Letter of Credit explained

What is a letter of credit?

A Letter of Credit (LC) is a document issued by your bank that essentially acts as an
irrevocable guarantee of payment to a beneficiary. This means that if you do not perform your
obligations, your bank pays. The letter of credit can also be the source of repayment of the
transaction meaning that the exporter will get paid with the redemption of the letter of credit.
Let me give you an example:
For simplicity sake lets imagine that your company imports radios from a Korean manufacturer
called Seoul Manufacturing, which banks at First Seoul Bank. Your company currently banks
at First American Bank

For the purpose of this example these will be the roles that the parties will play in the letter of
credit transaction:
Your company : applicant
Seoul Manufacturing : beneficiary
First American Bank : Issuing Bank
First Seoul Bank : Advising Bank

The example: You want to buy $50,000 worth of radios from Seoul Manufacturing, which agrees
to sell the merchandise and gives you 60 days to pay it with the condition that you provide them
with a 90 days letter of credit for the full amount. The steps to get the LC would be as follows:
1)You go to First American Bank and request a $50,000 letter of credit with Seoul Manufacturing
as a beneficiary.
2)The bank goes through its underwriting process. Although the bank is not advancing money,
they are extending credit on your behalf and are taking on a contingent liability. If your company
qualifies from a credit standpoint the LC is issued.
3)Even if your company does not qualify for credit, you can still get an LC if you are willing to put
cash collateral CD secured letters of credit are very common for small business .
4)The bank sends a copy of the letter of credit to First Seoul Bank, which lets the vendor knows
and the merchandise is shipped.

Take into consideration that the letter of credit itself might be the source of repayment of the
transaction. It could be that Seoul Manufacturing is interested in getting paid as soon as the
merchandise is shipped. Therefore, the letter of credit will indicate that payment shall be made as
soon as Seoul Manufacturing can present proof of shipping.
If the letter of credit that your vendor requires is not tied to a particular transactions, but they are
asking for a guarantee that makes sure that you will not default. They are probably asking for
a Stand-By letter of credit or a Revolving letter of credit. These types of LCs are usually for
a longer term. Usually a year and are the vendor?s guarantee that they will get paid.

The example above describes the simplest of letter of credit transactions. Although there are
other factors involved such as the role of correspondent banks and confirmations, the thing that
you should be concerned as a customer is expediency and the fees involved, which can run
anywhere from 1.5% to 8% of the value of the LC
TYPES OF LETTERS OF CREDIT
Revocable letter of credit
Just like the name says the LC can be revoked by the Issuing Bank without the agreement of the
beneficiary.
Irrevocable letter of credit
Can not be cancelled or amended without all the parties agreement.
Standby letter of credit
Guarantee of payment. If the beneficiary does not get paid from its customer it can then demand
payment from the Bank by forwarding the copy of the invoice that was not paid and supporting
documentation.
Revolving letter of credit
It is established when there are regular shipments of the same commodity between supplier and
customer. Eliminates the need to issue an LC for each individual transaction

Letter Of Credit Types

• There are several types of letters of credit.
○ The differences are found in the wording.
• Revocable versus Irrevocable
○ You should always insist and carefully
check that a letter of credit is
irrevocable.
 Once an irrevocable letter of
credit is open it cannot be
changed without the written
consent of all parties
including the beneficiary.
 A revocable letter of
credit can be change or
withdrawn without notifying
the beneficiary.
• Confirmed versus Advised
○ Confirmed is preferred, as the
Confirming Bank promises to pay.
○ Advised does not guarantee the
creditworthiness of the Opening
Bank.
• Straight versus Negotiation
 ○ A negotiation letter of
credit can be presented to
any bank.
A straight letter of credit can
only be paid in the country of
the Paying Bank.
• Sight versus Usance
○ At sight means the
Beneficiary is paid as
soon as the Paying
Bank has determined
that all necessary
documents are in
order.
○ Usance time can be
between 30 and 180
days after the bill of
lading date.
 This is a
form of
delayed
payment,
and should
be avoided.

