Basics of Letter of Credit & Receiving Overseas Payments

Welcome to the course. The course plan for this short course is given below or you can download the pdf from the resources section.

In the next video Dr. Vijesh Jain, gives an introduction on the course, about himself and what you can expect from this short course.

Hello, friends, welcome to my new class on how international letter of credit works. So Friends in the global trade mastery series I come out with the classes on the aspects related to exports, imports, international business, international trading. I'm Dr. Vijesh Jain. I have more than 30 years of experience in international business, letter of credits, dealing with the foreign buyers, signing different types of contracts, negotiating export deals and negotiating payment terms.

So friends, for receiving international trade payments, the best instrument for new exporters is international letter of credit. So Friends, With my experience with the hundreds of international banks and the professionals working there, I have prepared this class for you, which talks about the international LC, on how it works.

What is the role of UCP 500, UCP 600 and how the ICC France, controls and monitors this international system of documentary credit using which the exporters can be assured of the international payments and buyers can be assured of the right quality at the right price, at the right time So friends in this class, I'll be taking up a brief review of a typical traditional letter of credit cycle, how it works?

Who are the participants in this letter of credit cycle? and who are the intermediaries? What is the role of banks and how the flow of goods, documents and payments happen in this traditional life cycle of the letter? So Friends, let us now understand what is and LC

Friends this class I have created to tell you something about a very important aspect of exporting and importing, and that is the receiving the international payment and friends in receiving the international payments, the very important instrument of receiving international payment, especially for the new exporters, is the LC.

So Friends, in this class, I will tell you many, many things, new things about the letter of credit, some things which generally people do not know, some very revolutionary new ideas about LC, which have been tried and has been tested. So I will tell you about those also.

It is important to understand the typical exports framework of a typical exports transaction in order to understand the challenges of international payments and shipment of goods internationally both for the seller as well as the buyer. In the next video, Dr. Jain explains this framework to take off with this course.

So friends, in this, I will draw your attention to the typical export framework wherein the role of the banks is very aptly fitted. So I will show you one typical export framework. So friends in this export framework, as you can see here, the exporter and the importer, they come in contact with each other. The exporter want to sell the goods and the importer requires those goods and the matchmaking happens. The importer is interested in the goods. The exporter is interested in supply of these goods. And both the parties reach as export contract. Based on this export contract, the exporter want to be sure about the payment, which is due to be paid by the importer.

And importer is interested in ensuring that the goods which are sold and dispatched to the importer are in good condition. And all the due diligence has been done at the exporter end and the system has ensured that the goods reaches on time and in good order and condition. So what happens. To make it happen, the importer approaches the bank in his own country, which is herein, we are calling as importer's bank where the importer request the bank to make it possible for the importer to pay to the exporter once the goods are shipped.

So what does the bank do? Bank open a letter of credit in favor of the exporter. What is a letter of credit? It is a conditional guarantee by the bank that once the goods are shipped from the borders of the exporter and the exporter is able to satisfy about the shipment of the goods in time and in good order and condition the importer's bank will guarantee that the payment will be made to the exporter. So what does happen in this kind of situation is that the exporter is assured that once the goods are shipped in good order and condition and in the right manner and he's able to satisfy the bank, he will get the payment.

Because the bank is a reputed international bank and the payment is being guaranteed by the bank, not by the importer. So the interest of exporters is taken care of. Similarly, the bank is giving this conditional guarantee by ensuring that the exporter makes this shipment on time and with the right quality and quantity. So the conditions which are imposed by the bank are in the form of some original documents, which has to be produced by the exporter to ensure that the interest of the importer has been taken care of. So in this system, the interest of both the exporter and the importer has been taken care of by the bank who has opened the LC.

Normally this bank is called the issuing bank. Now what happens? The bank do not open this letter of credit directly to the exporter. Rather it wants another bank to be involved in the exporter's country so that the letter of credit, which is normally in very technical language, in the banking language, to ensure the sanctity of the system, it is advised by a local bank. So this letter of credit is advised to the exporter about its applicability and conditions through the bank local bank, which is located in the generally located in the exporter's country. So the purpose of this system is that the exporter later on cannot say that I have not been able to understand the conditions of that letter of credit Because of the involvement of a local bank with whom he can always go and ask for the understandings, which are related to the conditions which are imposed by the importer's bank. So what happened that in the system now the role of two banks has been created, that the the one role is of the issuing bank, which is the importer's bank, and the another role is the advising bank, which is located in the exporter's country. So by involving these two banks, this whole system has become possible and the interest of both the exporter and the importer has been taken care of.

And this kind of international payment and the dispatch of goods can now happen in this kind of framework. So once this letter of credit has been opened by the importer's bank and advised by the advising bank in the exporter's country, the exporter is now confident that if he dispatches the goods, exports the goods on time, he will receive the payment. So what he does, he prepares the goods and through port of loading, either by sea or by air or by any other means, he exports the goods on time, which are received by the importer through this system of letter of credit. So this is how this typical export import framework thake place and the role of both the importer's bank and the exporter's bank, which means the issuing bank and advising bank comes into the picture and this is how the system works.

Choose the one that is best

In order to carry out successful exports transaction and receive the timely and full payment for the goods exported, a international seller has limited choices. LC while being a costly options is certainly safe bet for new exporters or dealing with a new customer.

Typically in a documentary letter of credit, an exporter who is the beneficiary of the LC, must arrange the typical commercial documents. When presented on time and in desired manner to the bank, exporters can definitely expect payment against the documentary L/C

In the next video Dr. Jain has explained the flow of money, documents and goods in a a typical traditional LC cycle. Also discussed are the several types of overseas and local banks which play their role in a manner desirable of them.

Now, I will tell you in this very video itself. How letter of credit works?. So let us look at how the LC work? OK, Friends, so what happens in a typical LC, traditional LC cycle, there is a contract between the seller and the buyer, Friends this sales contract, which can also be in the form of a Proforma Invoice, is to initiate the international transaction. And what is the international transaction? The seller has to ship the goods in great quantity and quality, and the buyer has to make the payment in a timely manner and to the entire satisfaction of the seller. So friends to achieve this goal of the right goods and the right price. The seller, based on the sales contract, sends one LC opening instruction to the buyer.

The buyer examines the LC opening instructions which is given by the seller. and if finds everything is OK, he prepares a L.C opening instruction cum application to his own bank, which works as the issuing bank. It is the bank in the importer's country. Friends. This issuing bank opens the LC based on the LC opening instruction, drafted by and applied by the applicant, which means the buyer. which means the importer.

This particular letter of credit, which is issued by the issuing bank, invariably is a sight letter credit, depending upon case to case and it is irrevocable and the LC has been opened, as per UCP version 500 or version 600, as per the choice of both the seller and the buyer, whatever has been agreed and based on that, this LC is advised to the seller. by the advising bank, this advising bank is located in the country of the Seller. So once the seller receives the letter credit what he does, he looks at the LC. He looks at the different documents which are required as per the LC, because it is a conditional guarantee of the payment.

And the condition is that all the required documents, commercial documents, which has been asked in the LC, it has to be procured by the seller and prepared by the seller after making the shipment. And these documents has to be presented to the issuing bank through the nominated bank or the negotiating bank, as the case may be So if the seller finds that the conditions of the LC are as per the expected conditions and documents which the seller had agreed with the buyer and requested to the buyer as per the LC opening draft, it will accept the LC And once the LC is accepted by the seller, it makes the shipment of the goods from the Port of Loading to the Port of Discharge.

The buyer is informed about this shipment. Now buyer approaches the issuing bank and ask for the original documents so that it can claim the goods which are about to reach the port of discharge. In the meantime, the seller has presented all the documents, as required by the LC, including the transport documents, commercial invoice, packing list, certificate of origin and any other principle commercial documents, which has been passed by the LC.

