LETTER OF CREDIT - MAKE A BUSINESS EASY

(A) An introduction of Letter of Credit (LC): In today's modern era, Letter of Credit (LC) is often used as a form of trust between buyer and seller while doing business. Letter of Credit (LC) is a financial document issued by a bank in favor of the seller (beneficiary) at the request of the buyer (applicant). It is now a common method used in national and international trade to ensure that payment will be made and the terms of the sale will be met. An LC is highly secure because it is document-based, not goods-based. The bank ensures neutrality and guarantees payment once the terms are fulfilled. The Letter of Credit is issued in SWIFT MT700 message transmitted in SWIFT(Society for Worldwide Interbank Financial Telecommunication ) format to convey the terms and conditions of a documentary credit in international trade finance where seller/exporters receive payment from the buyer/importer, once the terms specified in the DLC (Documentary Letter of Credit) are completely fulfilled. The said LC SWIFT MT 700 is used the format of UCP 600 (Uniform Customs and Practice). Actually UCP 600 is a document that governs the operation of letters of credit in PDF format from several sources which may considered Spacewell.com, IBTRA and Scribd.com. Basically, the MT 700 LC has 40 fields of which 11 are mandatory and 29 are optional. The maximum length of LC is 10,000 characters. Some of the fields are mandatory in combination and some are mandatory only in one of the fields. For example, either field 39A or 39B may be present but not both. Similarly, either field 44C or 44D may be present but not both. (B) Rules for using the LC MT 700: 1. When a documentary credit message exceeds the maximum input message length, additional documentary credit messages must be transmitted via MT 701, which may be sent only up to eight additional MTs 701; 2. Information provided in the specified fields in an MT 700 must not be repeated in any related MT 701; 3. Unless otherwise specified, documentary credit extended to the beneficiary or another advising bank on the basis of a SWIFT message constitutes an operative credit instrument; (C) Points of Letter of Credit (LC): i. Applicant: The buyer who initiates the letter of credit and requests the bank to issue it. ii. Beneficiary: The seller or exporter who will receive the payment upon fulfillment of the terms and conditions of the letter of credit. iii. Issuing bank: The bank that issues the letter of credit on behalf of the buyer, taking responsibility for the payment to the seller. iv. Advising bank: The bank in the seller's country that advises and confirms the letter of credit to the seller. It can also be the same as the issuing bank. v. Irrevocable vs. Revocable: Irrevocable letters of credit cannot be changed or canceled without the consent of all concerned parties. Revocable letters of credit can be modified or canceled without giving prior notice to the beneficiary. vi. Confirmed vs. Unconfirmed: Confirmed letters of credit involve a second bank (the confirming bank) adding its confirmation to the letter of credit, giving the beneficiary an extra layer of assurance. vii. Terms and Conditions: These include the specific requirements that the seller must meet to receive payment. This may include presenting documents such as invoices, bills of lading, and inspection certificates. viii. Expiration Date: The date for which the letter of credit is valid. Documents must be presented and payment claimed before this date. ix. Amount: The total value of the letter of credit, specifying the maximum amount the bank is willing to pay x. Required Documents: The documents required for the seller to present to the bank to receive payment, such as invoices, bills of lading, certificates of origin, and inspection certificates. It is important for both buyers and sellers engaged in international trade to understand these points to ensure smooth and secure transactions. It is advisable for the parties involved to carefully review and understand the terms of the letter of credit before entering into any agreement. Some of the common terms or points that can be seen in a letter of credit (LC) are as follows, keeping in mind the above points: 1. Irrevocable: An irrevocable LC cannot be changed or cancelled without the consent of all the parties involved (buyer, seller and bank). 2. Confirmation: A confirmed LC involves a second bank (the confirming bank) adding its confirmation to the letter of credit, giving the beneficiary an additional layer of assurance. 3. On Site (Site LC): Payment is to be made immediately after the presentation of compliant documents. 