Chetan Kumar Verma
international Biz Consultant
Hi, my name is Chetan Kumar Verma from The Biz Solution India Exporter Team, India. I work as a CEO of Kliicksetup Business Solution OPC Pvt Ltd – Notes Book Publication LLP – The Biz Solution – India Exporter and many more. With this blog I’d like to share all about International Trade,Mandatory Export Import Registration , Top Buyer Countries for Indian Products Export , Starter Support for Export Import Business.
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Step for Opening Letter Of Credit L / C | Export-Import Document Payment
In the last article, I have explained to you about the What Is Letter Of Credit ( L/C) now again we will try to go in more deeper and will try to learn Step for Opening Letter Of Credit L / C | Export-Import Document Payment.
IN the context of buying and selling transactions carried out with letters of credit (L / C) as payment instruments, then if we discuss opening letters of credit (L / C), we must place our position on the IMPORT side and as an importer. This is because the L / C is opened by the importer (also called the applicant or accounted). Other parties involved besides the applicant are the applicant bank (issuing bank/opening bank). The import itself is the activity of bringing goods from outside the customs area of a country into the country’s customs territory.
Types Of Letter Of Credit – L / C –
- letter of credit at sight
- letter of credit bank guarantee
- letter of credit bill discounting
- letter of credit irrevocable
- letter of credit on Standby
- Letter of Credit Revocable
- Letter Of Credit Revolving
- Red Clause Letter Of Credit
The following are step by step procedures for opening L / C:
1. First Step for opening Letter of Credit – L / C – Legality Provisions
* To be able to open an L / C, the applicant must have:
* Import Export Number (IEC Certificate ) ==> Maybe in the form of Registered IEC,Import Export Certificate is prime document for all those want to start the export-import business. So as legal document for opening a Letter of credit Import-export certificate is the main prime document.
* Trading Business License (Company – Entity – Firm)
* Taxpayer Identification Number (TIN Number – Business Identification Number in case of Individual as Sole Proprietor)
* Having trade relations or contracts with overseas parties. In this case, the importer has made a sales contract with the exporter
2. Collateral –Second Step for opening Letter of Credit – L / C
The opening of the L / C will create an obligation for the issuing bank to make payments to the exporter (beneficiary), because the issuing bank takes over the obligation of the importer to pay for the goods sent by the exporter.
For this reason, issuing banks will ask for guarantees for opening Letter of credit L / Cs from importers in the form of “Marginal Deposit / MD” deposits. The amount of MD deposit that must be deposited by the importer is distinguished based on the presence or absence of import facilities obtained by the importer from his bank.
Without the Bank facility,
Importers are required to deposit MD at 100% (full cover) of the Letter Of Credit L / C value to be opened in the same currency as the L / C. MD deposits can be effective deposits, balances blocked in checking accounts, or blocked deposits.
With Bank facilities
By getting import facilities from the bank, it is possible for importers to be obliged to deposit MD not in full cover, but only 10 or 20 percent, depending on the credit agreement clause. Here, the risk for the importer is taken over by the bank after, of course, going through the stages of credit analysis.
3. Third Step for opening Letter of Credit – L / C
Application An application is an order from the importer to the bank to open an L / C based on an agreement with the exporter as outlined in the contract (sales contract). The L / C opening application has the function as:
* Instructions for carrying out the sales contract. Therefore, the Letter of Credit L / C application reflects the contents of the sales contract but is not related to the contract.
* Requests and instructions from the applicant to the bank (issuing bank) to issue Letter Of Credit L / C with the terms and conditions requested
* Contract between the applicant and the issuing bank
* Requests to the issuing bank to act on the obligation to pay to the exporter (beneficiary). In this case, what is paid is documents, not goods.
* As long as the Letter of Credit L / C has been issued on the basis of the L / C application, the said L / C application cannot be canceled unilaterally by the applicant.
Data on the L / C opening application form The L / C
application contains the items and clauses adopted from the sales contract. In turn, data on the application will be contained in L / C clauses. Data in the application generally includes the following items:
1. Form of L / C (must be ‘irrevocable‘ or cannot be changed unilaterally)
2. Name and address of the exporter (beneficiary)
3. Value and type of currency in the L / C
4. Method of payment of L / C (by payment, negotiation, acceptance, or deferred payment)
5. Tenor (at sight LC or usance LC ) and on behalf of whom the draft will be withdrawn
6. Export Item description, item / unit details, and price per unit
7. Terms of Export Product delivery => FOB, CFR, CIF, etc.
8. Requested documents along with duplicate details (original and copy)
9. Name of port of loading ( Exporter Port ) and destination port ( Importer Port )
10. Partial delivery and transhipment is permitted or not
11. Last date delivery
12. Date and place of maturity of L / C
13. Date of final delivery of documents to the authorized bank to obtain payment certainty (latest presentation document)
14. Is the L / C transferable
15. Types of communication facilities used to advocate for L / C to be opened (by mail, telex, or SWIFT)
16. Others of a special nature
4. The fourth Step for opening Letter of Credit – L / C– Issuing bank Conditions
The issuing bank is a Letter Of Credit L / C opening bank. Before the L / C is opened, the matters that must be ensured by the issuing bank are:
* The importer has obtained an import facility, otherwise MD must deposit 100% of the value of the opened L / C (full cover).
* Applicant imported goods do not include prohibited goods
* The application has been signed by an authorized company official with a signature that matches the specimen of the issuing bank.
* Applicant import permit is still valid (valid)
If the above matters have been fulfilled by the applicant, the issuing bank is ready to issue the Letter Of Credit L / C in question. That way, the issuing bank has committed to:
* Taking over the obligation to pay from the applicant. The beneficiary or his proxy can only request payment from the issuing bank, not the applicant.
* Make payments when the documents received from the beneficiary meet the L / C terms and conditions, or based on the applicant’s approval.
L / C – Letter of Credit can be opened using various facilities, including mail, telex, and SWIFT. Among them, SWIFT is the most widely used because it is practical and has a relatively more secure level of security.
After the Letter Of Credit L / C is opened, the next process is sending the L / C to the advising bank, whose task is to forward the L / C to the exporter (beneficiary). But this will be our language in another article because it will be very long if continued in this article 🙂
Hopefully sharing about the process of opening L / C can be useful for you. If you have opinions or anything related to this topic, please write your comments.
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