Ans: i). It assures the exporter not only against the failure of the importer but that of the issuing bank also. Though  a letter of credit bears the superior credit of a bank in importers country, the exporter may not know the financial standing of the issuing bank. When the credit is confirmed by a bank which he knows well, he is more secure. ii). It also saves the beneficiary from changes in the Government policies or disturbances in the political situation of the importers country. Irrespective of these changes the beneficiary is assured for payment by the confirming bank.   vi). Unconfirmed credit: When no banks provide their additional confirmation to the L/C, it remains unconfirmed. vii). Without Recourse/choice credit: When the exporter draws a “Recourse Bill of Exchange” with  export documents it signifies that in case the document rejected by the issuing bank or payment is not made by the issuing bank for any reason, he should not be called upon to pay back the amount he received earlier on negotiation of the documents from the negotiating bank.   viii). With Recourse L/C: In case of with recourse credit it should pay under reserve i.e. reserving the right to get back the money from the beneficiary if the document rejected by the issuing bank.

 

Note: i). In case of a confirmed credit, there is no need to draw “without recourse” bill of exchange because the confirming banks undertaking is to honor bills without recourse and therefore, the beneficiary is safe, irrespective of what transpires between the confirming bank and the issuing bank.   ii). There is difference between the credit being a “without recourse credit” and drawing the bill of exchange “without recourse”. Where a bank is wiling to waive its recourse it usually does so not by authorizing the beneficiary to draw without recourse but by the intimation that the credit is “without recourse” credit.   ix). Fixed/Non revolving credit: a Fixed or non-revolving credit is one in which the limit is reduced permanently to the extent of bills under the credits. If the limit is for Tk. 10.00 lac only bills up to this value can be drawn under the credit. 14.07.09 reviewed

x). Revolving Letter of Credit: The revolving credit is one, which provides for restoring the credit to the original amount after it has been utilized. How many time it will be taking place must be specifically mentioned in the credit. Revolving credit may be cumulative or non-cumulative.

• Non automatic revolving letter of credit: Renewal of limit depends upon the receipt by the negotiating bank of payment advice from the issuing bank.

• Automatic revolving letter of credit: Where the limits are renewed at fixed intervals irrespective of the fact whether the advice of payment has been received by the negotiating bank.

 

• Cumulative letter of credit: Under cumulative letter of credit, the amount utilized during one period (week) is carried forward to the subsequent period.

• Non cumulative credit: Under non cumulative credit, the amount not utilized during one period gets expired and cannot be utilized alogn with subsequent periods quota.

xi). Transferable Letter of Credit: A transferable Letter of credit is one which can be transferred by the original beneficiary in full or part to one or more subsequent beneficiaries. Such credit can be transferred once only, unless otherwise specified. Fractions of a transferable credit can be transferred separately, provided partial shipment are not prohibited.  

 

xii). Back to back L/C: Back to back L/C is a type of import L/C established against export L/C. The back to back L/C is a new credit opened on the basis of an original credit in favor of another beneficiary.  

 

xiii). Red Clause Credit: This is a L/C issued with a special condition authorized the confirming bank or negotiating bank to provide a pre shipment credit facility to the beneficiary  of the L/C for the purchasing, processing, packing and arranging for movements of goods up to the port of shipment. This condition printed on the L/C with Red ink, thus it is called Red clause L/C. Under the above credit, opening bank is liable for the pre-shipment credit made by the negotiating bank in case the beneficiary fails to repay or deliver the documents for negotiation. This is also known as ‘anticipatory credit’.  

 

xiv). Green Clause Credit: An extension of red clause credit is the green clause credit which not only permits pre shipment advances but also covers storage in the name of the bank.  

 

xv). Standby Credit: Under a stand by credit, also known as guarantee credit, the issuing bank assures the beneficiary that in the event of non performance or non payment of an obligation by the applicant, the beneficiary may get the payment from the issuing bank. The claim should be a draft accompanied by the requisite documentary evidence of non performance as stipulated in the credit.   Note: The stand by credit is to be distinguished from the other types of letter of credit in that the primary function of the standby credit is to serve as a security or guarantee rather than as a payment mechanism. 

