Business transactions usually begin with a purchase order placed by a buyer with a seller. It is very easy to understand, the order, or fax received from the buyer, is not something very reliable and secure. Although the order should be treated as an agreement binding both parties, the buyer and the seller, it is not a guarantee or an instruction for the seller to use to obtain payment for the merchandise shipped. For this reason, the “L/C” comes into the picture.
Letters of credit (L/C):
Letters of credit (L/C) is in general a conditional document extended by the bank in connection with presentation of exp[ort value. L/C pays a very dominant role in this matter. On receipt of this document from the buyer, the exporters become sure that they would obtain foreign currency after the peaceful shipment of the consignment directed by the buyer in the L/C. and for monetary transactions in this connection the negotiation banks stand as a symbol of surety for the exporters. Negotiating bank act on behalf of the exporter and is held liable or responsible for realization of exporter’s money from the L/C opening bank.
A credit may be advised to a beneficiary through another bank (the advising bank) without engagement on the part of the advising bank, but that bank shall take reasonable care to check the apparent authenticity of the credit which it advises.
All credit will always clearly indicate whether they are available by sight payment, by differed payment, by acceptance or bye negotiation. Moreover every credit must nominate the bank (nominated bank) which is authorized to pay (paying bank) or to accept drafts (accepting bank) or to negotiate (negotiating bank), unless the credit allows negotiation by any bank(negotiating bank). The nominated bank unless is the issuing bank or the confirming bank, its nomination by the issuing bank does not constitute any undertaking by the nominated bank to pay, accept or negotiation.
When an L/C issuing bank instructs a bank (advising bank) by any telegrams mission to advise a credit or a amendment to a credit, and intends the mail confirmation to be the operative credit instrument, for the operative amendment, the tele-transmisson must state “full details to follow” (or words of similar effect) or that the mail confirmation will be the in that case, operative credit instrument or the operative amendment. The issuing bank must forward the operative credit instrument or the operative amendment to such advising bank without delay.
Inspite of production of all related documents with the banks, the exporters however, became victims to some unpleasant situations which push them towards the uncertainty of realization of money. This results from the absurdity or ambiguity of L/C. An in most cases from faulty presentation of documents to be required in exports connection. So unless exporters have a clear conception and apprehension about exports business and be aware beforehand about all these documents, they would certainly face some major troubles, in per exports and post exports process, exporters will after all, have first hand knowledge about L/C. they must be in the climax of knowledge. It is L/C which act a medium of money during the time of execution of exports order and this give secretly the exporters that their dues would be obtained in due time.
In fact, in the whole exporter and import process four sides are connected. / in absence of any one of them the process can not take full shape. These four sides are, exporter, importer, exporter’s bank and importers bank. Principally. The success of import and export business lies in the exchange of proper and accurate correspondence, any fault in these may cause in total disaster in whole importers and export business. So in order to avoid the ambiguous, absurd and understandable correspondence, both the sides are to exercise special and particular attention. They should remember that the success of export and import business depends mainly upon the careful execution of these things.
In export business, the first thing to do is to make sale contract with the buyer. And this may be made in the presence of both of the importers and exporter. In most cases this may not be done formally. Yet, it plays a very significant role in the preliminary stage of export business. If this is not done formally, then exchange of letters, fax and email between them from time to time is taken for granted as the contract of the business. This may be styled as verbal contract. This also leaves importance in the business. These exchange documents are important for this reason that many a time this are required by negotiating bank of the exporters. Any loss of these may bring in fault in the business.
In case o9f verbal contact, verbal contract here refers to the contract which is formed through correspondences, exporters are to send pro-forma invoice along with all other details, including specification of goods, definite price and the date of shipment and payment terms. In addition this all other condition, if the exporters think necessary, may be placed in the form.
There are some methods of payment of export value. These are as follows:
1. through letters of credit
2. through advance T.T remittances
3. Deferred payment
4. C.A.D basis etc.
Of all the methods referred to above, letter of credit method is most popular and it is in fashion.
Letters of credit may be of different kind and nature:
1. Ravocable L/C
2. Irrevocable L/C
3. Confirmed letter of credit
4. Confirmed and irrevocable letter of credit
5. Transferable or divisible letter of credit
6. Back to back letter of credit
7. Red clause letter of credit
8. Sight letter of credit
9. Usance letter of credit
10. Revolving letter of credit
11. Stand by letter of credit
All letter of credit therefore, should clearly indicate whether they are revocable or irrevocable. In the absence of such indication the credit shall be deemed to be revocable.