And he presents this document along with the bill of exchange, that is the draft for the payment to the nominated bank or the negotiating bank to the issuing bank. So if the letter of credit is a sight letter of credit, the issuing bank either accepts the document, and make the payment within five to seven days, working days, or issues the rejection letter. In the case of a rejection letter, the documents are sent back to the seller and those has to be rectified or whatever the instruction has been given by issuing bank. If the payment is made by the issuing bank, the documents are sold to the buyer.

If anybody dues are there for the bank, the same will be deducted by the bank and based on whatever is the relationship between the issuing bank and the buyer and the satisfaction of the bank with regard to any pending dues, the documents would be handed over to the buyer. Now, the buyer uses these documents to claim the goods from the local customs that the customs in his own country and take delivery of the goods from the shipping company.

So Friends, this is a very typical letter of credit cycle, which is typically used in most of the cases around the world for any typical exports transaction.

Welcome back friends. Now, in this particular episode, I will talk about the LC parties who are the LC parties, which are part of the LC cycle, traditional LC cycle, LC issuance and what exactly are these steps which are involved. So step by step, I will explain here this particular process. So friends, first of all, there is a sales contract between the buyer and seller. So buyer and seller reaches a sales contract. So friends, based on this sales contract, the seller sends a draft LC opening instruction to the buyer. And based on this draft LC opening instruction, the buyer applies for opening the letter of credit to the issuing bank. He submits the final LC opening instructions, which is actually based on the LC opening draft, which was sent by the seller. Now friends, based on the LC opening instruction of the buyer, issuing bank issues LC and sends this LC, which is opened, which is issued by the issuing bank to the seller's bank, which is acting as advising bank.

Now friends advising bank reviews the letter of credit. It authenticates the letter credit. It authenticates the reputation of the issuing bank. It also authenticates the terms and conditions of the letter credit. And based on this analysis, if the advising bank finds the LC is technically correct, this bank advises the letter of credit to the beneficiary, that is the seller. So Seller's bank, after authenticating LC, sent this asset to the seller for the seller's acceptance.

Now it is up to the seller whether to accept LC or not. Now if the seller accepts the letter of credit and if he is okay with the terms and conditions, which seems to be in line with the expectations of the seller, as well as the LC opening draft, which was sent by the seller to the buyer at the very first stages after the sales contract, then Seller accepts the letter of credit and prepares the goods for the shipment. So after the shipment has been made by the seller, the seller presents the documents. First it procures all the documents, transport documents. Commercial invoice, packing list and any other commercial principle document which has been required by the LC, it because all those documents and presents these documents as required by the LC to the local bank, which now is acting as the negotiating bank.

Why? Because this negotiating bank examines the presentation made by the seller, and if he finds the presentation looks fine, it will negotiate the documents against the letter of credit with the issuing bank So this is the role of the negotiating bank. So what actually the negotiating bank do? After scrutinizing the documents, Negotiating bank forwards these documents to the issuing bank. Now issuing bank as per UCP 500 or 600, whatever it is applicable, examines the documents, and either it approves the document as compliant or send the refusal letter.

And if the documents are accepted by the issuing bank, it means it has to actually pay the LC amount to the seller within five or seven days, depending on the UCB version. In the meantime, issuing bank debits the buyers account for the payment and releases the original documents to the buyer after it has already paid the money to the negotiating bank to be credited to the beneficiary, that is the seller. Now, what actually had been done by the issuing bank, is that, on checking of the compliance, with the LC terms, the issuing bank reimburses the negotiating bank, by debiting buyer's account. It has already debited the account of the buyer and with the help of that collection of the money from the buyer, the issuing bank has already paid. So if the LC is payable at sight, payment will be made within five or seven days, depending on the UCP version.

Thereafter, the negotiating bank, on receiving the payment, credits the amount to the seller. So friends, this is a very typical traditional letter of credit cycle and the different parties which are involved in this traditional letter of credit cycle, which is the seller, which is also called the beneficiary, the buyer, which is also called the applicant. Issuing bank, which is the importer's bank, the advising bank, which is the exporter's. Issuing Bank, which is the importer's bank. advising bank, which is the exporter's bank and the negotiating bank, which also is the exporter's bank in the exporter's country only. So with the help of this letter of credit cycle and the assurances given by the reputed banks, which are involved in this kind of transaction as intermediary, the payment is assured to the seller for the shipment made.

Choose the one that is best

ICC through its publication i.e. UCP defines the expressions used for parties to the problem and specifically limits the number of participants to whom its rules apply. This perhaps is the best way to find the international solution to a diverse world.

Now friends, it is important to understand that this letter of credit system, which is prevalent for many, many decades, has its origin from the rules and regulations, which are drafted by The International Chamber of Commerce, based in Paris, France, and this particular private organization has been very, very successful in managing and monitoring the flow of international payments through documentary credit through the system of UCP, which is the uniform customs and practices for the documentary credit.

And the UCP rules and regulations were first published by I.C.C. France in 1933. And since then six revisions have come. Rev no 100, 200, 300, 400, 500 and 600. The latest revision came in 2007 and it is called UCP 600. And this is the latest revision. But most of the LC in the world either based on UCP 500 or UCP 600.

So let us look at the latest version of UCP, that is the Uniform Customs and Practices, which is called UCP 600 Revision, Uniform Customs and Practices for Documentary Credit. These are the revised rules which came into effect on 1st June 2007. And they are being used by the banks and the financial institutions around the world for documentary credit. It's not binding.

The letter of credit can go for the earlier version also, for example, the LC can be prepared as for the UCP 500 or 400, of course, 400 is very, very old. Nobody uses 400 now, but UCP 500 is still very popular with many banks. But the latest version remains UCP 600 and majority of the letter of credits in present times, these are based on the UCP 600 version. So Friends, let us try to understand what is this UCP? So UCP is the common reference for the uniform customs and practice for documentary credit, which I just mentioned to you, and it was first published by the International Chamber of Commerce, Paris, France in 1933.

As I just mentioned, the objective of this UCP was to create a set of contractual rules that would establish uniformity to the conflicting national regulations, the differences, the dichotomies, the conflicting nature of the nationals of different countries. So this uniformity is very, very important to be a banker. This uniformity is very, very important to be able to trade internationally. Without this uniformity, the trade cannot happen and the chances of conflict and disputes will increase manifold.

So now this UCP system is now recognized as standard practice by almost more than 38,000 banks in over 196 countries or even more. So, these figures are just indicative figures. The banking practices, especially the international trade financing practices by the banks, they are in major terms, are governed by UCP only.

Choose the one that is best

In the next video, some of the more popular types of L/C s and their features are discussed.

Friends, the most common type of letter of credit, which is normally used in international trade and transactions, is the merchandise L.C. It is also called as the commercial L.C or the trade L.C. So the purpose of this L.C is to deal with the individual transactions of merchandise, commercial transactions or international trade. So majority of the L/C issued are in payment for the goods in shipment or current services performed. Payment is normally made against documents for goods shipped. So the reference of this type of letter of credit is given in Article 1, 2 and 9 of UCP 500. So these are the articles of UCP 500, which deals with this very common type of letter of credit. And a majority of the international trade happens through this kind of L/C. So when we talk about letter of credit, normally by default, we are talking of the merchandise letter of credit in which the importer requests the issuing bank to open the LC and give L/C instructions based on which, a very typical type of merchandise L/C is opened by the issuing bank, which gives the conditional undertaking. And those conditions are documents.

And against those documents, payment is made to the exporter after the compliant presentation. So this is very, very normal, very, very common type of letter of credit, which is very popularly used. Now generally when we are talking of the merchandise L/C we are talking of the individual shipments. So it deals with the individual shipments. So there can be such situations where the same type of transaction, for example, is made month to month for a very long period. So every month there is a transaction happening. And if you go for the merchandise L.C of this type for each and every transaction on a monthly basis, which is of a very similar nature, then you end up paying monthly LC charges to the bank, which comes out to be very costly.

