LETTER OF CREDIT (LC) OPERATION

Mannan Bapari FCMA

Sr. Vice President & CFO
SBAC Bank Ltd
 INTRODUCTION
• One of the important functions of the commercial banks in the world is to
finance import and export trades.
• In international trade, because of distance involved, buyers and sellers do not
know each other.
• It is difficult for them to apprehend each others integrity and creditworthiness,
and apart from this, it is also difficult to know various regulations prevailing in
their respective countries regarding imports and exports.
• Thus, the buyer wants to be assured of goods and seller to be assured of
payments.
Methods of Payment Settlement in International Trade:

1. Advance Payment
2. Open Account
3. Bills for Collection
4. Documentary Letter of Credit (L/C)
Risk Level :
 What is Letter of Credit (L/C)
• Letter of Credit is irrevocable and thereby constitutes a definite
undertaking of the issuing bank to honour a complying
presentation.
• By opening letter of credit Bank guaranteeing payment to seller
and goods to buyer.
• By opening a letter of credit on behalf of a buyer in favor of a
seller, commercial banks undertake to make payments to a seller
subject to submission of documents drawn in strict compliance
with letter of credit terms giving title to goods to the buyer.
• It is a conditional guarantee. The letter of credit, thus, constitutes
one of the most important methods of financing foreign trade.
Types of Letter of Credit (L/C)
Required Documents & Papers for Opening of L/C

The importer must submit the following papers along with

L/C application before opening a Letter of Credit (L/C) :
 Import Registration Certificate (IRC).
 Taxpayer Identification Number (TIN)
 Agreement on buy/sell (Indent/Proforma Invoice)
 Insurance Cover Note/policy certificate with premium
paid receipt.
 VAT Registration Certificate
 L/C Authorization Form (LCAF).
 Import Permit (IP).
BANKER’S CONSIDERATION
On receipt of credit application along with the importer's requisite papers,
the bank takes into consideration the following points:
 The credit standing of the applicant is an important consideration. Moreover, the
amount of proposed credit, together with the drafts drawn under credits opened
previously on behalf of the customer, should not exceed the total limit
sanctioned for opening a letter of credit.
 The financial standing, market reputation and integrity of the customer to be
examined.
 The nature of commodity to be imported, its marketability and durability and
stability of prices will be considered to determine the margin asked for by the
banker for opening a letter of credit.
 The Exchange and Import Trade Controls ar supplementary. and complementary
to each other and so, before establishing a letter of credit, bank must ensure that
the credits conform to Exchange Control and Import Trade Control Regulations.
 The opening bank must also obtain a credit report of the beneficiary. The bank
has to satisfy itself that the exporter is a man of integrity and that he has the
capacity to supply the goods contracted to be purchased by the importer. This
may be necessary if the credit is for a large amount.
 The marine insurance for transaction is adequate.
Mechanism of Letter of Credit
1 Contract of Sale 2
(Indent/PI)

Exporter / Beneficiary 9 Ship Goods to Importer/Applicant

In China In Bangladesh
8 10 15 3
Forwards Presents Recovers Applies for
L/C to Docs & Obtain Amount Opening of
Payment From From L/C

7 11
14 4
Advising/ Obtains
12 Reimbursement 13 Issuing Bank
Negotiating Bank
From (SBAC Bank
(Bank of China)
Bangladesh)

6 Open LC &
Send it to 5
Parties to a Letter of Credit

 Applicant or Buyer (importer)

 Beneficiary or Seller (exporter)
 Issuing Bank (opening bank)
 Advising bank/Notifying bank
 Confirming bank
 Nominated Bank (intermediary bank)
 Negotiating bank
 Accepting bank
 Paying bank
 Reimbursing bank
Usual Terms & Conditions Set in a L/C
1. LC ADVISING BANK
2. LC NUMBER
3. LC ISSUING DATE
4. LC EXPIRY DATE & PLACE
5. APPLICANT BANK
6. NAME OF APPLICANT
7. NAME OF BENEFICIARY
8. CURRENCY AND AMOUNT
9. PERCENTAGE OF TOLERANCE
10. AVAILABLE WITH…… BY…..
11. DRAWEE
12. PARTIAL SHIPMENT
13. TRANSSHIPMENT
Usual Terms & Conditions Set in a L/C (Cont’d)
14. PORT OF LOADING
15. PORT OF DISCHARGE
16. LATEST DATE OF SHIPMENT
17. DESCRIPTION OF GOODS AND/OR SERVICES
18. DOCUMENTS REQUIRED
19. ADDITIONAL CONDITIONS
20. CHARGES
21. PERIOD OF PRESENTATION
22. CONFIRMATION INSTRUCTIONS
23. REIMBURSEMENT INSTRUCTION
24. INSTRUCTION TO PAYING/ACCEPTING/NEGOTIATING BANK
25. ADVISE THROUGH BANK
26. SENDER TO RECEIVER INFORMATION
There are 11 number of Incoterms Rules in current version i.e. Incoterms 2020

A. Incoterms for any Mode of Transport:

i. EXW – Ex Works (Delivery of goods at a named place of seller like
Factory, warehouse. Seller must pay all costs relating to the goods until
they have been delivered.)

ii. FCA – Free Carrier (seller delivers the goods to the buyer on the
means of transport arranged by the buyer. Seller also have to pay for
providing proof of delivery, tax, duty and cost related to export
clearance.)

