Export Letter of Credit:
Receipt, Scrutiny, Advising & Transfer Procedure Including Voucher Preparation
Mohammad Abdullah Al-Mamun
Assistant Vice President & Export In charge
Social Islami Bank Ltd
Principal Branch
Letter of Credit:
A Letter of Credit (LC) is a commitment or undertaking by a bank on behalf of the importer (foreign buyer) that payment will be made to the beneficiary (Exporter) as per terms & conditions stated in the letter of credit as evidence by the presentation of specified documents.
As per UCP 600, “a credit means any arrangements; however named or described that is irrevocable there by constitutes a definite undertaking of the issuing bank to honor a complying presentation”.
Generally five participants of Documentary Credit (DC):
1. Buyer/Importer: Means the party on whose request the credit is issued.
2. Beneficiary/Exporter: Means the party in whose favor a credit is issued.
3. Issuing Bank: Means the bank that issues a credit at the request of an applicant.
4. Advising Bank: Means the bank that advise the credit at the request of the issuing bank.
5. Nominated Bank: Means the bank with which the credit is available or any bank in the case of a credit available with any bank
Export Letter of Credit:
The same letter of credit would be termed an import letter of credit by the importer and an export letter of credit by the exporter. Here importer is buyer and exporter is beneficiary. When a bank advise a documentary credit at the request of issuing bank subsequently the advising bank informs exporter regarding the LC, then it is treated as Export Letter of Credit. Exporter normally receives the LC from issuing bank.
Fig: A Typical
International Trade
Receipt of Export LC:
At first time to be confirmed the genuineness of issuance of the LC through SWIFT message or any other satisfactory method before receipt of Export LC.
Credit Report:
To be collected credit report from a reputed company (i.e. D & B) to mitigate the risk. Indicators are as follows:
a. Risk score
b. Financial strength
c. Credit worthiness
d. Goodwill
e. No of outlet & parents company
f. Net worth
g. Payment behavior
h. Financial statement
i. Line of business
j. No of employees
k. Regulatory aspect
l. Legal status
After receiving of satisfactory credit report they (bank) should be lien the Export LC.
Scrutiny/Examination of Export LC:
Here is the check list:
1. Does the LC properly advised?
2. Does the LC contain the remark “Transferable “if required?
3. Are LC amount and currency in conformity with the contract?
4. Are date of shipment date of expiry and period of presentation of documents calculated sufficiently?
5. Do goods descriptions and terms of delivery conform/consistent to the contract?
6. Are able to fulfill LC conditions concerning transport route, partial shipments & transshipments?
7. Are able to present the required documents with clauses?
8. Are the conditions concerning who is going to pay the bank commissions & charges as per contract?
9. Are properly mentioned applicants name & address?
10. Are properly mentioned Beneficiary name & address?
11. Mode of payment (sight/deferred)
12. Are BL (bill of lading) clauses usual?
13. Are confirmed/without confirmed?
14. Are inserted any adverse clauses (penalty or any other adverse clauses)?
Advising of Export LC:
At request of the issuing bank advising bank advise the credit. When a letter of credit is issued the LC issuing bank sends the LC to the correspondent bank which is normally located in the seller (exporters) country. The correspondent bank receives the LC and advises the same. Usually advising bank satisfied and accepted the LC and bank will inform the beneficiary with terms and conditions required advising fees & charges.
Responsibility of Advising Bank:
a. An advising bank responsible to authenticate the LC issued by the issuer to avoid the fraud.
b. Advise the credit without changing any part/clauses
Transfer Procedure of Export LC
Ø Transferable LC:
A transferable letter of credit is a documentary credit under which the beneficiary (1st beneficiary) may request the bank specifically authorize to transfer the credit available in which or partially, to one or more second beneficiary (s) (Exporter)
The LC can be transferred only in accordance with the terms & conditions stipulated in original LC with the exception of the following
1. The LC amount
2. The unit price of goods(is stated in the original LC)
3. The time of shipment
4. Last date for presentation of negotiation shipping documents
5. Expiry date of LC
If all or part of the LC is transferred, the first beneficiary retains the right to substitute their own drafts and invoices for those of the second beneficiary, if they require.
Instruction must be provided on whether the bank is allowed to make any amendments the original LC to the second beneficiary.
How do apply for transferring of export letter of credit:
1. First beneficiary submit the application with signature of the company signatories and company stamp together with original LC
2. Export LC (LC must be advised)
3. Upon successful application/approval application for transfer LC will be processed.
4. Transferring bank will forward to second beneficiary along with signature of the authorized bank official signatories and stamp (The authorized officer should have to be verified the company’s signature with properly)
5. As and when require amendment the advising bank should be sent subsequent amendment of the Export LC to the second beneficiary.
Scrutiny of Export Documents:
Before presenting documents one should pay attention to the following issues:
a. Is the LC still valid
b. Is the documents presentation period not yet expired
c. Are goods shipped within latest shipment date or according to shipment schedule
d. Are required documents issued in the stipulated number of copies
e. Are all documents made as per LC terms
f. Do all documents correspond to each other concerning measurement, weight, number and kind of packing as well as marks
g. Are all documents if necessary certified and/or legalized by the correct authority
h. Have additional conditions (if any) been fulfilled
i. Are goods description and prices exactly as per LC terms
j. Are there any calculation errors in the invoice
k. Does the remark concerning freight in the transport document correspond to the terms of delivery
l. Is the consignee of the good stated in the transport document LC-conform
m. Do you have the full set of original Bills of Lading, are they signed properly and endorsed correctly if necessary
n. Is the notify party shown in the Bill of Lading conform with the LC
o. Has the shipment advice been sent correctly and in time
p. Are the measurement, weight and packing units stated correctly in the packing list/weight list/specification and do they correspond to the other documents
q. Are all documents which are made as certificate signed by the issuer
r. If the LC require the presentation of drafts – are they duly signed
References:
1. Charles W.L. Hill, International Business 7th edition, MC Graw Hill New York
2. L. R Chowdhury, A text Book on Foreign Exchange 1st Edition 2000
3. UCP -600 2007 revision
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