So for example, in this situation, you need credit, a certain type of documentary credit, a credit which is of a different nature. So there can be similar in many other situations where a typical merchandise letter credit may not be the best option. Now the other type of letter of credit, which is called the revocable letter credit. So in UCP 600 by default, all the letter of credit, especially the merchandise letter of credit by default, are irrevocable, which means once it is open by the issuing bank, either on the request of the importer or in the willingness of the issuing bank, the L.C cannot be revoked. But there can be a possibility of creating a letter of credit, which is revocable in nature, which means it can be amended or cancelled by the issuing bank at any moment and without any prior notice to the beneficiary. So Article 6 and 8 of UCP 500 deals with this. In UCP 600 also, there is a provision for the revocable letter of credit, although by default all the merchandise L/Cs even if nothing has been mentioned, are irrevocable, which was not the case in the case of UCP 500. So this is a new development which has happened in UCP 600. If the L/C has been based on UCP 600 by default, it is in irrevocable.

Now friends, there can be the letter of credit, and in fact, majority of such letter of credits are unconfirmed, which means the guarantee, which is associated with the letter of credit, is only of the issuing bank. So in an unconfirmed L.C, there is no further confirmation by a local bank or any other intermediary, any other financial institution. So such kinds of L/Cs are called unconfirmed L/Cs. At the same time, there is a confirmation possible by the local bank or some intermediary, which may be a third country. Or a international intermediary also, wherein the letter of credit, which is issued by issuing bank, which may not be of that stature, it may not be a reputed bank issuing bank or it may be a bank which is not listed in the top 100 or top 1000 banks of the world, so-called first class banks, in which case there is a possibility of the non-payment by the issuing bank.

In such cases, the concerns of the exporter, the credit risk of the exporter is assumed by the intermediary, which can be a confirming bank also, a local bank, which would be able to confirm a letter of credit. So this confirmed letter of credit is a credit in which a second guarantee is added to the letter of credit by another bank. And Article 9 of UCP 500 deals with both the unconfirmed L/C as well as the confirmed L/C. So it can be seen in these articles and there are corresponding articles in UCP 600 also with very little modifications, which deals with both of this type of letter of credit. Now Friends, the most popular and most sought after letter of credit is called the sight L/C or sight letter credit, where the payment is at sight, which means that the drafts and documents are honored if there is no irregularity, if there is no discrepancy, all the documents are in order, by the issuing bank by making payment without any delay.

And this period of payment for sight L/C in the case of UCP 500 is seven working days. But it has been reduced in UCP 600 to five working days. So if the LC is based on UCP 600 and it is sight L/C, which means it is payable at sight L/C, the payment would be made within five working days. Now friends, different from the sight L/C the other type of L.C is called Usance L/C or time L/C where there is a usance period of the credit. So in such types of letter of credit, the draft is honored by accepting it by the issuing bank. It accepts the draft. If there is no irregularity, if there is no discrepancy, everything is in order, for payment, at the future specified date, which can be 30 days later. It can be 60 days, it can be 90 days.

So payment is delayed until the maturity of the draft. So depending on the specified number of days, generally this time, this usance time does not exceed 180 days So, for example, in the case of Indian exports, the Central Bank of India that is a Reserve Bank of India specifies that it is illegal to go in for a contact with the letter credit, which is a usance letter of credit beyond 180 days. Because in Indian context, the guidelines, the foreign policy of India says that the money should be realized by the exporters within 180 days of the dispatch of the goods. Now friends there can be another type of L/C which is called revolving letter of credit, which actually comes into the use in a situation which I just explained to you about the similar type of transaction happening on a monthly basis or on a quarterly basis, on a regular frequency, if some transaction is happening, it is the best letter of credit and it is a cheaper option. Wherein the amount is renewed or reinstated without specific amendments to the letter of credit being needed, it can revolve in relation to time or value. So what happens?

The transaction is very similar, port of loading is same, port of discharge is same. The exporter is same. The Importer is same. What probably can change is the date of shipment, which is on a monthly basis or in some approximate frequency, and the value of the goods may also change, so the dates would be different or the value can be different, but otherwise the description of the goods in commercial invoice is same. The transport documents are similar in nature, which means the requirement of the documents in the L/C The L/C conditions also remain the same. So there is no really any amendment in the letter of credit except for the dates of dispatch, the last date of the letter of credit, or the value of the credit. So that can change, in which case the banks offer this revolving L/C, which would revolve a specified number of times, maybe three times, six times, 10 times, and the overall cost to the exporter and the importer by having this kind of L/C, becomes much more affordable. So banks are able to give better terms because there is no major changes in the letter credit. It is just that the letter credit is revolving. So the value, the amount is renewed actually in this L/C and reinstated otherwise bank has no other work to do for this L/C. So they give better terms in such a case.

Now friends, There is a type of letter of credit which is called the Red Clause Credit. So a red clause credit L.C authorizes the advising bank or the confirming bank, which is a local bank generally, to make the advances against the letter of credit to the beneficiary even before the presentation of the document. So Friends, the purpose of this type of letter of credit, is that the beneficiary, that is the exporters is able to take advances against the letter of credit to purchase raw material, to manufacture the goods. So it basically benefits the exporter.

But at the same time, it also benefits the importer because it facilitates this particular transaction, which is also in the interest of the importer. Now friends, then there is another type of letter credit, which is called the transferable credit. So Friends, this type of letter of credit, transferable letter of credit can be transferred by the original beneficiary, which is named in the letter credit to any one or more of the other parties. So what happens in some cases when the type of goods are very commoditized or in bulk and the procurement of which brings a lot of challenges and where the quantities are very large, the generally the value, the per unit value of such committees is not very high. So it is in the interest of the importer that it provides the transferable L/C so that the original beneficiary which received the L/C If he's not in a position to procure the material within the specific time, he can transfer L/C to another party.

And also, sometimes what happens is that the person who receives the letter of credit is a merchant exporter, and he consolidates the supplies from several manufacturers and the manufacturers wants the letter of credit to be transferred in their name. In many such cases, the letter of credit is also divisible, which means the L/C amounts can be divided among the several other beneficiaries to whom the original beneficiary transferred the L/C. So a transferable, divisible letter of credit, helps the importer to procure the most challenging products, and especially the commodities generally of the lower value. So one example of that is the soybean meal, which is exported from India, from a district called Raipur district in Chattisgarh.

Where there are a lot of manufacturers who extract soybean oil, and the byproduct of that extraction is the soybean meal, which is the animal feed and the cost of such a kind of commodity is very low and which requires the transportation of those goods by sea in the chartered big ships, where the quantity requirements for L/C is very, very high, which is not possible for a single manufacturer to satisfy the importer. So in such cases, the main beneficiary tries to get the transferable divisible L/C and transfers and divides the L/C to several exporters. And the result is that by doing this, it is possible to procure the material in the shipload quantities.

Now Friends in many cases, what happens is that the main beneficiary of the L/C, requires the local bank to open another letter of credit for the third party who can be another manufacturer of the similar goods, which are all the same goods which are mentioned in the letter credit and in which case the beneficiary, what it happens is that he offers the main L.C that is the overseas LC as security to the second L/C of the bank, which can be a advising bank or a local bank which opens a back to back L.C to the secondary beneficiary. It is required Friends, in order to avoid any advances or any extra cost of getting those advances from the banks. So instead of doing that, the main beneficiary is able to get a second credit against the main documentary credit as back to back. So the second credit becomes the back to back L/C. So friends, there are several types of letter of credits, and the ones I just discussed, are a few of the very popular documentary credits, the types of documentary credit in international trading, international transactions and international banking.