Requesting A Letter Of Credit

• Once you have sent a pro forma invoice or an order
acknowledgement to your buyer, you should request
a letter of credit.
○ Details on what such a request should
contain are available from banks that handle
letters of credit.
• Here is a list of items that you should ask your
buyer to provide when preparing a letter of credit.
○ That the letter of credit be confirmed,
irrevocable, and at sight.
○ Suggest a Paying Bank that is
convenient to you.
 ○ Quantity of items being shipped.
○ Value of items being shipped.
○ Specify the currency.
○ Specify the latest shipping and
expiration date.
○ Specify the appropriate Incoterm.
○ State whether partial shipments are
allowed.
○ Specify which documents that are
required for payment.
• It is best to provide the buyer with a sample
form for requesting a letter of credit.

Sample Form For Requesting A

Letter Of Credit
Top of Form

Dear International Buyer:

We are providing the following instructions as a guideline
to be used when opening a letter of credit to us. Because
a letter of credit is a very critical document, please verify
that the information is accurate and complete, without
any mistakes which can create a discrepancy and lead to
our subsequent request for an amendment, and delay the
shipment.

Regarding your purchase order number

dated , please ask your bank to open an

irrevocable, at sight, commercial letter of credit according
to the following terms and conditions.

Beneficiary Name

Beneficiary Address
Requested Advising Bank
Name
Requested Advising Bank

Address
Telephone Fax Swift

In the amount of US$

The letter of credit must be payable at the counters
name of bank

of or it must be negotiable and payable at the

city near the seller

counters of a bank in .

The letter of credit must be in the possession of the

Advising Bank and received by us days before the

agreed upon shipment date.

Shipment will occur days after an acceptable letter

of credit is in the possession of the Advising Bank.

Shipment terms are:

destination

Incoterms 2000
Partial shipments are permitted.

Latest shipment date is . Latest expiration date

is .
Documentary requirements are:

1. Signed commercial invoice originals and

copies

2. Packing list originals and copies

3.

4.

Documents are to be presented within days from

the shipping date.
All bank charges will be paid by the Applicant.
Bottom of Form

Receiving A Letter Of Credit

• Here is a partial list of questions you need to ask once
you have received a letter of credit.
○ Is the letter of credit irrevocable?
○ Is the letter of credit at sight?
○ Do you trust the Paying Bank?
○ Can you convert the currency to your
currency?
○ Are the value and quantities correct?
○ Are the shipping terms correct?
○ Can you provide the required documents?
○ Are the letter of credit fees as you had
agreed?
○ Is the merchandise correctly described?
○ Is there sufficient time to meet the shipping
date and expiration date?
○ Are the shipping terms correct?
○ Specify which documents that are required
for payment.
• Do not ship the goods if you are unable or
unwilling to meet all the conditions stated in
the letter of credit.
 ○ Request an amendment to the letter of
credit.

Presenting A Letter Of Credit

• Once a letter of credit has been received, it needs to
presented to the bank for payment along with other
documents which may include:
○ Commercial invoice
○ Consular invoice
○ Insurance documents
○ Bill of lading
○ Certificate of origin
○ Packing list
○ Inspection certificates
○ Import permits
• The bank will not pay if there are discrepancies
and the documentation is not in order.

Common Mistakes Made With

Letters Of Credit
• Exporters make the following common mistakes, which
cause them to lose the sale or not get paid.
○ Presenting documents late, after the letter
of credit has expired.
○ Shipping their goods after the specified
date.
○ Making a partial shipment when partial
shipment is not allowed.
○ Not presenting the proper documents.
○ Not legalizing the documents.
○ Not obtaining completed bills of lading.
○ Not obtaining required insurance.
○ Submitting copies instead of originals.
 ○ Spelling mistakes.
○ Mathematical mistakes.
• In addition to creating payment problems,
mistakes can also cause problems for the
importer when clearing customs.

Documentary Collection Against

Payment
• Documentary collection against payment is the closest
international equivalent to cash on delivery.
○ It is not as expensive as a letter of credit.
○ The seller must ship before getting paid.
○ The buyer does not receive the goods until
payment is made.
 The buyer receives the goods
after signing a note promising to
pay.
 This promisory note may
be negotiable.
• There is risk with this form of payment.
○ The buyer may not contact the
collecting bank to acknowledge
acceptance.
○ The collecting bank is under no
obligation to force such an
acknowledgement.

Open Account
• An open account is an unsecured credit extended to
the buyer.
○ It should only be used with well-established
customers with excellent credit ratings.
○ Payment terms should be clearly state when
payment is due.
  Net 30.
• Because an open account is the perferred term
from the buyer's perspective it is easy to
negotiate.
• Disadvantages of an open account are:
○ No assurance of payment.
○ Loss of possession of goods.
○ Difficulty of collection.

