Trade - Brac

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International Trade FinanceLetter of Credit



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Letter of Credit/ Documentary Credit

It is a conditional undertaking given by a bank at a request of an importer

(Applicant) or on its own behalf to effect settlement (Payment) to an

exporter (Beneficiary)

It ensures payment provided the terms and conditions of the credit have

been fulfilled

The importer has to pay for the documents of the goods to take ownership

of the goods

The bank is able to supply trade and credit information which is important

to both the importer and exporter

It is also known as Documentary Credit

Other types of L/C:

Transferable L/C

Revolving L/C (not allowed for Import in Bangladesh)



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Exporter

Issuing/Confirming bankNegotiating / Advising bank

4. Goods are shipped

1. L/C application

6. Documents sent to issuing bank

2. L/C issued

7. Issuing bank will effect payment or accept for a future payment

5. Documents presented. If

any discrepancy exists the

exporter is notified

3. L/C

advised

Letter of Credit (L/C)

9. Documents

received and

import

bill settled

Cash FlowDocuments Goods Flow

8. Payment toexporter

Advice / Notice

Importer



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Transferable L/C

A transferable L/C is an irrevocable L/C designated as transferable

It is a L/C that can be transferred by the original beneficiary to another party

for the same or lesser value

The transferable L/C allows partial shipments under which the L/C may be

transferred to one or more beneficiary

However the second beneficiary is not allowed to transfer to a third

beneficiary

The first beneficiary is allowed to substitute only drafts and invoices for

presentation unless otherwise specified in the master L/C



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Transferable L/C Phase 1

Exporte

r

2. Master L/C issued

3. Master L/C

advised

6. Transferred L/C advised


5. Transferred L/C issued


Middleman

Advice / Notice

1. L/C application

allowing L/C to be

µTransferable¶

4. Request for L/C to

be transferred

Advising bank Issuing bankTransferring bank

Importer



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11. Master L/C documents

sent to issuing bank

Transferable L/C Phase 2

Exporte

r


9. Transferred L/C documents

sent to transferring bank

13b. Remittance made

under Transferred L/C

12. Remittance made under Master L/C

14. Documents

received and

importbill settled

Middleman

Advising bank Issuing bankTransferring bank

13a.Middleman

receives

payment

13c.Payment toexporter

Advice / Notice

Importer

10. Middleman advised

to substitute

documents for

presentation under

Master L/C


any discrepancy exists the

exporter is notified




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Revolving L/C

It is a single documentary credit that covers multiple shipments over a long

period

It is automatically reinstated after each drawing or upon receipt of

authorisation from the L/C issuing bank

It has limits as to the duration of the facility and as to the amount involved

for each drawing

It provides convenience and possible reduction in transaction fess for large

sourcing agents



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Revolving L/C

Exporte

r

Negotiating / Advising bank

4. Goods are shipped, since being a revolving L/C

multiple shipments can be accommodated


2. Revolving L/C issued


3. L/C

advised

9. Documents

received and

import

bill settled.

Multiple

drawings

allowed

under

revolving

L/C


Issuing bank

8. Payment toexporter

Advice / Notice

Importer

1. L/C application onrevolving

payment terms


any discrepancy exists theexporter is notified



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Trade Finance



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L/C Discounting / Negotiation

A L/C is said to be discounted / Negotiated when the negotiating

bank agrees to make payment in advance to the beneficiary upon

receipt of compliant or accepted documents.

The exporter receives the money for their exported goods from the

bank before the due date. It is thus beneficial to discount / negotiate

the L/C to enhance cash flow



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L/C Discounting / Negotiation

Negotiating / Advising bank


1. L/C application


2. L/C issued


9. Documents

received and

import

bill settled


Issuing bank

Exporte

r

Advice / Notice

3. L/C

advised

Importer

6. Negotiating

bank will

discount L/C

and deliver

full value to

the exporter

5. Documents presented for

examination with request

for discounting, subject to

clean presentation



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L/C Confirmation

A L/C is considered µconfirmed¶ if a second bank (confirming bank) confirms to pay the

invoice amount even if the issuing bank fails to make the payment

Bank and country risks, which may arise from defaults or political restrictions, are mitigated

The confirmation is only valid if compliant documents are presented to the confirming bank

Confirmation charges are usually borne by the exporter and are reflective of the bank and

country risk

The ability to confirm a L/C will depend on confirming bank¶s risk appetite for the issuing

bank and country where the L/C is issued

Any advance payment or L/C discounted against a confirmed credit is on a non-recourse

basis



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L/C Confirmation

1. L/C application

2. L/C issued

3. L/C advised

5a. Yes. Bank adds confirmation

5b. No. Bank notifies accordingly

4. Requests for confirmation

Confirmation requirements met?

Exporte

r

Documents Advice / Notice

Negotiating /

Advising bank

Issuing bank

Importer



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