Many such documentary credit instruments are offered by the banks. Many a times, they are very innovative in nature and many a times these letter of credits, they are not even mentioned in the UCP 500 or 600. But the banks try to match those innovative documentary credit instruments with the existing articles of UCP 500 and 600.

Choose the one that is best

After the contract is signed between the exporter and the importer, the exporter usually sends the LC opening instructions to the buyer based on the terms and conditions agreed in the contract or the written communication earlier. These LC opening instructions serve as the expected conditions and shape of the LC which would be acceptable to the exporter. Importer on receipt of this document from the exporter creates its own LC opening instructions for the issuing bank and applies for opening the LC in favor of the exporter. Usually, the importer replicates the LC opening instructions sent by the exporter. In this example of the LC opening instructions sent by the exporter, the most common LC conditions can be understood.

The sample copy of a typical format of LC instructions usually sent by the exporter can be downloaded from the resource section of this lecture.

So let us look at this document. So this document is called Letter of Credit Instructions, which is given by the exporter. So Exporter frames this letter of credit instruction, mostly based on the sales contract. So I've given here the sample of one of the letters of credit instructions, which is typically the format which the exporter will be using, would be, like this. The date is there, the name of the buyer there. Whatever the buyer's name is there, he will write the exact name, the address, so that buyer knows that what is in the record of the exporter, what buyer's name is there? Because ultimately these details have to come in the commercial documents. So he writes - gentlemen, following are the particular details we wish to have included in your documentary Letter of Credit issued in reply to our Proforma invoice number.

Or it can be a sales contract number. Now, obviously this proforma invoice or the sales contract, which is very much the same thing, except that the proforma invoice is very minimal in nature. It does not have the kind of conditions which are given in the sales contract. It is not so detailed, but many times for small transactions. instead of an extensive export contract, the trade is done using the so-called proforma invoice, which is very, very similar and the basis for the commercial invoice. So he writes here that in reply to our proforma invoice no. so and so. dated so and so, please instruct your bank to open and issue this credit in accordance with the following terms and subject to the uniform customs and practices for documentary credit by the International Chamber of Commerce publication 500 or it can be 600 also. So if you don't write anything by default, it will be 600. Generally, even today many exporters will go for UCP 500 because they understand it better.

Their staff is well conversant with UCP 500. They have probably not updated themselves, according to UCP 600. So many of the exporters try to get the L/C as for the UCP 500, but it is always advisable to go for UCP 600. The letter of credit instruction format further talks like this that we have made every effort in these instructions to provide you with terms, which can be easily accommodated. So the language of the L/C instruction should be that you are taking care of the interest of the buyer also. And whatever has been understood in the sales contract or the proforma invoice and whatever has been discussed orally or through some kind of email communication even that is quite good. So if you have the written communication in the form of some emails, that can be a very good basis and very good support document with the PI because it would have the agreed terms and conditions in the emails in written form, which is as good as a detailed export contract. So it says that if you or your bank that means the importer's bank, that means the issuing bank, are unable to comply with these terms and conditions, please consult with our office prior to issuance of the letter of credit to avoid any delay or the NON shipment of the goods. So friends, the Int'l trading transactions are of mutual interest to the buyer as well as to the seller. So while the seller expect everything is in order and acceptability scope of the seller, the importer also wants the goods in good quality and good time as well as in the right quantity. So it is in the interest of both to have this type of understanding that what all should be involved in the L/C, which means what all conditions, what all documents has to be incorporated in the letter credit and what is the nature of the L/C? What is the type of letter of credit?

What are the payment terms of the letter of credit? whether it is a sight L/C? whether it is a revocable or irrevocable letter of credit? whether it is a RED CLAUSE letter of credit? whether it is a revolving credit? So the nature of the transaction, the value of the transaction, the understanding, and communication between the seller and the buyer, they will define all these conditions and all those things should come into this document. So it writes that the letter of credit shall be irrevocable, as you can see here, issued under the rules of UCP 500, or it can also be UCP 600. So depending on the choice of both the seller and the buyer. So if the seller says 500 and the buyer says 600, so that should be OK. The credit shall be advised and confirmed by So here the seller says that the bank which is nominated to play as the role of the advising bank as well as the confirming bank, which would be same as per the request of the seller as requested by the seller to the buyer. So he writes the name of the bank, the local bank of the seller. Generally, it is the bank with which the seller has the main business account because it makes things very easy for the seller and if it is possible for the issuing bank as well as for the importer, the buyer, if it is possible to accommodate this nominated bank, it would be good for both parties. So it writes the name of the bank, the address of the bank.

Normally the address is given for the foreign exchange branch of the bank because it is possible that the actual account of the seller may not be in the foreign exchange branch, in which case he will invariably give the bank name along with the address and details of the foreign exchange branch and the other details, the current account number or whatever the business account number is there depending on the country of export. So all this information has been given in this letter of credit instruction.

Further the letter of credit instruction talks about the nature of the letter of credit. That is, the credit shall be freely negotiable, the meaning of which is that the seller would be in a position to use any local bank as the negotiating bank. So freely negotiable means the issuing bank is advised not to nominate by itself a bank, which would act as a negotiating bank. So the credit shall be freely negotiable means that the seller wants the freedom to choose the bank of his choice to act as the negotiating bank for negotiating the documents and getting the remittance from the issuing bank. So this request has been made in this. The fourth request, which is made in this instruction, is that the credit shall show as the beneficiary, the exact name. So he will write here the exact name of the exporter, generally the business name, which is in the bank records also, and in which the current account has been created in the local bank, the nominated bank. So the exact name has to be shown here so that there is no mistake in the letter of the credit. The credit shall be payable in the currency, which is the U.S. dollar in this case.

And the total amount is also mentioned here in order to avoid any misunderstanding or miscommunication. Further, it says that the credit shall be payable at sight, which means, as I mentioned to you, that the request of the seller is to get sight L/C, which is payable immediately on presentation of the documents, so there is no usance period. Or if it is usance period is there as agreed in the sales contract or the proforma invoice So it will right here the number of days after which the payment will be made after acceptance of the complaint documents. It may be 30 days, it may be 60 days, it may be 90 days. So whatever the time period is there, it will be mentioned here.

The usance period will be mentioned here. The credit shall show that all banking charges except for the seller's bank charges are for the account of the applicant. Now, here, as I mentioned to you, the applicant means the buyer, the importer. So for the banking purpose, the applicant is the buyer. And except for the charges, which will be on the account of the seller's bank charges, the local bank charges, all other charges have to be in the applicant's account. So this request has been made in the L/C instruction. All reimbursement charges are for the account of the applicant. So all kinds of letters of credit-related charges, reimbursement charges. So all these charges have to be on account of the applicant. Now applicant will not have any objection to this. The buyer will not have any objection to it for the simple reason, if even if it is in the account of the exporter, it will reflect in the price.

Because if the agreement was that those certain charges have to be paid by the beneficiary, that means the exporter. Obviously, the export price will be increased by the exporter. So ultimately all the cost and the payments has to be paid by the buyer only. So this kind of request is very much logical. and valid Now another condition and the request which has been made is that the confirmation charges, the local conf charges are on account of the applicant. Now, here there can be some kind of differences in the opinion that it is in the interest of the seller to have the local confirmation. So the applicant can say that the charges will be made by the beneficiary. But again, as I mentioned to you, that the export price will go up and the requirement of the confirmation would arise if the issuing bank, which has been discussed in the past in the communication, happens to be a bank which is not in the list of the first class banks. And if it is not in the first-class list of banks, so the contention of the buyer would be on the weaker side.