Minimum Guarantee
• A minimum guarantee works when the buyer pays a
certain minimum.
○ This may only cover the cost of carriage,
freight and insurance.
○ It should only be used with well established
customers with excellent credit ratings.
○ A minimum guarantee works well when the
price of the product fluctuates due to market
demand.
○ The seller has the right to inspect the
buyer's records to verify all sales.
• The advantange of a minimum guarantee is that
the exporter has a firm order to sell.
○ The price may be very low, but at least
there is a minimum guarantee.
○ The minimum guarantee may be
assured through a letter of credit.

Consignment
• Consignment means the exporter is paid when the
importer resells the product.
○ It should only be used with well established
customers with excellent credit ratings.
 ○ The exporter is entrusting its money to the
sales abilities of the overseas reseller.

Which Payment Term

• Here is a simple table listing factors to consider when
offering payment terms.

Consider
Require Documentary Consider
Factor Letter of Collection Open
Credit Against Account
Payment

Type Of
Undetermined Acceptable Excellent
Customer

Relationship New Established Established

Economic
Unstable Stable Very Stable
Stability

Type of Regular
Custom In Stock
Order Production

Transaction
Large Moderate Small
Size

Cash Flow Always Never Never

Financing Exports Through Your

Bank
• Banks like export collections because:
○ There is evidence of the movement of
goods.
○ There is the likelihood of the buyer paying
for the goods.
  Proceeds can be used to pay the
bank in advance.
○ There is a strong probability the transactions
will be monitored independently of the
exporter.
○ Financing may be provided on a transaction-
by-transaction basis.
• Banks are more eager to lend when there is credit
insurance.
○ Credit insurance can be obtained from
government agencies established to
promote exports.
 International Banks
• Make sure your bank abides by the
International Banking Standard Practice
(IBSP) for Uniform Customs and Practice for
Documentary Credits (UCP600).
In International trade, the buyer and the seller who are located in different countries, may not know each other and
hence many times the problem of Buyer’s Creditworthiness hampers the trade between the buyer and the seller. The
main objectives of the buyer and the seller in any international trade and contradictory in terms of Buyer will always
try to delay the payment while the seller would like to receive funds at the earliest.

To mitigate this problem, Seller always request Buyer to arrange for a Letter of Credit to be issued by Buyer’s Bank.
Upon issuance of Letter of Credit, the Buyer’s bank replaces its own Creditworthiness to that of the Buyer, it
undertakes to reimburse the Seller for the value of the Letter of Credit “Irrevocably” provided two
underlineconditions are fulfilled by the Seller:

1. All the documents stated in the LC are presented;

2. All the terms and conditions of the LC are complied with.

The beauty of the LC is that if above two conditions are fulfilled, Issuing Bank will effect payment to the Beneficiary,
irrespective of Applicant reimburses the Issuing Bank or not. Thus, a Letter of Credit is an undertaking issued by a
bank in favor of a Beneficiary (Seller), which substitutes the bank’s creditworthiness for that of the Applicant
(Buyer).

Why Letter?

It is named a Letter because initially the LCs were issued manually in a Letter format address by Issuing Bank to
Beneficiary confirming its conditional undertaking to reimburse the Beneficiary, the amount of the LC provided above
2 basic conditions are fulfilled.

Parties involved in LC transaction:

 1. The Applicant is the party that arranges for the letter of credit to be issued.

2. The Beneficiary is the party named in the letter of credit in whose favor the letter of credit is issued.

3. The Issuing or Opening Bank is the applicant’s bank that issues or opens the letter of credit in favor of the
beneficiary and substitutes its creditworthiness for that of the applicant.

4. An Advising Bank may be named in the letter of credit to advise the beneficiary that the letter of credit
was issued. The role of the Advising Bank is limited to establish apparent authenticity of the credit, which it
advises.

5. The Paying Bank is the bank nominated in the letter of credit that makes payment to the beneficiary, after
determining that documents conform, and upon receipt of funds from the issuing bank or another
intermediary bank nominated by the issuing bank.

6. The Confirming Bank is the bank, which, under instruction from the issuing bank, substitutes its
creditworthiness for that of the issuing bank. It ultimately assumes the issuing bank’s commitment to pay.

Letter of Credit Process:

commercial letter of credit flow

Applicant approaches Issuing/ Opening Bank with LC application form duly filled and requests Issuing Bank to issue a
Letter of Credit in favour of Beneficiary.