4. Usance: Payment is deferred and will be made at a specified date in the future after the documents have been presented and accepted. 5. Required Documents: Specifies the documents that the seller must present to the bank to receive payment. Common documents include invoices, bill of lading, certificate of origin and inspection certificate. 6. Shipping Documents: Details the requirements for shipping documents, such as bill of lading, packing list and shipping invoice. 7. Insurance Documents: Specifies the requirement for insurance documents, including insurance certificates, to cover the goods shipped. 8. Inspection Certificates: A certificate issued by a third-party inspection agency may be required to verify the quality, quantity or condition of the goods. 9. Partial Shipments: Indicates whether partial shipments are allowed or the entire quantity must be shipped at once. 10. Transshipment: Specifies whether goods may be transferred from one ship to another during the voyage. 11. Latest Shipping Date: The latest date by which the goods must be shipped to comply with the terms of the LC. 12. Expiry Date: The date till which the LC is valid. Documents must be submitted and payment claimed before this date. 13. Notifying Bank: The bank in the seller's country that advises and confirms the letter of credit to the seller. It may also be the same as the issuing bank. ( D) MT 700 Format Specifications of Letter of Credit Status: M = Mandatory, O = Optional Status Tag Field Name Field Info M 27 Sequence of Total This field specifies the number of this message in the series of messages sent for a documentary credit, and the total number of messages in the series. If only MT700 is issued it will say 1/1. If in addition one MT701 is sent for the same LC, it will day 1/2 M 40A Form of Documentary Credit This field specifies the type of credit · Irrevocable, · Irrevocable Transferable, · Irrevocable Standby, · Irrevocable Trans Standby M 20 Documentary Credit Number Documentary credit number which has been assigned by the Sender. O 23 Reference to Pre-Advice Use of this field indicates that the documentary credit has been pre-advised M 31C Date of Issue Date On Which The Issuing Bank (Sender) Considers The Documentary Credit As Being Issued. M 40E Applicable Rules This field specifies the rules the credit is subject to. If LC is silent it will be deemed as irrevocable as per Art.3 of UCP 600 · Eucp Latest Version, · Eucpurr Latest Version, · Isp Latest Version, · Othr, · Ucp Latest Version, · Ucpurr Latest Version M 31D Date and Place of Expiry Art.6.d. of UCP 600 stipulates that every credit must state the date of expiry of credit. Expiry Date would be the last date for presentation of documents by the beneficiary under the letter of credit and is referred to as validity date of letter of credit Along with the date of expiry, credit must also specify the place for presentation of documents as per Art.6.d, where the LC expires. O 51a Applicant Bank Bank of the applicant customer, if different from the issuing bank. M 50 Applicant Party on behalf of which the documentary credit is being issued. M 59 Beneficiary Party in favour of which the documentary credit is being issued. M 32B Currency Code, Amount Currency code and amount of the documentary credit. O 39A Percentage Credit Amount Tolerance Tolerance denotes the variance that has to be built around the LC amount, to arrive at the actual availability amount for the LC · The positive tolerance is the percentage that should be added to the LC amount, to arrive at the Maximum LC Amount. · The negative tolerance is the percentage that should be subtracted from the LC amount, to arrive at the Minimum LC Amount. O 39B Maximum Credit Amount This field further qualifies the documentary credit amount. Not Exceeding O 39C Additional Amounts Covered Additional amounts available to the beneficiary under the terms of the credit, such as insurance, freight, interest, etc M 41a Available With … By … As per Art.6.b. of UCP 600, the Issuing Bank must indicate how a credit is available, whether 1) By Sight Payment : Nominated / Overseas Bank will make payment on receipt of documents 2) By Deferred Payment : Nominated/ Overseas bank will make payment on due date 3) By Acceptance : Nominated/ Overseas Bank will accept the draft to make payment on due date provided the draft is drawn on them – this normally is done when the credit is confirmed or restricted 4. By Negotiation : Nominated / Overseas Bank will negotiate the draft drawn on the Confirming Bank/LC issuing Bank to part with the value on sight basis or at a future date. O 42C Drafts at … Tenor of drafts to be drawn under the documentary credit. O 42a Drawee This field identifies the drawee of the drafts to be drawn under the documentary