And the seller would say that since the bank is not having the kind of due diligence which is required in a transaction, it is the right of the beneficiary to have the local confirmation for the safety of the transaction. So in that case, logically, it would make sense to have this request that the confirmation charges will be borne by the applicant. That means the buyer. Now next request made in the letter of credit instruction, is that credit shall show that all the charges for amendments to the credit, including related communications expenses, are for the applicant to be paid, which means it will be to the account of the applicant. So again, friends, the same thing comes here that the very clear instructions are been given to the applicant.

And for some reason, if there are some discrepancies and the differences in the letter of credit and some kind of amendments has to be done, obviously, the fault is not of the beneficiary. So obviously, it is very logical to ask for this kind of condition that all these expenses will be to the account of the applicant. Now, the other instruction which is given is that partial shipments are permitted. So depending on the nature of the goods and the agreed terms, It is possible that the goods may not be ready by the time the export has to be effected, the shipment has to be made and if it was agreed by the buyer that he's flexible about the quantity.

So in case, the L/C is made for a certain quantity and that quantity is not available before the due date. So partial shipment should be allowed. And it would also be in the interest of the buyer, because if it is not allowed and the goods are not ready depending on the nature of the goods, then the whole shipment will not reach the buyer, which will not be in the interest of the buyer.

Now another condition here given Trans Shipment shipment not allowed. Now trans shipment means the goods are being shipped by whatever means. Obviously, transshipment question comes for the sea because mostly in the air it is very difficult to see whether trans shipment is there or not there because the shipment by air is a little more complicated and very fast. So this question of trans shipment mostly comes in the transportation by sea wherein trans shipment means that the goods are unloaded from the ship to be further loaded during the transit at some middle point, which means the ship, which is carrying the goods, is not going directly to the port of discharge from the port of loading, which actually is not a very good idea because in the sea shipments, sea transportation, loading, unloading is a major, peril, major transit peril. So normally buyers will not agree to the transshipment unless the situation is like that, that there are no regular sea routes and sea services from the port of loading to the port of discharge, as per the contact. In which case trans shipment may be necessary.

And further in the case of the transshipment, normally the Marine insurance charges are also increased. So again, it is not in the interest of the buyer. And if the direct routes are available and the possibility of sending the foods directly in the single ship is there, then obviously it will be in the interest of the buyer as well as in the interest of the seller to ship the goods without trans shipment So generally this condition would be that the trans shipment is not allowed. would be there. Now shipment from any Indian port or airport. So here! A lot of flexibility is being taken by the seller, both in terms of the port of loading, which can be any port in any large country like India in this example, as well as the mode of transportation. So the choice of mode of transportation, that freedom has been taken by the seller in this. And again, it would not be of major concern to the buyer because it will not really make a major operational issue for the buyer. So generally, this kind of request would be very much compatible and very much desirable by the Seller, and it will not really affect the interest of the buyer.

The letter of credit expiration date shall be the date here mentioned, generally, it would be the date two to three weeks later to the desired shipment date, the last date of the shipment. The expiration should allow for sufficient time for the presentation to be made to the local bank for negotiation with the issuing bank. So generally, it is always a good practice to have at least two to three weeks gap between the last date of the shipment of the goods to the expiry date of the letter of credit. Here, the latest shipping date is also mentioned here, which would serve as the date beyond which the bill of lading would be termed as stale, which is not be the Clean onboard Bill of lading, which is the desired condition in the interest of the buyer. So this last date of shipment, the latest shipment date will be mentioned here. Now here in the L/C instruction the seller requests for the documents, which would be mentioned as the conditions of the letter of credit. So it would use these words, Full Set Clean Onboard Ocean Bill of Lading or AWB consigned to the issuing bank. So here the request of the seller is the name of the consignee to be mentioned as the issuing bank. So it will be a very safe condition request for the seller, because if it is consigned to the issuing bank, the bank's interest as well as the interest of the seller would be protected and the buyer will not be affected because ultimately buyer has to pay the money to the issuing bank and obtain an no-objection certificate from the issuing bank. The moment NOC is issued, even if the bank is the consignee, the bill of lading is consignee named, which means it shows the ownership of the goods to the issuing bank until the NOC is obtained by the importer from the bank. So it makes a lot of sense that the name of the consignee is there. So it is a consignee named Bill of Lading wherein the consignee name requested is the issuing bank.

And it is a very, very smart and very safe request by the seller, which would be normally acceptable to the buyer if the intentions of the buyer are good and if he is willing to pay the total amount to the issuing bank. he does not have any other kind of intention. It would really not be objectionable by the buyer. And he will agree to this requirement of having the Consignee named Bill of Lading and consigned to the issuing bank. The name of the exporter would be there in the documents, but the Consignee name would be the issuing bank. And here you will be writing the other documents, which have been agreed between the buyer and seller, as per the requirement of the customs of the port of discharge, which means the customs of the country of the buyer, and normally it would be the certificate of origin, or the quality certificate or maybe the insurance certificate, depending on whether it is a CIF contract or C & F contract or FOB contract. So what international commercial terms have been used, which INCOTERM has been used for the delivery. So depending on those delivery terms, certain documents may be requested by the buyer and agreed by the buyer in the communication. So those documents which the seller actually can procure, so it should not contain any document which is not in the scope of the exporter, to be able to procure locally or by any means. So any document which is possible and which is doable will be mentioned here. And it writes, your cooperation is very much appreciated.

Please contact us for any questions that you may have. So this is a very professional type of communication which is made by the seller to the buyer while giving the letter of credit instructions So, friends, this is a very good starting point of the international export transaction, wherein the seller gives point wise requests to the buyer to be incorporated in the LC opening instructions. The other document which now will be created by the buyer and submitted to the issuing bank, based on which the issuing bank will open a letter of credit.

See the sample of a typical international letter of credit. Download the sample from the resources section of this lecture.

This is an optional assignment and is for your self study and learning. It is not mandatory requirement of the course. If you wish to solve this assignment and submit the same to the instructor you can send the solution through direct messaging on UDEMY to the instructor. You may alternatively like to share the solution in the Q&A section if you wish.

Optional assignment no. 1

Based on the sample international letter of credit as given in the download section of this lecture, write down all the main conditions of the letter of credit, which may be most important for the exporter. You can have a look at the LC opening instruction sample already shared in the download section of the resource section of lecture no. 14.

Best wishes.

What are the common L/C flaws to look for when a seller receives the L/C and before accepting it for the seller? Watch the next video.

Hello friends, welcome back to the course. So friends, now your knowledge of L / C is getting strengthened and you are now able to understand the fine prints of the letter of credit, you can understand how the letter of credit works. What are the different types of letters of credit are there? And what role do the credit opening instructions play? And what role does the document that the exporter provides to the importer in relation to the instructions, this is a very, very important document. So friends here everything is very logical. The system works very logically. It has proven itself over the last almost 80 or 90 years. The system works very smoothly and not many changes have occurred. Certain changes made have been reflected in the various new versions of the UCP, uniform customs and practices, the latest version of which is UCP 600. Let's now look at when the LC is opened by the issuing bank and advised by the advising bank to the beneficiary who is the exporter.

It is now the exporter's turn to review the letter of credit and decide whether it is acceptable or not, and to check whether the advised letter of credit corresponds to the LC Instructions given by the beneficiary to the applicant that is the importer, through the L / C instructions. And if there are differences, changes or deviations from the given LC instruction from the exporter to the importer. Whether these changes are acceptable, whether the given conditions is feasible in the letter of credit whether the documents required by the LC, whether the exporter can obtain these documents. So there are certain fine things that the exporter, i.e. the beneficiary, should check before acceptance of the letter of credit, advised by the advising bank.

So I am now sharing a checklist of the things that should be checked step by step before accepting a letter of credit, which is a new letter of credit recently advised by the bank. So let's take a look at this checklist. Now it must first be checked in the letter of credit whether the name and address, which is mentioned in the letter of credit of both parties, the beneficiary and the applicant the address should be correct. The name should be correct. Since these addresses will appear on several documents and It should match the correct name and address, the correct spelling, and even the correct format. Everything should be sufficiently the same. So this first step is very, very important.