1. Issuing Bank issues a Letter of Credit as per the application submitted by an Applicant and sends it to the
Advising Bank, which is located in Beneficiary’s country, to formally advise the LC to the beneficiary.

2. Advising Bank advises the LC to the Beneficiary.

 3. Once Beneficiary receives the LC and if it suits his/ her requirements, he/ she prepares the goods and hands
over them to the carrier for dispatching to the Applicant.

4. He/ She then hands over the documents along with the Transport Document as per LC to the Negotiating
Bank to be forwarded to the Issuing Bank.

5. Issuing Bank reimburses the Negotiating Bank with the amount of the LC post Negotiating Bank’s
confirmation that they have negotiated the documents in strict conformity of the LC terms. Negotiating
Bank makes the payment to the Beneficiary.

6. Simultaneously, the Negotiating Bank forwards the documents to the Issuing Bank to be released to the
Applicant to claim the goods from the carrier.

7. Applicant reimburses the Issuing Bank for the amount, which it had paid to the Negotiating Bank.

8. Issuing Bank releases all documents along with the titled Transport Documents to the Applicant.

Settlements Under a Letter of Credit

All commercial letters of credit must clearly indicate whether they are payable by sight payment, by deferred
payment, by acceptance, or by negotiation. These are noted as formal demands under the terms of the commercial
letter of credit.
In a sight payment, the commercial letter of credit is payable when the beneficiary presents the complying
documents and if the presentation takes place on or before the expiration of the commercial letter of credit.

In a deferred payment, the commercial letter of credit is payable on a specified future date. The beneficiary may
present the complying documents at an earlier date, but the commercial letter of credit is payable only on the
specified future date.

An acceptance is a time draft drawn on, and accepted by, a banking institution, which promises to honor the draft at
a specified future date. The act of acceptance is without recourse as it is a commitment to pay the face amount of
the accepted draft.

Under negotiation, the negotiating bank, a third party negotiator, expedites payment to the beneficiary upon the
beneficiary’s presentation of the complying documents to the negotiating bank. The bank pays the beneficiary,
normally at a discount of the face amount of the value of the documents, and then presents the complying
documents, including a sight or time draft, to the issuing bank to receive full payment at sight or at a specified
future date.

types of letter of credit

Irrevocable

An irrevocable letter of credit can neither be amended nor cancelled without the agreement of all parties to the
credit. Under UCP500 all letters of credit are deemed to be irrevocable unless otherwise stated. Here, the importer's
bank gives a binding undertaking to the supplier provided all the terms and conditions of the credit are fulfilled.

Unconfirmed

The advising bank forwards an unconfirmed letter of credit directly to the exporter without adding its own
undertaking to make payment or accept responsibility for payment at a future date, but confirming its authenticity.
Confirmed

A confirmed letter of credit is one in which the advising bank, on the instructions of the issuing bank, has added a
confirmation that payment will be made as long as compliant documents are presented. This commitment holds even
if the issuing bank or the buyer fails to make payment. The added security to the exporter of confirmation needs to
be considered in the context of the standing of the issuing bank and the current political and economic state of the
importer's country. A bank will make an additional charge for confirming a letter of credit. In many cases, the
confirming bank is located in Beneficiary’s country.
Confirmation costs will vary according to the country involved, but for many countries considered a high risk will be
between 2%-8%. There also may be countries issuing letters of credit, which banks do not wish to confirm - they may
already have enough exposure in that market or not wish to expose themselves to that particular risk at all.

Standby Letters of Credit

A standby letter of credit is used as support where an alternative, less secure, method of payment has been agreed.
They are also used in the United States of America in place of bank guarantees. Should the exporter fail to receive
payment from the importer he may claim under the standby letter of credit. Certain documents are likely to be
required to obtain payment including: the standby letter of credit itself; a sight draft for the amount due; a copy of
the unpaid invoice; proof of dispatch and a signed declaration from the beneficiary stating that payment has not
been received by the due date and therefore reimbursement is claimed by letter of credit. The International
Chamber of Commerce publishes rules for operating standby letters of credit - ISP98 International Standby Practices.

Revolving Letter of Credit

The revolving credit is used for regular shipments of the same commodity to the same importer. It can revolve in
relation to time or value. If the credit is time revolving once utilised it is re-instated for further regular shipments
until the credit is fully drawn. If the credit revolves in relation to value once utilised and paid the value can be
reinstated for further drawings. The credit must state that it is a revolving letter of credit and it may revolve either
automatically or subject to certain provisions. Revolving letters of credit are useful to avoid the need for repetitious
arrangements for opening or amending letters of credit.

