Lc procedure @ hrtdc 1
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The document provides information on opening letter of credit procedures, including: - Defining key parties in an LC transaction such as the issuing bank, beneficiary, applicant, and advising bank. - Describing the 5 major steps in an LC transaction: issuing, advising, amendment, presentation, and settlement. - Explaining types of LCs like revolving, back-to-back, transferable, and standby credits. - Listing documents required for opening an LC like the application form, proforma invoice, insurance cover note, and import registration. - Noting banks must check applicant signature, proforma invoice acceptance, importer entitlement, and restricted items
Lc procedure @ hrtdc 1
- 1. LC Opening prOCedure & FOrmaLities Presented byPresented by Nazrul IslamNazrul Islam Assistant Vice President &Assistant Vice President & Head of Ibrahimpur BranchHead of Ibrahimpur Branch Prime Bank Ltd; DhakaPrime Bank Ltd; Dhaka 1
- 2. What is Import? • To bring in, from abroad, something in kind of goods or services is Import. • Import is regulated by Import & Export Control Act-1950 with Import Policy Order (IPO) under the Ministry of Commerce and public Notices issued from time to time by the office of the Chief Controller of Imports and Exports (CCI& E). 2
- 3. Who is eligible to Import? • As per Importers, Exporters and Indenters (Registration) Order-1981 no person can import goods in to Bangladesh unless he is registered with CCI & E or exempted from the provision of the said Order. • An AD shall have to deal with those customers who are known to Ads having a business place in Bangladesh and can be traced easily (GFET-1996, Vol-1,Chapter- 15,Para-2) 3
- 4. What is L/C? It is a definite undertaking given by a bank (issuing Bank) at the request of a customer (Applicant) or its own behalf to pay a seller (Beneficiary) against presentation of compliance document as per terms and conditions of the credit. 4
- 5. Definition according to UCP According to UCP-600 (2007 Rev) Credit means any arrangement, however named or described, that is irrevocably and thereby constitutes a definite undertaking of the issuing bank to honour complying presentation. Honour means: • To pay at sight if the credit is available by sight payment • To incur a deferred payment undertaking and pay at maturity if the credit is available by deferred payment • To accept a bill of exchange (draft) drawn by the beneficiary and pay at maturity if the credit is available by acceptance. All letters of credits are IRREVOCABLE CREDIT. Revocable credit is no longer existing according to UCP-600 (2007 Rev) 5
- 6. Types of letter of credit: Special Documentary Credit: • Revolving L/C: The revolving credit is one which provides for restoring the credit to the original amount after it has been utilized. How many times it will be taking place must be specifically mentioned in the credit. The revolving credit may may either cumulative or non-cumulative. ( According to Article No.18 (ii), Chapter 15 of GFET-1996, Volume-1 this type of cannot be opened without BB approval) • Bank to Back L/C: is a new credit opened on the basis of an original credit (export L/C) in favour of another beneficiary. Under the back to back to bank concept, the seller as the beneficiary of the first credit offers it as security to the advising bank (or negotiating bank) for the issuance of the second credit. The beneficiary of the BTB L/C may be located inside or outside the original beneficiary’s (export L/C) county. 6
- 7. Types of letter of credit: Continue... • Transferable L/C: A transferable credit is one that can be transferred by the original beneficiary in full or in part to one or more subsequent beneficiaries. Such credit can be transferred once only. That means second beneficiary has no right to further transfer the credit to other. • Red Clause L/C: is a credit with special condition incorporate (is printed/ typed in red) into it that authorises the confirming bank, or any other nominated bank to make advance to the beneficiary before presentation of documents. Under this credit the opening bank is liable for the pre-shipment advance made by the negotiating bank, in case the beneficiary fails to repay or deliver the documents for negotiation. 7