Verification of name and address. Second, in the case of the letter of credit, the beneficiary must check whether the credit amount that is the LC amount, corresponds to the reality, the calculation, and the actuallly the exporter had indicated to the beneficiary in the letter of credit instruction. Whether this is sufficient? So this needs to be checked. Second thing to check. The third thing to check is the list of required documents, Commercial documents, L / C documents, they are called principle documents are also the same. So basically principle commercial documents, which are also called letters of credit documents, These are listed in the letter of credit and may vary depending on the terms and conditions.

It must therefore be checked here that these documents, which are required by the LC, whether they are obtainable and according to the Conditions of sale and as per the sales contract or any communication between the exporter and the importer by email or in writing. These written documents should be checked to see if there is a discrepancy in the letter of credit. Fourth thing to check, the shipping and destination locations must be checked to ensure that they are correct with the port of loading, if the L / C is flexible as to the port of loading, this is good for the beneficiary. And when the beneficiary was asked in the LC instruction that the flexibility of the loading port or if the name of the port is given, this is convenient for the beneficiary to use And if it's OK with the beneficiary, it will work. The point of shipment that is the port of loading and the destination is the port of discharge has to be checked.

The fifth point to check is the insurance coverage and the terms and scope of the Insurance. What is the insurance coverage requirement stated in the letter of credit? Whether these requirements can be met, is obtainable and according to the agreements in the sales contract or in the written communication between exporter and importer. So these have to be checked. So friends, the sixth thing to check on the letter of credit is the date of shipment. which is permissible for the dispatch of the goods, the specified date, whether manufacturing, packaging, preparation of the documents and all formalities to ensure that the space can be booked on this ship that is sailing from the port of loading to the port of discharge before this date. So these things have to be checked and requested by the beneficiary from the shipping company, the C&F agent and who is responsible for shipping.

These things need to be clarified whether the dates are convenient and doable. The seventh point to check is the expiry date of the L/C, according to this checklist? whether it allows enough time for the submission of the draft and the documents. Usually, banks allow 17-18 days after shipping for presentation, according to the latest UCP, this type of amount should be present in the L / C. This amount should be stated in the letter of credit, in particular, the expiry of the letter of credit be consistent with this schedule.

The last thing to check Friends in the letter of credit is the description of the goods. It should be logically and technically, it should conform to the agreements and all documents such as certificate of origin, all other documents that have to be obtained from third parties, the mentioned description should be feasible and doable. It should match the ITC HS code on which the entire deal is based on, prices are based on. Because if the ITC-HS code changes, the entire calculation can change. The description of the goods must be correct from the point of view of the importer as well as the exporters. And these descriptions should be given very clearly and correctly in a very simple way. It shouldn't be too complex. It shouldn't be too difficult to understand. So this has to be checked.

The worst thing which can happen to the seller is the documents presented to the issuing bank are rejected. It is better to learn about common documentary discrepancies observed by several international banks worldwide. And it is better to avoid such discrepancies. Watch about it in the next video.

Friends, I will share with you now what are the common discrepancies which happen in the letter of credit when the exporter prepares the goods and ship the goods, procure the documents and then presents the documents to the negotiating bank and the bank negotiates with the issuing bank, sends the documents, the common discrepancies which are observed by the issuing banks around the world. I will just share all these discrepancies and the exporters should be very much aware and should be knowledgeable about these discrepancies so that sufficient care is taken by the exporter while dispatching the goods, procuring the documents and making sure that that process of dispatch of the goods and the procurement of the documents does not result into any of these types of discrepancies. So let us look at what are these common discrepancies among the letter of credit documents. So these are the discrepancies normally observed in export documents and the exporters are advised, to keep them in view while tendering the documents for the negotiation by negotiating bank.

The very common type of discrepancy, which is observed in general that when the presentation is made, credit is already expired. It normally happens when the expiration date of the letter of credit is very close to the last date of the shipment. Sufficient time is not allowed by the letter of credit for the presentation of the document. So if that due diligence has been done, that care has been taken, chances of this discrepancy happening is very less. Second very common discrepancy, which has been observed in many letters of credit based presentation documents is that the shipment date in the transport document is later than the latest date by which the shipment must have been done. So the last date of the shipment has been crossed and the documents, the transport documents have become stale. So this is a very, very common discrepancy. So sufficient care should be taken by the beneficiary to make sure that this kind of situation does not arise.

The third very common discrepancy in the presented documents is that the bill of lading is not clean on board B/L It is a claused B/L, which means either the quantity is not as per the Comm Invoice, and it is the gap between the quantity mentioned in the Comm Invoice, is quite different from the actual situation, or the goods which have been loaded on the ship are damaged or have become dirty, or some kind of problem has happened with the shipment as can be inspected by the captain of the ship. So in such a case, the B/L will be claused B/L. It will not be a clean bill of lading. Most of the required Clean Onboard B/L, which in such a case, is not a clean bill of lading. So sufficient care must be taken by the beneficiary to make sure that the loading of the goods or any other reason should not result into Claused B/L. Another very common discrepancy, which is observed by the issuing banks around the world, is that the documents were presented to the bank at a date which was beyond the allowed date of the shipment documents. So as I told you that generally, the time allowed is 16 to 18 days after the shipment of the goods and the shipment date on the documents. So if the documents are reaching the issuing bank at a date, which is beyond this allowable period, the presentation will not be compliant. Friends another very common discrepancy, which is observed, is that the shipment is not to as per the quantity which has been required by the letter of credit.

It generally happens when the partial shipment is not allowed. In such a case, if the quantity does not match with the quantity of the LC required quantity. If it is short, then the documents will be non-compliant. So it is a short shipment, so obviously, the bank will raise the objection. Another observed discrepancy is that the credit amount, which is mentioned in the commercial invoice and which is demanded by the exporter, is more than the one which is allowable in L/C. So this again is a discrepancy which is very common. Then another discrepancy, which is observed very commonly is that the insurance requirements, have not been met by the beneficiary. So as was demanded by the L.C, the type of insurance, the coverage or the value of the shipment, the value of the insurance which was required, and which is as per the trade practices, if it is not done by the exporter in a way which is very clearly mentioned in the letter of credit, then it would be under insured documents. So This means the insurance part has not been fully taken care of.

Friends, another discrepancy that is commonly observed by the issuing banks around the world is that the description of the goods on the invoice does not match with the description given in the letter of credit. Now, that is very, very important. The goods which have been shipped, the documents which have been created for that shipment, those information in all the documents, main documents, which are the L/C documents, the description should be reasonably matching to what has been demanded in the L/C. If there are differences, if there variation in the description and the details which are indicated in the letter of credit, the discrepancy will be raised by the issuing bank and the bank may not accept the documents.

Then Friends the documents sometimes indicate the marks and numbers which are different from what the LC has mentioned about, in the packing list, the marks and the numbers, the part numbers, the way they have been put on the documents. If they do not match with the requirements of the conditions of L.C, the documents may not be accepted by the bank. Friends, another very common discrepancy which is observed in the presented documents is that the documents mentions that the goods have been shipped and they have been decked, which means the goods have been put on the deck. While the requirement of the L/C made it very clear that the goods should not be decked. They should be below the deck. If that condition has not been met, the documents may be rejected by the issuing bank. Many a time Friends the transport documents, b/L, and the insurance documents, and the bill of exchange, are not properly endorsed, they are not properly signed and they are not been signed by the right person as per the guidelines of the UCP. The person who's authorized to sign is not as per the requirement of the UCP. The documents may not be accepted by the issuing bank. Friends if the documents which are asked, in the letter of credit, if any document is not there, any listed document is not in the presented documents.