Transferable Letter of Credit

A transferable letter of credit is one in which the exporter has the right to request the paying, or negotiating bank to
make either part, or all, of the credit value available to one or more third parties. This type of credit is useful for
those acting as middlemen especially where there is a need to finance purchases from third party suppliers.

Back-to-Back Letter of Credit

A back-to-back letter of credit can be used as an alternative to the transferable letter of credit. Rather than
transferring the original letter of credit to the supplier, once the letter of credit is received by the exporter from the
opening bank, that letter of credit is used as security to establish a second letter of credit drawn on the exporter in
favour of his importer. Many banks are reluctant to issue back-to-back letters of credit due to the level of risk to
which they are exposed, whereas a transferable credit will not expose them to higher risk than under the original
credit.

advantages of letter of credit:

1. The beneficiary is assured of payment as long as it complies with the terms and conditions of the letter of
credit. The letter of credit identifies which documents must be presented and the data content of those
documents. The credit risk is transferred from the applicant to the issuing bank.
 2. The beneficiary can enjoy the advantage of mitigating the issuing bank’s country risk by requiring that a
bank in its own country confirm the letter of credit. That bank then takes on the country and commercial
risk of the issuing bank and protects the beneficiary.

3. The beneficiary minimizes collection time as the letter of credit accelerates payment of the receivables.

4. The beneficiary’s foreign exchange risk is eliminated with a letter of credit issued in the currency of the
beneficiary’s country.

risks involved in letter of credit.

1. Since all the parties involved in Letter of Credit deal with the documents and not with the goods, the risk of
Beneficiary not shipping goods as mentioned in the LC is still persists.

2. The Letter of Credit as a payment method is costlier than other methods of payment such as Open Account
or Collection

3. The Beneficiary’s documents must comply with the terms and conditions of the Letter of Credit for Issuing
Bank to make the payment.

4. The Beneficiary is exposed to the Commercial risk on Issuing Bank, Political risk on the Issuing Bank’s
country and Foreign Exchange Risk in case of Usance Letter of Credits.

Why there are so many types of letter of credit

In principal they all serve the same objective, i.e. a document

authorizing a bank, at the request of a customer, to pay money to a
third party (the beneficiary) on presentation of documents specified
in the bill of lading and policies of insurance. The different types
of Letter of Credit can be categorized as follows: -
1. Confirmed Letter of Credit
Letter of Credit, issued by a foreign bank, with validity confirmed by
a bank of origin. A seller who requires a confirmed Letter of Credit
from the buyer is assured of payment by the origin bank even if the
foreign buyer or the foreign bank defaults.
2. Deferred Payment Credit
Type of Letter of Credit providing for payment some time after
presentation of the shipping documents by seller.
3. Discrepancy Letter of Credit
When documents presented do not conform to the Letter of Credit, it is
referred to as a "discrepancy".
4. Documentary Credit
Commercial Letter of Credit providing for payment by a bank to the
name beneficiary, usually the seller of merchandise, against delivery
of documents specified in the credit.
5. Irrevocable Letter of Credit
Letter of Credit with a fixed expiration date that carries the
irrevocable obligation of the issuing bank to pay the exporter when
all of the terms and conditions of the Letter of Credit have been
met.
6. Red Clause Letter of Credit
Letter of Credit that allows the exporter to receive a percentage of
the face value of the Letter of Credit in advance of shipment. This
enables the exporter to purchase inventory and any other costs
associated with producing and preparing the export order.
7. Revocable Letter of Credit
Letter of Credit that can be cancelled or altered by the Drawee
(buyer) after it has been issued by the Drawee's bank
8. Transferable Letter of Credit
Letter of Credit that allows all or a portion of the proceeds to be
transferred from the original beneficiary to one or more additional
beneficiaries.
9. Letter of Credit, Payment by sight draft
Document, issued by a bank per instructions by a buyer of goods,
authorizing the seller to draw a specified terms, usually the receipt
by the bank of certain documents within a given time.
Difference between gurantee nd letter of credit

A bank guarantee and a letter of credit are similar in many ways but they're two different things.
Letters of credit ensure that a transaction proceeds as planned, while bank guarantees reduce the
loss if the transaction doesn't go as planned.