- 8. Types of letter of credit: Continue... • Green Clause L/C: is a credit with special clause incorporated into it which not only authorises the advising bank to grant pre-shipment advances but also storage cost for storing the goods prior to shipment. It is useful in situations where shipping space is not readily available, e.g some African counties. It is so called so because the credit was originally written in Green Ink to draw attention to the unique nature of this credit. At present this type of Credit is not in use. • Standby L/C: is a documentary credit or similar arrangement, however named or described, which represents an obligation to the beneficiary on the part of the issuing bank to: a) Repay money borrowed by the applicant, or advanced to or for the account of the applicant. b) Make payment on account of any indebtedness undertaking by the applicant c) Make payment on account of any default by the applicant in the performance of an obligation. • This concept introduced by North American country. It is a type of Guarantee. 8
- 9. Parties involved in the letter of credit: Main Parties: i) The issuing bank ii) The confirming bank iii) The beneficiary • Issuing Bank: Issuing bank means the bank issues letter a credit at the request of an applicant or on its own behalf. • Confirming Bank: Confirming bank means the bank that adds its confirmation to a credit upon the issuing bank’s authorization or request. • The beneficiary: the beneficiary means the party whose favour the L/C is established 9
- 10. Parties involved in the letter of credit: Other Parties: i) The applicant ii) The advising bank iii)The nominated paying /negotiating/ accepting bank iv)The reimbursing bank v)The transferring bank (if any) 10
- 11. Parties involved in the letter of credit: Other Parties: Continue... i) Applicant: Applicant means the party on whose request the credit is established. ii) Advising Bank: Advising Bank means the bank that advises the credit at the request of the issuing bank. iii) Nominated bank means the bank with which the credit is available or any bank in the case of a credit available with any bank. Negotiating bank is a bank which negotiates the bill and pays the amount to the beneficiary. Negotiation means the purchase by the nominated bank of drafts (drawn on a bank other than the nominated bank) and or documents under a complying presentation, by advancing or agreeing to advance funds to the beneficiary on or before the banking day on which reimbursement is due to the nominated bank. 11
- 12. Parties involved in the letter of credit: Other Parties: Continue... iv) Paying / Reimbursing Bank: is the bank as whom be bill will be drawn ( as per condition of the credit). It is nominated in the credit to make payment against stipulated documents complying with terms of the credit. It may or may not be issuing bank. v) Transferring Bank: Transferring Bank means a nominated bank that transfers the credit or, in a credit available with any bank, a bank that is specifically authorised by the issuing bank to transfer and that transfers the credit. An issuing bank may be transferring bank. Transferred credit means a credit that has been made available by the transferring bank to the second beneficiary. 12
- 13. Operations of Documentary Letter of Credit: The following 05 (five) major steps are involved in the operations of a documentary letter of credit. i) Issuing ii) Advising iii) Amendment (if necessary) iv) Presentation and v) Settlement 13
- 14. Operations of Documentary Letter of Credit: Continue... i) Issuing of Letter of Credit: Before issuing of a L/C, the buyer and seller located in different countries, concludes a sales contract providing for payment by doc credit. As per requirement of the seller, the buyer then instructs the issuing bank to issue a credit in favour of the seller (Beneficiary). Instruction/Application for issuing a credit should be made by the buyer ( Importer) in the issuing bank’s standard form. The credit application which contains the full details of the proposed credit, also serves as an agreement between the bank and the buyer. After being convinced about the necessary conditions contained in the application form and sufficient conditions to be fulfilled by the buyer for opening a credit, the opening bank then proceeds for opening the credit to be addressed to the beneficiary. 14
- 15. Operations of Documentary Letter of Credit: Continue... ii) Advising a letter of Credit: Advising through a bank is prior of apparent authenticity of the credit to the seller. The process of advising a credit consists of forwarding the original credit to the beneficiary to whom it is addressed. Before forwarding the advising bank has to verify the signature(s) of the officer (s) of the opening bank in case of mail L/C & in case of should check BKE arrangement for authenticity of the SWIFT L/C and ensure that the terms and conditions of the credit are not in violation of the issuing bank does not undertake any liability. 15