(1)A revocable L/C:
May be amended or canceled by the issuing bank an any moment and without prior to the beneficiary.
In case of revocable credit, however, the L/C issuing bank is bound to:
a)Reimburse a branch or bank with which a revocable credit has been made available for deferred payment, if such branch or bank has , prior to receipt by it for notice of amendment or cancellation, taken up documents which appear on their face to be accordance with the terms and conditions of the credit.
b. Reimburse a branch of bank with which a revocable credit has been made available for sight payment, acceptance or negotiation, for any payment, acceptance or negotiation, for any payment, acceptance or negotiation
made but such branch or bank prior to receipt by it for notice of amendment or cancellation, against documents which appear on their face to be accordance with the terms and conditions of the credit
2) An Irrevocable L/C:
Constitutes a definite undertaking of the issuing bank, provided that the stipulated documents are presented, the term and conditions of the credit are complied with:
The full name of “L/C” i.e. irrevocable letter of credit which means once it is issued by the bank for the buyer and accepted by the beneficiary (the seller) , it cannot be cancelled or withdrawn by the buyer or the opening bank, unless with the consent of the beneficiary. In short, once the buyer opens the L/C form his bank to cover the goods he has purchased, he will have to pay for the goods when the seller ships the goods exactly as per as the terms stipulated in the L/C. Therefore, as far as the seller is concerned, the sooner he has the L/c on hand, the safer he is.
L/Cs can be opened in many ways, but in essence, it is a promise the buyer’s bank makes to the supplier, to pay home when he does certain things with evidence to prove. The things the LC opening bank wants the supplier to do are called “terms”. Therefore, when the supplier receives an L/C, he must read the term carefully to make sure he is capable of fulfilling them all exactly as they are written. If some terms are beyond his capable of fulfilling them all exactly as they are written. if some terms are beyond his ability to fulfill, he must point them out to the buyer and explain why he cannot comply with those terms, and request the buyer to amend them by means of an official amendment through the bank.
3) Confirmed letter of credit:
This is such a credit for which exporter’s bank gives all shorts of surety for the advance of payment.
4) Confirmed and irrevocable letter of credit:
Which combines the quality of clause (2)and (3)
5) Transferable or divisible L/C:
A Transferable credit is a under which the beneficiary has the right to request the bank called upon to effect payment or acceptance or any bank entitled to effect negotiation to make the credit available in whole or in part to one or more other parties(second beneficiary)
A credit can be transferred only if it is expressed designed as “transferable” by the issuing bank. Terms such as “divisible”, “fractional” assignable” and “transmissible” and nothing to the meeting of term” transferable” and shall not be used, in that case the bank requested to effect the transfer(transferring bank),whether it has confirmed the credit or not shall be under no obligation to effect such transfer expect to the extent and in the manner expressly consented to by such bank. Bank charges in respect of transfers are payable by the first beneficiary unless, otherwise specified.
A transferable L/C can be transferred once only. The credit can be transferred only one the terms and conditions specified in the original credit, with the exception of the amount of the credit.
6) Back to back L/C:
This type of L/C is opened against the original master L/C.
(7) Red Clause L/C:
In this credit, the export’s bank is directly to advance his dues even before they produce all export documents to the bank. And some clause is attached there. The manufacture must have maintained this clause.
(8) Sight L/C:
It means when the shipper ships the goods covered by the L/C, and presents the document to the bank for negotiation, the bank (the negotiation bank) will credit the proceeds to the shippers account immediately after checking and finding the documents in order. When the documents are sent by the negotiation bank to the L/C opening bank, the L/C opening bank will effect payment to the negotiation bank immediately. such L/C usually say”AT SIGHT” which means “pay when the bank sees the documents”.
(9)Usance L/C:
It means L/C with time allowed for the opening bank to make payment of a foreign bill of exchange. Or, put in another way, payment from the L/C opening bank to the negotiation bank will only be made after a period of time as stipulated in the L/C. The length can be worked out between the buyer and the supplier, sometimes 60 days, sometimes 90 days or 120 days.
10. Revolving L/C: It means that the beneficiary can draw money from such L/C up to the amount specified by means of documents, and after drawing , the amount drawn will automatically be replenished and is available for anther drawing another drawing and so on.