A letter of credit is an obligation taken on by a bank to make a payment once certain criteria are met.
Once these terms are completed and confirmed, the bank will transfer the funds. This ensures the
payment will be made as long as the services are performed.

A bank guarantee, like a line of credit, guarantees a sum of money to a beneficiary. Unlike a line of
credit, the sum is only paid if the opposing party does not fulfill the stipulated obligations under the
contract. This can be used to essentially insure a buyer or seller from loss or damage due to
nonperformance by the other party in a contract.

For example a letter of credit could be used in the delivery of goods or the completion of a
service. The seller may request that the buyer obtain a letter of credit before the transaction
occurs. The buyer would purchase this letter of credit from a bank and forward it to the seller's bank.
This letter would substitute the bank's credit for that of its client, ensuring correct and timely payment.

A bank guarantee might be used when a buyer obtains goods from a seller then runs into cash
flowdifficulties and can't pay the seller. The bank guarantee would pay an agreed-upon sum to the
seller. Similarly, if the supplier was unable to provide the goods, the bank would then pay the
purchaser the agreed-upon sum. Essentially, the bank guarantee acts as a safety measure for the
opposing party in the transaction.

These financial instruments are often used in trade financing when suppliers, or vendors, are
purchasing and selling goods to and from overseas customers with whom they don't have
established business relationships. The instruments are designed to reduce the risk taken by each
part

Ex-Im Bank Letter of Credit Insurance For Banks

SUMMARY
The Ex-Im Bank Letter of Credit policy can reduce a bank’s risks on confirmations and negotiations of irrevocable
letters of credit issued by overseas financial institutions for the financing of U.S. exports.
This policy affords commercial and political coverage against the failure of an overseas financial institution
(issuing bank), whether sovereign or private, to make payment or reimbursement to the insured bank on an
irrevocable letter of credit. Coverage is also provided for the insured bank's refinancing of payments under a sight
irrevocable letter of credit of the issuing bank.
What is Covered
The policy applies to irrevocable letters of credit which conform with the Uniform Customs and Practice for
Documentary Credits (UCP), 2007 revision, publication number 600 of the International Chamber of Commerce
(as may be amended from time to time) where the insured has a relationship with the foreign issuing bank. The
policy is not applicable to revocable, back-to-back, red clause or conditional letters of credit.
Coverage applies to irrevocable letter of credit sales for goods produced in and shipped from the United States
during the policy period, and for services performed by U.S. personnel either in the U.S. or in a host country.
Receivables for products, which are less than 50% U.S. content, excluding mark-up, and certain defense
products, are not eligible for cover.
Terms up to 180 days from the date of first presentation of documents may be extended for consumer goods,
spare parts and raw materials. On a case-by-case basis, agricultural commodities, fertilizer and capital
equipment may be insured on terms up to 360 days.
Principal amounts are covered up to the maximum insured percentages stated below or as specified in the policy
declarations. Documented interest is covered up to 180 days after the date of the issuing bank's default (or fewer
days when the claim is settled earlier). On letters of credit that are payable in U.S. dollars, the insured interest
rate is generally prime rate minus 0.5% or the rate stated in the credit agreement, whichever is less. Ex-Im Bank
uses the prime rate published in the Wall Street Journal, under the table "Money Rates."
The policy specifically excludes coverage for those transactions in which there is an unresolved documentary
dispute between the insured and the issuing bank. Additionally, coverage is specifically excluded in situations in
which the issuing bank refuses documents at the time of presentation and seeks a refund from the insured bank
to which a reimbursement has already been made.
ELIGIBLE INSURED BANKS
The policy may be issued to any bank doing business in the United States in accordance with applicable federal
or state banking laws and regulations. An application, form EIB92-34, is required. The insured bank must act
under the terms of the UCP as either the paying, accepting, or negotiating bank for the insured transaction.
PERCENTAGES OF COVER
The Bank Letter of Credit policy provides coverage against losses caused by events such as war, revolution,
expropriation or confiscation by a governmental authority, cancellation of import or export licenses, and foreign
exchange inconvertibility, and commercial losses caused by events such as insolvency of the foreign issuing
bank, and failure to reimburse or to pay for other reasons.
Equalized coverage for commercial and political risks (comprehensive cover), or political only coverage is
available at the following maximum percentages:
Comprehensive or Political-Only
Sovereign Financial Institution 100%
Non-Sovereign Financial Institution 95%
Approved Agricultural Commodities 98%
RECOURSE
The insured may arrange recourse or "pass back" to a third party of all or any part of any uninsured amount.
HOW THE POLICY WORKS
The policy affords coverage for eligible issuing banks in 2 ways:
1) As determined by Ex-Im Bank based on the insured's submission of an issuing bank credit limit (IBCL)
application, form EIB92-36, for the overseas financial institution and issuance by Ex-Im Bank of a written credit
approval in form of a policy endorsement. The application requires disclosure of all relevant financial information
on the issuing bank.