- 16. Operations of Documentary Letter of Credit: Continue... iii) Amendment of a letter of Credit: Parties involved in a L/C, particularity the seller and the buyer, cannot always satisfy the terms and conditions in full as expected due to some obvious and genuine reasons. In such a situation, the credit should be amendment. A credit can neither be amended nor cancelled without the agreement of the issuing bank. Confirming bank (if any) and the beneficiary. 16
- 17. Operations of Documentary Letter of Credit: Continue... iv) Presentation of Documents under letter of credit: The seller being satisfied with the terms and conditions of the credit proceeds to dispatch the required goods to the buyer and after that, has to present the documents evidencing dispatching of goods to the negotiating bank on or before the stipulated expiry date of the credit. If the documents are found in order, the bank will pay, accept or negotiate to the issuing bank, either = effect payment or = reimburses in the pre-agreed manner. 17
- 18. Operations of Documentary Letter of Credit: Continue... v) Settlement of letter of credit: Settlement means fulfilling the commitment of issuing bank in regard to effect payment subject to satisfying the credit terms fully. a) Settlement by payment: b) Settlement by Acceptance c) Settlement by Negotiation 18
- 19. Operations of Documentary Letter of Credit: Continue... v) Settlement of letter of credit: a) Settlement by payment: Here the seller presents the doc to the paying bank. In compliance presentation paying bank makes payment to the beneficiary and in case this bank is other than the issuing bank, then sends the doc to the issuing ban. If the issuing bank is satisfied with the requirements, payment is obtained by the paying bank from the issuing bank. 19
- 20. Operations of Documentary Letter of Credit: Continue... v) Settlement of letter of credit: b) Settlement by Acceptance: Under this arrangement, seller submits the documents evidencing the shipment to the accepting bank accompanied by the draft drawn on the bank (where credit is available) at the specified tenor. After being satisfied with the documents, the bank accepts the docs and drsft if it is a bank other than the issuing bank, then sends the docs to the issuing bank stating that it has accepted the draft and at maturity the reimbursement will be obtained in the pre-agreed manner. 20
- 21. Operations of Documentary Letter of Credit: Continue v) Settlement of letter of credit: c) Settlement by Negotiation: This settlement procedure starts with the submission of docs by the seller to the negotiating bank accompanied by the draft drawn on the drawee at sight or at a tenor, as specified in the credit. After scrutinizing that the docs meet the credit requirements, the bank may negotiate the draft. This bank, if other than the issuing bank, then sends the docs and the draft to the issuing bank. As usual, reimbursement will be obtained in the pre-agreed manner. 21
- 22. Following paper / documents are required for opening of letter of credit 1. Application form duly signed by applicant with LCAF 2. Proforma Invoice or Indent 3. Insurance Cover note 4. Letter of allotment or consent from concern Ministry ( In case of Govt. L/C) 5. Valid member ship certificate from a registered Chamber of commerce and industry or others business body/Trade association. 6. Renewed Trade licence, TIN and VAT certificate 7. Renewed Import registration certificate (IRC) 8. Income Tax assessment 22
- 23. Before opening a L/C, the issuing bank must check the following: 1. Applicant signature verified with bank record 2. L/C application properly stamped 3. Proforma Invoice/ Indent duly accepted by the applicant 4. In case of import under indent the Indentor Registration No with CCI&E and Bangladesh Bank permission No. has been quoted in the L/C applicant form. 5. The importer entitlement as per IRC 6. The items are not one are banded list or restricted list in accordance with current Import Policy Order (IPO). 7. Correct HS code. 8. Insurance cover note mentioning the items to be imported, the port of shipment & destination, mode of shipment and particulars of risk coverage. 9. Price verification. 10.Suppliers credit report. 11.Ensure the imported items are bonded or not. If not bonded and other than capital machineries incorporated PSI clause in the L/C. 23
- 24. As required by Guidelines for Foreign Exchange Transaction (GFET), Volume-1 the credit report of the supplier should be obtained in all cases of L/C involving Tk.10,00,000/- or over against indent issued by local indenting agent and over Tk.5,00,000/- against proforma invoices issued by the supplier direct. 24
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