iii. CPT – Carriage Paid to (Delivery takes place by handling goods over
the carrier. The seller pay all costs till delivery of goods; Cost of export
clearance; Transportation and loading cost; Costs related to proving of
transport document;Unloading cost, if agreed.)
There are 11 number of Incoterms Rules in current version i.e. Incoterms 2020 (CONTD)

• CIP – Carriage and Insurance Paid to ( Seller pay all costs till
delivery of goods. All costs till delivery of goods; Cost of export clearance;
Transportation and loading cost; Costs related to proving of transport
document; Cost of insurance; Unloading cost, if agreed)
• DAP – Delivered at Place (seller bears all risks involved in bringing
the goods to the named place of destination or to the agreed point within
that place. Seller pay all costs till delivery of goods; Cost of export
clearance; Transportation and loading cost; Costs related to proving of
transport document; Cost of insurance; Cost of transit clearance, if
any;Unloading cost, if agreed.)
• DPU – Delivered at Place Unloaded ( Same as DAP including
unloading cost.)
• DDP – Delivered Duty Paid (seller must pay, All costs till delivery of
goods; Cost of export, transit and import clearance; Transportation and loading
cost; Costs related to proving of transport document; Cost of insurance;Cost of
transit clearance, if any.
There are 11 number of Incoterms Rules in current version i.e. Incoterms 2020 (contd)

B. Incoterms for Sea and Inland Waterway Transport:

i) FAS – Free Alongside Ship (seller must pay All costs till delivery of
goods; Costs related to proving of transport document; Cost of export
clearance)
ii) FOB – Free On Board ( Same as FAS)

iii) CFR – Cost and Freight (The seller pay all costs till delivery of
goods; Cost of freight; Cost of transit and unloading if it is for seller’s account
under contract of carriage, Costs related to proving of transport document;
Cost of export clearance.)

iv) CIP – Cost Insurance and Freight (seller must pay All costs till
delivery of goods; Cost of freight; Cost of insurance; Cost of transit and
unloading if it is for seller’s account under contract of carriage, Costs related
to proving of transport document; Cost of export clearance.
Guidelines to follow for Opening
L/C:
• Import Policy Order
• Guideline for Foreign Exchange Transactions of
Bangladesh Bank
• UCPDC (Uniform Customs & Practice for
Documentary Credit)- ICC Publication No. 600.
• Time to time circulars issued by concerned
authority(ies).
 Amendment to a Letter of Credit
• Any change made to a letter of credit after it is issued is an
amendment.
• All parties involved must agree to accept the amendment.
• The buyer initiates the Letter of Credit by submitting a written
request to the issuing bank.
• L/C amendment is referring to change the terms of L/C, the contents
of the master L/C while the commercial transaction is in proceeding
as per the established L/C to other terms and L/C cancellation is
invalidating the already established L/C by withdrawal.
• An exporter upon L/C acceptance, if there is any unclear statement
or any non-conforming contents to the contract agreement by
examining the details, amendment should be requested.
 Amendment to a Letter of Credit
(Cont’d)
• To change L/C or cancel, the L/C applicant(importer) must receive written
agreement by requesting an amendment agreement of a beneficiary through
opening bank (If a confirming bank exist, include the confirming bank).
• When an exporter request changes or cancellation of L/C (include the
confirming bank) a consent of an opening bank is required but importer's
consent is not necessary.
• An amendment should be made within L/C validity period. If the valid period
has been elapsed, an amendment to extend the validity period is the first step
to take then there is no problem for the effectiveness and there is no limitation
for the number of times of the amendments.
• The other party's acceptance for amendment proposal must be unconditionally
and wholly therefore, partial acceptance, partial refusal is not allowed.
 ADD Confirmation
• Confirmation means a definite undertaking of the
confirming bank, in addition to that of the issuing bank to
honour or negotiate a complying presentation.

• When an LC is issued, the Issuing Bank may request the

Advising Bank to add its confirmation on the LC. By
agreeing to add the confirmation, the Advising Bank will
become the Confirming Bank and undertakes to pay the
beneficiary (seller) if all the terms and conditions of the LC
are complied with. Such undertaking from the Confirming
Bank is separate and in addition to the undertaking given by
the Issuing Bank.
ADD Confirmation (Cont’d)

• LC Confirmation is usually requested if the seller is

not comfortable with the creditworthiness of the
Issuing Bank, and/or is concerned over the buyer’s
country risk. In return, the seller is required to pay an
LC confirmation fee to the Confirming Bank.
• By adding confirmation, all subsequent negotiations
should be restricted to the Confirming bank. If the
seller chooses to negotiate the LC through another
bank, he will lose the rights and benefits of having a
confirmed LC.
Confirming Bank
Confirming bank means the bank that adds its confirmation to a credit
upon the issuing bank's authorization or request.

Often the beneficiary of the credit stipulates that the credit must be
confirmed by a bank in his own country, so that he is assured of payment
as soon as the documents are presented to it at his own centre. When a
bank in the exporter's country adds its confirmation to the credit, it gives
an additional undertaking to the beneficiary, in addition to that of the
issuing bank, to negotiate documents under the credit. The bank
confirming the credit is known as the "confirming bank", and the credit is
known as "confirmed credit". Therefore, the relationship of the confirming
bank with the beneficiary is similar to that of the issuing bank. If the
documents tendered are in conformity with the letter of credit terms and
within the expiry time of the credit, it has to make payment against them.
LC Retirement :
• Cash Payment.

• Post Import Finance (PIF) : LTR ( Loan against Trust Receipt) &
LIM (Loan against Imported Merchandise)

• Term Loan ( For Fixed Assets Import)

THANKS TO ALL.