High credits may be extended up to the amount specified in the IBCL, which generally remains valid for a
maximum period of 12 months. Once issued, the IBCL becomes a revolving credit approval limited only to the
approved issuing bank with specified terms and tenor.
Ex-Im Bank has published its Short-Term Credit Standards (EIB99-09) - Buyers, for Letter of Credit Transactions
that may be consulted to determine the likelihood of approval of the confirming bank and the issuing bank.
2) By use of a Discretionary Credit Limit (DCL) given to the insured bank. The DCL requires the insured bank to
have specified documentation of the issuing bank’s creditworthiness, such as a short-term debt rating or
minimum net worth and profitability.
Under the DCL, political risks coverage is provided against those of the country of the issuing bank’s head office.
If the insured bank wants coverage against the political risks of the country of the issuing bank, when different
from the country of the issuing bank’s head office, it must specifically apply for that cover (see IBCL above).
The insured bank is required to obtain an Exporter Certificate, form EIB94-07, certifying, among other things, that
a letter of credit has been established in support of the described transaction and that the goods are
manufactured or produced in and shipped from the United States. If the beneficiary of the letter of credit is an
entity other than the exporter, a Beneficiary Certificate, form EIB92-37, is required.
PRE-PRESENTATION AGREEMENT
Prior to the presentation of documents on the insured bank under a letter of credit and at the time an insured
bank commits to finance or pay, the insured may obtain a pre-presentation agreement under which Ex-Im Bank
agrees not to withdraw coverage, add, delete, or amend any policy condition, credit limit or other limitation,
including the country limitation schedule for a period of up to 90 days. The policy also sets forth a method by
which this optional agreement may be used and extended for additional time under the Discretionary Credit Limit.
WHAT THE INSURED AGREES TO DO
The insured agrees:
• to submit reports to Ex-Im Bank, form EIB92-30, listing appropriate bank commitments and insured
transactions, with payment of the corresponding premiums (which will vary from month to month with
the level of activity);
• to report all amounts past due (insured and uninsured), form EIB92-27, from the foreign issuing bank;
• not to enter into an insured transaction with an issuing bank that is 30 days or more past due;
• to obtain Ex-Im bank’s prior written approval for rescheduling or accelerating any insured transaction;
• to make written demands for payment on the foreign issuing bank within 30 days after default;
• to exercise reasonable care to minimize or prevent loss;
• to maintain evidence of the documents or experience used to exercise a Discretionary Credit Limit.
CLAIMS AND PAYMENTS
Claims may be filed no earlier than 60 days and no later than 120 days after the date of default. Prior to claim
submission, the insured is required, within 30 days of default, to make written demand for payment on the issuing
bank. The insured is required to file a release and assignment form with Ex-Im Bank, transferring any rights to
the defaulted receivables and any security when the claim is paid, so that recovery may be attempted.
Ex-Im Bank will pay claims within 60 days of receiving a satisfactorily completed and documented proof of loss,
form EIB92-39.
RISK-BASED PREMIUM RATES
A risk-based pricing system is used that reflects the major risk elements of each transaction. Applicants may
obtain a non-binding rate indication by referring to the Country Short Term Fee Schedule at Ex-Im Bank’s
Internet Homepage or by contacting the Business Development Division with specifics of the contemplated
transaction. Changing conditions may result in a different rate being finally offered than is initially indicated.
However, premiums specified by Ex-Im Bank in writing are firm.
An advance deposit of $2,000 is paid to set-up the policy. This deposit is collected upon issuance of the policy.

