

• Substitutes the bank’s name and credit risk for that of the applicant (buyer, importer)

• Guarantees payment of a customer’s draft up to a stated amount for a specified period

if certain conditions are met

• Document and undertaking issued by a bank

• At the request of the applicant (buyer, importer)

• In favor of a beneficiary (seller, exporter)

• Substitutes the bank’s name and credit risk for that of the applicant (buyer, importer)

• Guarantees payment of a customer’s draft up to a stated amount for a specified period

if certain conditions are met

Letter of CreditLetter of CreditSummary of a contract between seller and buyer with the bank(s) as referee.

Governed by UCP 600

WHY HAVE A LETTER OF CREDIT?WHY HAVE A LETTER OF CREDIT?

IF I SHIP GOODS,WILL YOU PAY?

IF I PAY, WILL YOUSHIP THE GOODS?

SOLVES ISSUES OF MUTUAL MISTRUST BY USINGBANKS AS ARBITERS

NEGOTIATE L/C TERMS BEFOREENTERING A CONTRACT

TRADE FINANCEIMPORT LETTER OF CREDIT

TRADE FINANCEIMPORT LETTER OF CREDIT

1) NBP ISSUES ITS LETTER OF CREDITTO THE EXPORTER’S BANK ABROAD

2) EXPORTER SUBMITS SHIPPING DOCUMENTS TO THE FOREIGN BANK

3) FOREIGN BANK REVIEWS AND SENDS DOCUMENTS TO NBP

4) NBP REVIEWS THE DOCUMENTS AND IF DOCUMENTS COMPLY WITH THE L/C, NBP PAYS

THE PROCESS LOOKS LIKE THIS. . . . . . . . . . . . . . .

LETTERS OF CREDITWHO ARE THE PLAYERS?LETTERS OF CREDITWHO ARE THE PLAYERS?

NBP’sCUSTOMERIMPORTER

(Buyer)

FGN BANK

CUSTOMEREXPORTER

(Seller)

NBP(ISSUING BANK) L/C

FOREIGN BANK

(ADVISING BANK)

CONTRACT

(MAY CONFIRM)

IMPORT L/C PROCESSINGDOCUMENT FLOWIMPORT L/C PROCESSINGDOCUMENT FLOW

L/C

CONTRACT

documentsPAYS

DOCUMENTS

FGN BANK

CUSTOMEREXPORTER

(Seller)

NBP(ISSUING BANK)

NBP’sCUSTOMERIMPORTER

(Buyer)

FOREIGN BANK

(ADVISING BANK)

NATIONAL BANK located in the Pakistan

Issuing / Opening Bank located

overseas

Advising / Confirming Bank

Ap

plicati

on

Beneficiary

Seller

Exporter

Docu

men

ts

Contract

Goods

Docu

men

ts

Letter of Credit (Sight/Time)

Documents

Applicant / BuyerImporter

L/C

Export Letter of Credit ProcessExport Letter of Credit Process

TRADE FINANCELETTER OF CREDIT DOCUMENTS

TRADE FINANCELETTER OF CREDIT DOCUMENTS

BANKS DO NOT DEAL IN THE MERCHANDISE WHICHTHE LETTER OF CREDIT COVERS

BANKS DEAL ONLY IN

THE BANK’S COMMITMENT IN THE LETTER OF CREDITTHE BANK’S COMMITMENT IN THE LETTER OF CREDIT

• AMOUNT

• EXPIRY

• LATEST SHIPMENT DATE

• DOCUMENTS REQUIRED

• AMOUNT

• EXPIRY

• LATEST SHIPMENT DATE

• DOCUMENTS REQUIRED

THE L/C SAYS WHAT IT MEANS & MEANS WHAT IT SAYS

PAYMENT WILL BE MADE ONLY WHEN ALL TERMS AND CONDITIONS ARE MET

KEY ELEMENTS

RESOLVE UNCLEAR ITEMS PRIOR TO SHIPMENT

THE DOCUMENTS REQUIRED BYTHE LETTER OF CREDIT

THE DOCUMENTS REQUIRED BYTHE LETTER OF CREDIT

ALL DOCUMENTS MUST CONFORM TO THE LETTEROF CREDIT AND BE CONSISTENT WITH EACH OTHER

THREE FORMS OF DOCUMENTS:

FINANCIAL DOCUMENTS

TRANSPORT DOCUMENTS

COMMERCIAL DOCUMENTS

1

23

FINANCIAL DOCUMENTS:FINANCIAL DOCUMENTS:

• Bill of Exchange

• Promissory Note

• Trust Receipt

• Delivery Order

1

2 TRANSPORT DOCUMENTS:TRANSPORT DOCUMENTS:

• Bill of Lading

• Airway Bill

• Air Consignment Note

• Postal Parcel Receipt

• Truck Receipt

• Railway Receipt

• COMMERCIAL INVOICE

• PACKING LIST

• INSURANCE CERTIFICATE

• CERTIFICATE OF ORIGIN

• INSPECTION CERTIFICATE

• WEIGHT NOTE

• CERTIFICATE OF ANALYSIS

• BLACK LIST CERTIFICATE etc.

INVOICE PKG.LIST

INSURANCEORIGINCERT.

3 COMMERCIAL DOCUMENTS:COMMERCIAL DOCUMENTS:

Importance of L/C for ExporterImportance of L/C for Exporter• Dependence on Credit worthiness of a bank

instead of importer

• If the credit is confirmed by a bank in the exporter’s country, the exporter is neither subject to commercial not to country risk

• If the credit is irrevocable, it can’t be cancelled without the exporter’s consent and notice of revocation can be rejected by the exporter if received after shipment

• The documents and therefore the goods will not be released until payment or commitment to payment is made (In terms of L/C)

• Where credit has been allowed the accepted bill of exchange can be used to obtain the finances

Importance of L/C for ImporterImportance of L/C for Importer

• The importer can negotiate better terms as the exporter is assured of payment

• Importer is assured that no funds will be released unless title documents and received correct and in order

• Protection is provided under UCP for documentary Credit

Thanks!Thanks!

Any Question ???Any Question ???