 

What do you mean by ‘advising a letter of credit’?

Ans. Advising through a bank is a proof of apparent authenticity of the credit to the beneficiary. The process of advising consists forwarding the original L/C to the beneficiary. Before forwarding, the advising bank verify the signatures of issuing bank’s officials & ensure that the terms & conditions of the credit are not in violation of the existing exchange control regulations.

 

What do you mean by ‘Presentation of documents’?

 Ans. The seller after being satisfied with the terms and conditions of the credit, proceeds to dispatch the required goods to the buyer & 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. After receiving all the documents, the negotiating bank than checks the documents against the credit. If the documents are found in order, the bank will pay, accept or negotiate to the issuing Bank.

 

What do you mean by settlement?

Ans. Settlement means fulfilling the commitments of issuing bank in regards to effecting payment subject to satisfying the credit terms fully.

 

What do you mean by “Negotiation”

Ans. Negotiation is broadly defined as “conferring, discussing or bargaining to reach agreement in business transaction”  

 

What are the advantages of Letter of Credit?

 Ans.   * From Exporter’s point of view: The exporter does not lose his right over the goods till the issuing bank pays against the documents. In addition to that following are the advantage:  

i). L/C provides sort of assurance that an exporter likes before he embark/get on of manufacturing the goods for export. It also protects the exporter against failure of the importer to pay. A superior undertaking of a Bank assures the exporter that when the documents are tendered as per the terms of the credit, payment would be ,made to him. Thus it also helps the seller to expand the business by enabling him to conclude deals which in the absence of credit he would be hesitant to do.

 ii). The exporter does not require to know the exchange control regulations of importers country. The Bank which issues the credit would take care to see that the goods covered by the letter of credit would be permitted to be imported under the exchange control regulations.

 iii). L/C helps easing the financial position of the exporter. The exporter can easily discount the bills under a L/C with his Bank. Thus the exporter gets payment immediately on shipping documents.  

 

* From Importer point of view:   i). L/C enables the importer to purchase material without making full advance payment. On the  strength of a superior credit of a Bank, he is able to finalise the contracts which the seller may not agree had he to rely on the exporter.

 

  ii). If he takes certain safeguards like calling for packing certificates etc. the quantity & quality of the goods consigned is assured.   iii). Provided the buyer has a big credit with his bank under trust & pay for them on sale. 16.07.09  

 

What are the limitations of L/C?

Ans. To the Exporter: The undertaking of the issuing bank is conditional. The documents tendered should strictly comply with the requirements of the credit. It is only the bank that would decide if the documents are as per the terms & conditions of the credit. Any slight variations of non fulfillment or excess details in the documents tendered give scope for the bank to claim that the documents are not as per the terms of the credit. Moreover the credit does not protect the exporter from the governmental action that may deter payment.  

 

To the Importer: The major disadvantage is that it does not ensure that he would be receiving the goods of the specific condition and order. In letter of credit transactions, all parties deal in documents and not in goods. He stands committed to reimburse the issuing bank when documents as required are tendered to him. But this does not ensure the receipt of proper goods.

 

What are the difference between ‘Acceptance credit & ‘Deferred payment Credit’ ?

Ans. In case of a deferred payment credit no draft are drawn. On the other hand in case of an acceptance credit a bill of exchange of a specified period is drawn. In that respect deferred payment credit is considered inferior to acceptance credit from beneficiaries point of view because he does not get a bankers acceptance which he could discount and raise funds.

 

What are the distinguished between ‘Back to back credit’ & ‘Transferable credit’?

Ans. a). There is an authority from the issuing bank for the transfer of benefit under the credit in the case of a transferable credit. No such authority is there under a back to back credit.  

b). In a transferable credit the second credit is only an extension of the first credit. A back to back credit has an existence in depended of the original credit.

 c). Following from the above, under the transferable credit the negotiating bank can submit the documents submitted by the second beneficiary to the issuing bank in case the first beneficiary fails to submit his own documents (i.e. invoice etc.) on first demand by the negotiating bank. Under a back to back credit submission of documents submitted bu the second beneficiary os not possible.