credit. O 42M Mixed Payment Details This field specifies the payment dates, amounts and/or method for their determination in a documentary credit which is available by mixed payment. O 42P Negotiation / Deferred Payment Details This field specifies the payment date or method for its determination in a documentary credit which is available by deferred payment or negotiation only. O 43P Partial Shipments LC should indicate expressly whether partial shipments are allowed or not. If nothing is stated, by virtue of Art.31.a of UCP 600, the partial shipments are deemed as allowed. · Allowed · Conditional · Not Allowed O 43T Transhipment Articles 19 to 24 of UCP 600 allow transhipment even if the credit specifically prohibits transhipment. In the light of these provisions, it is up to the banks to act prudently as per instructions of applicant and to allow transhipments wherever credit allows combined transport · Allowed · Conditional · Not Allowed O 44A Place of Taking in Charge/Dispatch from…/Place of Receipt This field specifies the place of taking in charge (in case of a multimodal transport document), the place of receipt (in case of a road, rail or inland waterway transport document or a courier or expedited delivery service document), the place of dispatch or the place of shipment to be indicated on the transport document. O 44E Port of Loading/Airport of Departure Port of loading or airport of departure to be indicated on the transport document. O 44F Port of Discharge/Airport of Destination Port of discharge or airport of destination to be indicated on the transport document. O 44B Place of Final Destination/For Transportation to…/Place of Delivery Final destination or place of delivery to be indicated on the transport document. O 44C Latest Date of Shipment Latest date for loading on board/ dispatch/ taking in charge. O 44D Shipment Period Specifies the period of time during which the goods are to be loaded on board / despatched /taken in charge O 45A Description of Goods and/or Services While stating the description of goods, excessive details (particularly technical specifications etc.) must be avoided. They should be as brief as possible. Reference to proforma invoices must be avoided. In the description, INCO terms such as ‘CIF MUMBAI’, ‘FOB TOKYO’ etc. should be stated. In the description of goods either quantity or unit price should necessarily be mentioned. O 46A Documents Required Description of any documents required. O 47A Additional Conditions Description of further conditions of the documentary credit. O 49G Special Payment Conditions for Beneficiary This field specifies special payment conditions applicable to the beneficiary, for example, post-financing request / condition O 49H Special Payment Conditions for Receiving Bank This field specifies special payment conditions applicable to the receiving bank without disclosure to the beneficiary, for example, post-financing request/conditions for receiving bank only. O 71D Charges This field may be used only to specify charges to be borne by the beneficiary. In the absence of this field, all charges, except negotiation and transfer charges, are to be borne by the applicant. · Agent, · Comm, · Corcom, · Disc, · Insur, · Post, · Stamp, · Telechar, · Warehous O 48 Period for Presentation in Days As per Art.14.c of UCP 600, every credit which calls for a transport documents must stipulate a specified period of time after the date of issuance of the transport documents during which beneficiary must present the documents to the nominated bank (for settlement). If no such period is stipulated, banks will not accept documents presented later than 21 days after the date of shipment. M 49 Confirmation Instructions This field contains confirmation instructions for the Receiver (advising bank). · Confirm, · May Add, · Without O 58a Requested Confirmation Party Bank which is requested to add its confirmation or may add its confirmation. O 53a Reimbursing Bank Name of the bank which has been authorised by the Sender to reimburse drawings under the documentary credit. This may be a branch of the Sender or the Receiver, or an entirely different bank. O 78 Instructions to the Paying/Accepting/Negotiating Bank This field specifies instructions to the paying, accepting or negotiating bank. It may also indicate if pre-notification of a reimbursement claim or pre-debit notification to the issuing bank is required. O 57a Second Advising Bank This field identifies the bank, if different from the Receiver, through which the documentary credit is to be advised / confirmed to the beneficiary. O 72Z Sender to Receiver Information Additional information for the Receiver.

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