Role of LC in International Trade Finance
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ROLE OF LETTER OF CREDIT
IN INTERNATIONAL TRADE FINANCE
Prepared By
Muhammad Yasir
MTO (HR)
National Bank of Pakistan
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What is a Letter of Credit?What is a Letter of Credit?
• Document and undertaking issued by a bank
• At the request of the applicant (buyer, importer)
• In favor of a beneficiary (seller, exporter)
• Substitutes the bank’s name and credit risk for that of the applicant (buyer, importer)
• Guarantees payment of a customer’s draft up to a stated amount for a specified period
if certain conditions are met
• Document and undertaking issued by a bank
• At the request of the applicant (buyer, importer)
• In favor of a beneficiary (seller, exporter)
• Substitutes the bank’s name and credit risk for that of the applicant (buyer, importer)
• Guarantees payment of a customer’s draft up to a stated amount for a specified period
if certain conditions are met
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Letter of CreditLetter of CreditSummary of a contract between seller and buyer with the bank(s) as referee.
Governed by UCP 600
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WHY HAVE A LETTER OF CREDIT?WHY HAVE A LETTER OF CREDIT?
IF I SHIP GOODS,WILL YOU PAY?
IF I PAY, WILL YOUSHIP THE GOODS?
SOLVES ISSUES OF MUTUAL MISTRUST BY USINGBANKS AS ARBITERS
NEGOTIATE L/C TERMS BEFOREENTERING A CONTRACT
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TRADE FINANCEIMPORT LETTER OF CREDIT
TRADE FINANCEIMPORT LETTER OF CREDIT
1) NBP ISSUES ITS LETTER OF CREDITTO THE EXPORTER’S BANK ABROAD
2) EXPORTER SUBMITS SHIPPING DOCUMENTS TO THE FOREIGN BANK
3) FOREIGN BANK REVIEWS AND SENDS DOCUMENTS TO NBP
4) NBP REVIEWS THE DOCUMENTS AND IF DOCUMENTS COMPLY WITH THE L/C, NBP PAYS
THE PROCESS LOOKS LIKE THIS. . . . . . . . . . . . . . .
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LETTERS OF CREDITWHO ARE THE PLAYERS?LETTERS OF CREDITWHO ARE THE PLAYERS?
NBP’sCUSTOMERIMPORTER
(Buyer)
FGN BANK
CUSTOMEREXPORTER
(Seller)
NBP(ISSUING BANK) L/C
FOREIGN BANK
(ADVISING BANK)
CONTRACT
(MAY CONFIRM)
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IMPORT L/C PROCESSINGDOCUMENT FLOWIMPORT L/C PROCESSINGDOCUMENT FLOW
L/C
CONTRACT
documentsPAYS
DOCUMENTS
FGN BANK
CUSTOMEREXPORTER
(Seller)
NBP(ISSUING BANK)
NBP’sCUSTOMERIMPORTER
(Buyer)
FOREIGN BANK
(ADVISING BANK)
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NATIONAL BANK located in the Pakistan
Issuing / Opening Bank located
overseas
Advising / Confirming Bank
Ap
plicati
on
Beneficiary
Seller
Exporter
Docu
men
ts
Contract
Goods
Docu
men
ts
Letter of Credit (Sight/Time)
Documents
Applicant / BuyerImporter
L/C
Export Letter of Credit ProcessExport Letter of Credit Process
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TRADE FINANCELETTER OF CREDIT DOCUMENTS
TRADE FINANCELETTER OF CREDIT DOCUMENTS
BANKS DO NOT DEAL IN THE MERCHANDISE WHICHTHE LETTER OF CREDIT COVERS
BANKS DEAL ONLY IN
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THE BANK’S COMMITMENT IN THE LETTER OF CREDITTHE BANK’S COMMITMENT IN THE LETTER OF CREDIT
• AMOUNT
• EXPIRY
• LATEST SHIPMENT DATE
• DOCUMENTS REQUIRED
• AMOUNT
• EXPIRY
• LATEST SHIPMENT DATE
• DOCUMENTS REQUIRED
THE L/C SAYS WHAT IT MEANS & MEANS WHAT IT SAYS
PAYMENT WILL BE MADE ONLY WHEN ALL TERMS AND CONDITIONS ARE MET
KEY ELEMENTS
RESOLVE UNCLEAR ITEMS PRIOR TO SHIPMENT
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THE DOCUMENTS REQUIRED BYTHE LETTER OF CREDIT
THE DOCUMENTS REQUIRED BYTHE LETTER OF CREDIT
ALL DOCUMENTS MUST CONFORM TO THE LETTEROF CREDIT AND BE CONSISTENT WITH EACH OTHER
THREE FORMS OF DOCUMENTS:
FINANCIAL DOCUMENTS
TRANSPORT DOCUMENTS
COMMERCIAL DOCUMENTS
1
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FINANCIAL DOCUMENTS:FINANCIAL DOCUMENTS:
• Bill of Exchange
• Promissory Note
• Trust Receipt
• Delivery Order
1
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2 TRANSPORT DOCUMENTS:TRANSPORT DOCUMENTS:
• Bill of Lading
• Airway Bill
• Air Consignment Note
• Postal Parcel Receipt
• Truck Receipt
• Railway Receipt
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• COMMERCIAL INVOICE
• PACKING LIST
• INSURANCE CERTIFICATE
• CERTIFICATE OF ORIGIN
• INSPECTION CERTIFICATE
• WEIGHT NOTE
• CERTIFICATE OF ANALYSIS
• BLACK LIST CERTIFICATE etc.
INVOICE PKG.LIST
INSURANCEORIGINCERT.
3 COMMERCIAL DOCUMENTS:COMMERCIAL DOCUMENTS:
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Importance of L/C for ExporterImportance of L/C for Exporter• Dependence on Credit worthiness of a bank
instead of importer
• If the credit is confirmed by a bank in the exporter’s country, the exporter is neither subject to commercial not to country risk
• If the credit is irrevocable, it can’t be cancelled without the exporter’s consent and notice of revocation can be rejected by the exporter if received after shipment
• The documents and therefore the goods will not be released until payment or commitment to payment is made (In terms of L/C)
• Where credit has been allowed the accepted bill of exchange can be used to obtain the finances
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Importance of L/C for ImporterImportance of L/C for Importer
• The importer can negotiate better terms as the exporter is assured of payment
• Importer is assured that no funds will be released unless title documents and received correct and in order
• Protection is provided under UCP for documentary Credit
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Thanks!Thanks!
Any Question ???Any Question ???