 

What is the procedure of transferring L/C?

Ans. A credit is transferred in the following ways:   The exporter i.e. the first beneficiary will apply to the negotiating bank(intermediary bank) to transfer the credit in favor of the second beneficiary a letter of credit with same terms & conditions as that of the original with the exception to the following:   a). The amount of the credit may be reduced. The difference would be the profit or commission on the transaction for the first beneficiary.  

b). The validity period and date of shipment may be curtailed/cut. The difference in time would be required by the first beneficiary to substitute his invoices of those submitted by the second beneficiary.  

c). Because the value of goods is reduced, the percentage for which insurance cover must be effected may be increased in such a way as to provide the amount of cover stipulated in the original credit.   The negotiating bank will obtain the original credit and endorse the fact of transfer on it. It will than issue a credit in favor of the second beneficiary complying with the terms of the first beneficiary. The credit would show the first beneficiary as the applicant.

 

Who can effect the transfer of a credit?

Ans. A credit can be transferred only if it is expressly designated as transferable by the issuing bank. In the case of payment credit or acceptance credit, the paying bank or the accepting bank as the case may be, is authorized to effect the transfer. In the case of a freely negotiable credit, transfer can be effected by the bank specifically authorized in the credit as a transferring bank. Bank charges in respect of transferring the L/C are payable by the first beneficiary unless otherwise specified.

 

What are the most common clauses in a sales & purchase contract?

Ans. These clauses are common in a sales & purchase contract:  

i). Which condition to apply.

ii). Definition of the terms.

iii). Conclusion of the terms.

iv). Trade terms.

v). Quality & quantity of the goods.

vi). Price & payment.

vii). Pre-shipment inspection.

viii). Delivery & damage.

ix). Warranty.

x). Shipping documents.

xi). Dispute settlement.

xii). Other clauses as required.

 

What do you mean by Reimbursement? What is Reimbursement/settlement Bank?

Ans. Reimbursement: A letter of Credit provides Reimbursement by incorporating Reimbursement clause in the credit. The reimbursement means a standard process for remitting payment to the Negotiating/Nominating Bank (Situated in foreign country) as per ICC formulated Uniform Rules for bank to bank Reimbursement (URR) under documentary credit, ICC publication 525.  

 

Reimbursement Bank: L/C issuing bank mentioned a banks name as reimbursement bank from which the negotiating/nominating bank would obtain reimbursement. On receipt of document, negotiating bank/nominating bank forward the document to the L/C issuing bank & claim reimbursement from the mentioned reimbursing bank. Normally the reimbursing bank would be the bank with whom the issuing bank maintain their Nostro account.

 

What do you mean by ‘Reimbursement Authorization’ ‘Reimbursement undertaking’ & ‘Reimbursement claim’ ?

Ans. Reimbursement authorization: Reimbursement Authorization is the instruction issued by the L/C issuing bank to reimburse the claiming bank.

 

Reimbursement Undertaking: Reimbursement undertaking is the undertaking of reimbursement bank submitted to the claiming bank issued upon reimbursement authorization of the issuing bank to honor the reimbursement claim provided the terms & conditions of the reimbursement undertaking have been complied with.

 

Reimbursement claim: Reimbursement claim is a formal claim by the claiming bank for reimbursement.  Procedures of reimbursement claim are as follows:

• • The reimbursement claim must be in the form of Tele transmission unless prohibited by the issuing bank.
  • The claim must clearly state the number of credit, name of the credit issuing bank, claim amount, additional amount & charges, if any.
  • Claiming bank must not indicate in a claim that a payment, acceptance or negotiation was made under reserve or against an indemnity.
  • The reimbursement bank has reasonable time, not exceeding three banking days, to process the claim. If a pre debit notification is required from issuing bank, such period will be available.
  • If the reimbursing bank decides not to reimburse, it give notice to that effect by Tele transmission or any other expeditious means without delay but no later than the period mentioned above to the issuing bank & claiming bank.
  • Reimbursement charges are for account of issuing bank. Where the charges are for another account, the issuing bank indicate so in the original credit and in the reimbursement authorization. 19.07.09