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 exporter’s angle Financing risk / Credit Risk Commercial risk Contract risk Country risk Political risk ( Sovereign Risk & Force Majuere ) Economic risk Forex risk .

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 ? .Basic Questions  What are the three basic contracts in trade? Which contract dictates terms of the other two contracts? .Sales contract.

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 buyer’s 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 .

However. FOB. DAF. FCA. CIF. DEQ. Nominated bank – Issuing bank & Beneficiary . FAS. EXW. What is it? – Sales contract  Who are the parties to a letter of credit. Second advising bank. Issuing bank. Advising bank. Beneficiary. CPT. Who are they? – Applicant. Reimbursing bank. DES. Confirming Bank. CFR.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. DDP  The Letter of Credit is based on a document which is rarely (if ever) viewed by the Issuing Bank. CIP. the letter of credit itself involves only two parties. DDU.

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? .

the various costs that are associated with every importexport transaction Seller: Minimum Risk and Obligations CFR CIF CPT CIP C DAF DES DEQ DDU & DDP D Buyer: Minimum Risk and Obligations .INCO Term Groups EXW E FCA FAS FOB F Incoterms specify: .point in the journey at which responsibility passes from the seller to the buyer .

Import duties & license Importer Exporter: Make goods available at premises Importer:(1-8) All arrangements for transport / insurance .Transport from dock / carrier 2. Export duties & license Exporter 8. Unloading 1.Transport to dock / carrier 7. Insurance 6.EXW 3. Loading Used for any mode of transport 4. Freight 5.

FCA 3. Loading Used for any mode of transport 4. arrange freight and insurance . Freight 5. Unloading 1. evidence of delivery Importer:(3-8) Specify carrier.Transport from dock / carrier 2. export duty. Export duties & license Exporter 8. Insurance 6. Import duties & license Importer Exporter: (1-2)Deliver goods.Transport to dock / carrier 7.

export duty. Unloading 1. Loading Used for sea & inland waterway transport 4. Freight 5. arrange freight and insurance .Transport to dock / carrier 7. evidence of delivery Importer:(3-8) Specify carrier.Transport from dock / carrier 2. Insurance 6. Import duties & license Importer Exporter: (1-2) Deliver goods alongside ship.FAS 3. Export duties & license Exporter 8.

Freight 5.Transport from dock / carrier 2.Transport to dock / carrier 7. export duty. loading costs. arrange freight and insurance . evidence of delivery Importer: (4-8) Specify carrier. Export duties & license Exporter 8. Loading Used for sea & inland waterway transport 4. Unloading 1.FOB 3. Import duties & license Importer Exporter: (1-3) Deliver goods on board. Insurance 6.

Transport to dock / carrier 7. loading & freight costs. Export duties & license Exporter 8. export duty. Loading Used for sea & inland waterway transport 4. evidence of delivery Importer: (5-8) Accept delivery.CFR 3. Insurance 6. Freight 5. Import duties & license Importer Exporter: (1-4) Deliver goods on board. Unloading 1. arrange insurance and unloading .Transport from dock / carrier 2.

Freight 5.Transport from dock / carrier 2. Insurance . Export duties & license Exporter 8. Transport document.CIF 3.Transport to dock / carrier 7. freight & insurance costs. Insurance 6.8) Deliver goods on board. evidence of delivery Importer: (5-7) Accept delivery. Loading Used for sea & inland waterway transport 4. arrange unloading Typical documents: Commercial invoice. loading. Import duties & license Importer Exporter: (1-4. Unloading 1. export duty.

Import duties & license Importer Exporter: (1-4) Deliver goods to carrier.Transport to dock / carrier 7. Export duties & license Exporter 8.CPT 3. Common for multi-modal transport 4. export duty. Unloading 1. arrange insurance and unloading . Loading Used for all modes of transport.Transport from dock / carrier 2. Freight 5. Insurance 6. loading & carriage costs. evidence of delivery Importer: (5-8) Accept delivery.

Insurance 6. carriage & insurance costs. Import duties & license Importer Exporter: (1-4.8) Deliver goods to carrier. Common for multi-modal transport 4. loading. Freight 5. arrange unloading .CIP 3.Transport from dock / carrier 2. Export duties & license Exporter 8. Loading Used for all modes of transport. evidence of delivery Importer: (5-7) Accept delivery. Unloading 1. export duty.Transport to dock / carrier 7.

Import duties & license 6.Transport from frontier 2.Transport to frontier 3. Insurance Importer Exporter Exporter: (1-3. evidence of delivery Importer: (3-5) Accept delivery. arrange on carriage .DAF Can apply to all modes of transport. Export duties & license 5. export duty. Unloading / Loading 4. carriage & insurance.6) Deliver goods at frontier. Designed for road & rail transport 1.

export duty.Transport to dock / carrier 7. Loading Used for sea & inland waterway transport 4. Export duties & license Exporter 8.8) Deliver goods on board at destination. Unloading 1.DES 3. evidence of delivery Importer: (5-7) Accept delivery. Import duties & license Importer Exporter: (1-4. arrange unloading .Transport from dock / carrier 2. freight & insurance costs. Insurance 6. Freight 5.

Insurance 6. Import duties & license Importer Exporter: (1-5. evidence of delivery Importer: (6-7) Accept delivery . freight & insurance costs.8) Deliver goods on quay at destination. Loading Used for sea & inland waterway transport 4.Transport to dock / carrier 7. Unloading 1. export duty. Freight 5.DEQ 3.Transport from dock / carrier 2. Export duties & license Exporter 8.

Unloading 1. Delivery order .DDU 3. Freight 5. Export duties & license Exporter 8. Import duties & license Importer Exporter: (1-5.7-8) Deliver goods at named place.Transport from dock / carrier 2. pay import duty Typical documents: Commercial invoice. Loading Can apply to all modes of transport 4. provide required documents Importer: (6) Accept delivery. Insurance 6.Transport to dock / carrier 7.

Export duties & license Exporter 8.DDP 3. Insurance 6. provide required documents Importer: Accept delivery . Unloading 1.Transport from dock / carrier 2. Freight 5.Transport to dock / carrier 7. Import duties & license Importer Exporter: (1-8) Deliver goods at named place. Loading Can apply to all modes of transport 4.

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 Seller’s Bank L/C & Documents Buyer’s/ Issuing Bank Reimbursement Authorization L/C Documents Payment Negotiating Bank Reimbursing Bank Reimbursement Claim Reimbursement .

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 .

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 – 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.

Confirmed vs Unconfirmed Criteria Confirmed 1.Commercial risk 2.Letter of Credit .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 .Certificate of Origin .weight note .Certified Invoice Documents represent goods and evidence various aspects of the transaction .commercial invoice • describing a specific aspect .transport documents .Consular Invoice .inspection certificate .insurance documents .packing list • dealing with customs or duty considerations .Sales contract .

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 by…Settlement 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 .

ISSUING BANK € NOMINATED BANK € docs BENEFICIARY  Tenor: Sight docs .By Payment: Available with Nominated Bank Issuing Bank has an account with the Nominated Bank or provides funds in advance.

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 .

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