Rate of interest on Bill Discounted under LC for all categories

Particulars Rate of interest
1. When Bills Discounted are under Letter of Credit of our Bank/other prime Banks
a. Having contractual maturity from 1 to 90 days. 0.50% above Base Rate, i.e. 10.00% p.a. at present.
b. Having contractual maturity from 91 to 180 days. 0.75% above Base Rate, i.e. 10.25 % p.a. at present.
c. Having contractual maturity more than 180 days
4.00% above Base Rate i.e.13.50% p.a at present.
upto 1 year(Our Bank's LC)
d. Having contractual maturity more than 180 days
4.50% above Base Rate, i.e. 14.00% p.a. at presen
upto 1 year (Other Bank's LC)

Letter of credit and

Letter if Credit is an indirect form of working capital financing where a letter is written by a bank
stating that the bank guarantees payment of a billed amount if all the specified agreements are met and
banks assume only the risk, the credit being provided by the supplier himself. The purchaser of the
goods on credit obtains a letter of credit from a bank. The bank undertakes the responsibility to make
payment to the supplier in case the buyer fails to meet his obligations. Thus, the way the letter of credit
works is that the supplier sells goods on credit, the bank gives a guarantee and bears risk only in case of
default by the purchaser.

tandby Letter of Credit - SLOC

What Does Standby Letter of Credit - SLOC Mean?

A guarantee of payment issued by a bank on behalf of a client that is used as "payment of last resort"
should the client fail to fulfill a contractual commitment with a third party. Standby letters of credit are
created as a sign of good faith in business transactions, and are proof of a buyer's credit quality and
repayment abilities. The bank issuing the SLOC will perform brief underwriting duties to ensure the
credit quality of the party seeking the letter of credit, then send notification to the bank of the party
requesting the letter of credit (typically a seller or creditor).

Also known as a "non-performing letter of credit".

Investopedia explains Standby Letter of Credit - SLOC

A standby letter of credit will typically be in force for about one year, allowing for enough time for
payment to be made through standard contractual guidelines.

Standby letters of credit are often used in international trade transactions, such as the purchase of
goods from another country. The seller will ask for a standby letter of credit, which can be cashed on
demand if the buyer fails to make payment by the date specified in the contract. The cost to obtain a
standby letter of credit is typically 1-8% of the face amount annually, but the letter can be canceled as
soon as the terms of the contract have been met by the purchaser or borrower.

TRADE FINANCE(KOTAK BANK)

International - Exports
Finance solutions of real value to your import-export business

Kotak Mahindra Bank provides a wide range of export related services, assisting the growth of your organization
into the overseas market.
 Key Features
• Tailor made solutions to suit all your export needs

• Experienced trade finance team that focuses on client requirements

• Leverage our global network of correspondent banks

Pre-Shipment Credit
We offer pre-shipment credit to exporters by way of packing credit, enabling them to finance operations like
purchase/import of raw materials or processing and packing of export goods. Exporters can avail of this pre-
shipment credit either in rupees or foreign currency.
Post-Shipment Credit
We offer post-shipment credit to exporters, helping them finance export sales receivable for the time lag between
shipment of goods and date of realization of export proceeds. Exporters can avail of the following services:
• Negotiation/ payment/ acceptance of export documents under letter of credit

• Purchase/ discount of export documents under confirmed orders/export contracts etc.

• Advances against export bills sent on collection basis

• Advances against exports on consignment basis

• Advances against undrawn balance on exports

• Advances against approved deemed exports

Exporters can avail of this post-shipment credit either in rupees or foreign currency.
Bills & Collection
We have a strong, experienced trade finance team that focuses on client trade-related requirements, whether
domestic or international. This team advises and guides clients on documentation and transactions ensuring:
• Quick turnaround times through smooth document processing

• Faster payments through constant follow-ups with correspondent banks for timely recovery of funds

• Cost effectiveness

• Better reach

• Excellent trade support

• Arrangement of credit reports of overseas parties

• Specialised advice on international trade related issues as well as technical issues such as ECM requirements,
RBI reporting, new circulars and international developments

We have developed a global network of correspondent banks that enables us to handle large volume collection
portfolios. We offer world-class facilities for handling collections related to international trade.
We also handle documents where proceeds have been received by the exporter on an advance payment basis
and the actual shipment takes place later. In such cases, the documents need to be accompanied with an
Foreign Inward Remittance Certificate (FIRC) as proof of receipt of the advance payment.
Inward Remittances
We facilitate Foreign Inward Remittance (foreign exchange received by a person in India through banking
channels) and offer convenient modes of operations for quick and easy disbursement.
The facility is extended through arrangements with reputed, correspondent banks located in most countries
around the world