The documents may not be accepted by the bank. Many a time what happens that instead of the insurance policy, which is demanded by the letter, that the beneficiaries tend to supply the insurance certificate rather than the insurance policy. So that difference between the policy and the insurance should be very clearly understood by the exporter. And he should make sure that if the policy is required, then the policy should be given. If the insurance certificate is allowed, then the certificate can be given. So these mistakes should be avoided. Another very common type of discrepancies which are there and observed in the world around with the issuing bank, is with regard to the measurement and the weight of the shipments, which may differ from one document to the other document. Friends, all the documents which are presented to the bank against a particular LC are for a particular shipment. So the various measurements and other identification of the shipment should be the same. Because the shipment is same.

Then Friends, the type of transport documents which can be of different nature, it can be house bill of lading, it can be combined transport documents type of B/L, it can be the charter party bill of lading. So the type of transport document which has been mentioned in the L/C, bill of lading is to be procured. So sufficient care must be taken by the exporter to get the right document for the transport document, which is acceptable to the bank and which is demanded in the LC. If it is not so, the documents may be rejected. Now Friends, another very common discrepancy, which is observed, is that the insurance cover or sometimes some more documents also are indicated in a currency other than the currency which is demanded in the LC. So all the documents should adhere to the currency, which is the currency if it is the U.S. dollar. the amount shown in all the documents, including insurance cover, should be expressed in the same currency that is the US dollar. If those differences happen, the documents may not be accepted by the issuing bank. And then, of course, the signatures, if these signatures are not there in any document or the signature and the endorsement has been done by a party that is not as of the UCP guidelines. So those can be the reasons of the rejection of the documents.

Then the transport documents sometimes may have the names of the exporter or the consignee name, consignee party, the names may differ. They may not be as per the other documents, the comm invoice and very importantly. as per the LC, so the transport documents like Comm invoice is very, very important document that is the main negotiable document, and if the wrong parties have been shown at the wrong place, it can lead to the rejection of the documents. by the issuing bank. Then, the discrepancies may also arise in the bill of exchange, which you may not be drawn as per the tenor, which is stated in the documentary credit. So the bill of exchange should check the tenor, which is mentioned in the LC, and accordingly, the draft should be presented in the form of a bill of exchange. Then the nature of the risk, which has been covered by the insurance coverage obtained by the exporter, may not match, sometimes, with the letter of credit. The extent of insurance cover, the nature of the insurance cover the scope of the insurance cover should match the risk coverage requirement of the LC.

If those risks as demanded by the LC are not covered, the documents may be rejected. Then friends, it is very commonly seen that the insurance which has been taken, the start date, that is the effective date of the shipping document may not match with the what is given in the insurance cover. Those dates should be sufficiently effective, logically effective. And the due care should have been taken by the exporter to make sure that the insurance coverage have the right dates, the effective dates from the start to the end. It should match with the shipment needs and the requirement of the L/C. Friends, in the case, when the terms of delivery in accordance international, which items are CnF or CIF, wherein the the onus of payment, friend, of the freight, ocean freight is on the exporter, the beneficiary? The transfer document should very clearly mention that freight has been already paid. It is very obvious, it is required, even if it is not mentioned in the letter of credit. So the transport document in the CNF terms or the CIF terms or D terms transport document which has been obtained, should indicate that freight has been already paid.

If it is not, the documents may be rejected, then Friends as most of the LC, ask for the clean onboard bill of lading, the transport document must indicate - shipped on board, then only it will be called as the clean onboard bill of lading. It should not be closed, it should be clean and then it should be on board, shipped on board, stamp must be there on the transport document to be able to be accepted by the issuing bank. Another type of very common discrepancy which has been observed that the amount shown on the invoice and the B/E may not match. So those mistakes should not happen. Shipment made between port other than those stated in the L/C. Again, as I mentioned to you, that when you accepted the letter credit, you have checked the points of shipment and the destination that is the port of loading and the port of discharge. So in the transport document, the port of loading and port of discharge, wherever it is given in the L/C, it should match. Then the issue of the trans shipment or the part shipment, partial shipment, as well as the transshipment, whether it is allowed or not allowed, that has to be checked up And if it does not match with the LC, for example, if the transshipment is not allowed.

But the documents indicate that the Trans-shipment has happened or the partial shipment is not allowed, but the actual shipment quantity is short and it is in part. So Friends, these were some very, very common discrepancies, which I wanted to share with you. So this checklist is very, very important and it should be handy with the exporters. They should write it down in this course. In the resource section, you can download the checklist both for checking the LC before acceptance as well as the common discrepancies which are observed around the world by issuing banks, those both checklist I've given in the resource section and you can download. You can keep it handy for the smooth conduct of the export shipment and due diligence. and due care should be done by the exporter while obtaining all the documents for presentation to the bank and make sure that no such types of discrepancies which are mentioned here or any other type of discrepancies which may arise depending on the nature of the goods being shipped and the nature of the contract, which is there between the exporter and the importer

In the next few videos, Dr. Jain explains what are the different types of L/C related costs are there. And who pays what?

Friends welcome back to the course. Now let us try to understand. What are the different fees which are involved in the traditional LC Cycle? It is very, very important to know this cost and who bears this cost. So Friends, let us first try to understand how the L.C fees, different types of fees are split between the importer and the exporter, which means the buyer and seller that means the applicant and the beneficiary. So, Friends, it all depends on the arrangement between the buyer and seller. So it's more of a mutual understanding between the seller and buyer.

The cost in the beneficiary's country are usually the responsibility of the beneficiary and the costs which are in the applicant's country are the responsibility of the applicant. However, buyer and seller can arrange to split letter of credit fees in a variety of ways. So which means it is possible that all the costs, whether it is in the applicant's country, buyer's country or seller's country may be borne by the buyer or it may be borne by the seller, whether it is the opening charges or the advising charges or negotiating charges or the documents examination charges or the reimbursement charges or amendment charges, whatever the cost.

It is possible that the beneficiary will bear all the cost. But ultimately these costs would be reflected in the price and the price has to be paid by the buyer only. So at the end of the day, for the goods as well as for any related cost, ultimately the payment has to be made by the buyer only.

But in usual terms, let us look at what are the different costs and who pays for them. So suppose we want to see what are the costs, which are typically paid by the beneficiary. The first important cost is the L/C advising cost, which compensates the advising bank for authenticating the L/C, sending the L/C to the beneficiary, logging in the LC into bank's liability system. The second cost, which is to be generally paid by the beneficiary, refers to the negotiating bank and it is for the document's examination. So negotiating bank examines the documents, which is normally the percentage of the drawing amount, but subject to a minimum charge, which may range from anything between $150 to $250, or maybe the percentage of the total drawing amount.

Another cost, which is usually paid by the beneficiary is the discrepancy cost. So if the documents are discrepant, if there is any discrepancy, so negotiating bank would charge discrepancy cost for the purpose of additional work involved, including the rectifying discrepancy, if any, if it is possible, or arranging for the payment with the discrepant documents. So it is possible that the bank would take responsibility of some minor discrepancy and will assure that it will arrange the payment. So but it will charge for this. So these are two types of discrepancy charges. Normally these costs, discrepancy costs are generally unpredictable. So buyer will never pay for this cost. So this cost has to be definitely borne by the beneficiary. This is the only cost, actually, which is out of the expected costs, And the same has to be paid by the beneficiary. And generally, it is not reflected in the price.

Friends in addition to those costs, I just mentioned there are costs, which have to be paid by the beneficiary, which relate to the communication cost, Telex and Comm cost. When there are discrepancies or for the following up for the payment. Only for that kind of communication, additional costs have to be paid by the exporter. But otherwise the normal course of communication, normally negotiating banks do not charge anything. So what generally exporters could do that they should try to fax the query to the buyer directly to work out any issues with payment since it would be definitely cheaper for the exporter.

Then the cost related to courier and postage for sending the documents and drafts to the issuing bank or reimbursement bank. So generally what happens is that issuing bank also selects a reimbursement bank, which reimburses the payment. So the cost involved in sending the original documents to either the issuing bank or the reimbursement bank, the cost has to be paid by the beneficiary. Similarly, the charges for a reimbursement bank, if it is there if the issuing bank selects a reimbursement bank, those charges are typically paid by the beneficiary and usually range from $150 to $250. So these are the very common costs that are paid by the beneficiary.

Now friends, let us look at what are the costs which are associated with the applicant that is the buyer, especially the cost of letter of credit and its fees. So Friends cost of opening L/C varies from country to country. But as a thumb rule, in most developed nations, Western nations, it ranges from three to four percent of the LC amount. Which if it is in excess of one hundred thousand dollars. But if it is less 100,000 dollars, that is the L/C amount is less than 100,000 dollars, there may be minimum charges which would vary from bank to bank.

And Friends in the underdeveloped countries, the L/C issuing charges, as well as the negotiating charges, can be more than 1.5 percent of the total L/C amount So it should be noted that the cost of issuing a letter of credit as well as the cost of negotiating the L/C are very much comparable.

In addition, Friends, for the importers who do not have a credit line with the bank with whom they are getting the L/C issued, there may also be the cost of using the credit facility because the amount has to be paid by the bank. And for that period, the bank will definitely charge for extending the credit line. Unless the bank has asked for the hundred percent margin money, in which case this cost would not be charged

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Compared to the paper-intensive and time-consuming processes involved in the traditional methods of trade finance, by digitizing the end to end exchange of information and streamlining the process of LC issuance and confirmation, all trade participants achieved a significant reduction in processing time and costs using the new emerging Blockchain based letter of credit. In next several videos Dr. Jain has discussed several aspects of blockchain based letter of credit system.

So, friends, this is a very, very basic cycle, which I just told you about the LC, the traditional LC. Now friends, there is a new document recently. In the operation of LC, since many decades, no major change had come in the payment systems through documentary credit. But recently, friends blockchain technology has provided new ways of operating. LC wherein role of banks is useful but not necessary.

And new blockchain based platforms, consortium are emerging in the market, which are making the operation of international payment through LC, which is based on blcokchain, cost effective. And it takes very less time and it is really very convenient. It is in real time. And the single document that is the LC opening instruction itself becomes the letter of credit on the block chain, which is advised to the exporter and governed by the multi signatory access mechanism, wherein all the major parties to the transactions have access to the blcockahin based single document system of network. It makes the operation of the new type of credit very cheap and very less time consuming.

It has been observed that in recent time the blockchain based LC took just five to six hours as against five to seven days, which traditional LC takes and there has been a significant reduction in the cost of operating LC

So let us know try to understand the concept of the Blockchain based based L/C. So basically it has been proposed that there are mainly seven steps to a Blockchain based L/C transaction cycle. And what are these steps? The importer creates an LC application for the importer's bank to review and store it on the block chain platform or the network. The importer's bank receives notification to review the letter of credit and can approve it or reject it, based on the application type, the data provided and the conditions which are mentioned.

Once checked and approved by the importer's bank, access is then provided to the Exporter's Bank that is the advising bank automatically, for their verification, endorsement and the acceptance by the exporter. The exporter's bank in this next step, approves or rejects the L/C. If approved, the exporter is able to view the LC requirements on the same platform. So permissions are granted step by step to the parties involved. So if the issued letter of credit is approved by the advising bank, that is exporter's bank, the exporter is able to view the L/C requirements, conditions included and is prompted to review through the complete application, the exporter completes the shipment. Adds invoice and export application data and upload the photo images of any other required document in a prescribed manner. Once validated, these documents are stored on the Blockchain.

In the step number of five, the documents are reviewed by the Exporter's Bank, which approve or reject the application. The documents, which are submitted by the exporter, are viewed by the Exporter's Bank. That is the advising bank, which now is acting as a negotiating bank which approve or reject the application. The importer's bank reviews the data and images against the LC requirements if it has been approved by the negotiating bank and it is willing to negotiate further, marking any discrepancies for review by the importer.

Now, this review by the importer is the subject of the debate. How and whether it is to be done? because ultimately the payment has to be made by the bank not the importer in this case. But depending on the platform, the depending on the smart contract and the immutability, it is very much possible that importer is able to do it. When approved the L/C goes straight to the completed status or is sent to the importer for settlement. If required. due to the discrepancy, the importer can review the export documents and approve or reject them.

So depending on the nature of the discrepancy, if it is acceptable to the importer, the importer can still accepted it and the payment would be made to the exporter. So these are the seven steps, friends, very basic step of the Blockchain based L/C

So what happens that the traditional L/C Cycle has not really seen the kind of overhaul which is required over so many decades. Now this letter of credit, which is based on the BLOCKCHAIN looks something like this, the seven steps, which I have just discussed with you about this Blockchain based LC Cycle, you can you can easily understand that there is only one platform. And that is the Blockchain network, also called the Blockchain platform. On this platform Blockchain platform, the activities, whatever are taking place is over the single document and that starts with the L.C opening instructions. This blue box you can see here. Importer submits the LC opening instructions and conditions on the bank's Blockchain platform.

Now here itself this L.C opening instruction itself becomes the letter of credit. This green box you can see here. But it is the same platform. It is the same document. So there is no manual system here. And it's this platform is a multi signatory access platform wherein the parties can be importers, importer's, bank, exporter and exporter's bank. So at the right time, the access to all these parties are available on the single platform. On the single document itself. So there is no two documents. It's only just one document, a single document, which is a immutable, which is sacrosanct, and it contains all the information, conditions and the requirement of the Importer as well as the ones which are approved by the importer's bank. Now once it becomes the full fledged L/C, you can see this red box here in this red box, you can see that the advising bank verifies and endorses and exporters either accept or reject the letter of credit. So if it rejects, it is visible to the importer and the importer's bank in real time, whether it has been accepted or not. So there is a time bound acceptance or rejection, depending on this letter of credit on the Blockchain platform, which is now in the form of a smart contract. So this smart contract, which is having a lot of automatic features, a lot of features which are available through the robustness of the block chain technology and the single network, Single Platform and single document gives the convenience, speed and very high potential of the reduction of the cost because there is hardly any manual work involved. So once it is visible to all the signatories, multi signatories who have the access to the permission data on this document, it is happening through automatically rule. So there is no manual work involved. So obviously the cost reduction is very, very high. So herein if any amendment is required and it is visible in real time, if the amendment is made by the importer or the importer's bank, it is easily available and viewable by the exporter's bank as well as the exporter. So any unwanted amendment or any changes in the L/C has to be approved by all the parties.

If it is not, then it will be automatically red flagged in real time. So you can see here that this whole system, what it makes is that it makes this whole transaction of the credit of the letter of credit so simple and fast, something similar to what we know about the credit card. So if that happens and because of the volume and because of the exclusion of any manual work, obviously all the parties are happy. The cost reduction possibility is very high and.

With this cost reduction and convenience, which is available on the BC based L/C platform, what happens is that the volume is definitely going to increase, for example, from 10 to 15 percent of the total international trade financing, this figure can increase many fold. So banks are also happy because of the volume they receive without putting too much off efforts, whether it is a main L/C or the amendments or the negotiation or the release of the payment. So what happens? The situation is Win-Win for both the importer as well as the exporter and the importer's bank as well as the exporter's bank. So this is how friends it works and. This kind of technology change, which is really incredible and was not seen for so many decades in the past, so Friends obviously this technology is definitely going to revolutionize the way L/C operations are handled

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