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Dynamics of
Documentary
Credit
Adnaan Jamilee
Senior Executive Officer
Credit Risk Management
IDLC Finance Limited.
May 15, 2012

International Trade
• International trade is the backbone of our modern, commercial world, as
producers in various nations try to profit from an expanded market, rather
than be limited to selling within their own borders.

International Trade Payment Methods
• Cash in Advance – the seller receives cash from the buyer prior
to shipment
• Open Account – goods are shipped to the buyer and payment is
made through an arrangement negotiated in advance with the
seller
• On Consignment – the seller ships goods to the agent but
retains ownership. Payment is made if and when the agent sells the
goods completely
• Collection – The goods the are shipped to the buyer. The seller’s draft
and documents covering the shipment are presented through the buyer’s
bank for payment
• Letter of Credit (LC) – It is a bank’s conditional undertaking of
payment

International Sales Contract
• The contract to buy and sell any goods between two parties
(located in two different countries) is the starting point of
international trade.
• An international sales/purchase contract with specifications of the
terms of payment comes into being when an exporter makes an
offer and the importer accepts it.
• If the contract calls for payment by Letter of Credit (LC), the
importer requests its bank for issuance of letter of credit by
submitting properly filled-up forms and documents.

International Transportation of Goods
Seller/Exporter/B
eneficiary
Place of
Receipt
Buyer/Importer
/Applicant
Delivery Point
Forwarder Customs Broker
Goods
International Shipment
Goods

Import Under LCAF (without opening of LC)
• Yearly permissible limit – for import of any item by making payment from
Bangladesh is not over US$ 50,000.
• Import from Myanmar – food items (rice, wheat, soybean oil, palm oil,
onion, fish etc.) not exceeding US$ 20,000 per consignment.
• Under government arrangement – Import of rice for US$ 2,000,000 per
consignment irrespective of yearly ceiling.
• Under approval from Drugs Administration, pharmaceuticals companies
are allowed to import chemical goods.
LC Authorization Form issued by the
customs.

Import Under LCAF (without opening of LC)
• Perishable Food items through Teknaf custom station – US$ 10,000 to US$
15,000 per consignment
• Other Land Ports – US$ 5,000 to US$ 7500 per consignment
• Industrial raw materials and capital Machinery – irrespective of value
restrictions permissible for import
• For import without opening of LC, the importers are required to be
registered with the Authorized Dealer (AD) branches of banks.

. . .
Process Flow of
Documentary Draft Transaction
or Non-LC Import

Documentary Draft Transaction (Non-LC)
Exporter Importer
1.International Sales Contract
Carrier at
Departing
Port
2. Goods
3. Transport
Documents
Remitting
Bank
Presenting
Bank
4. Draft &
Transport
Documents
5. Draft and
Transport
Documents
6. Draft
7. Payment
10. Transport
Documents
Carrier at
Arrival Port
8. Payment
9. Payment
11. Transport
Documents
12. Goods

Definition of LC
• A letter of credit is a written commitment by a bank to make
payment at sight of a defined amount of money to a beneficiary
(exporter) according to the terms and conditions specified by the
importer (applicant). The letter of credit should set a time limit for
completion and specify which documents are needed to confirm
the transaction's fulfillment.
• More properly called a documentary letter of credit, it is important
to remember that a letter of credit is an additional contract dealing
with credit between the applicant (importer) and the issuing bank
and separate from the original grain contract.

Parties to Documentary Credit
 Applicant (Opener): Applicant which is also referred to as account party is normally a buyer
or customer of the goods, who has to make payment to beneficiary. LC is initiated and issued
at his request and on the basis of his instructions.
 Issuing Bank (Opening Bank) : The issuing bank is the one which create a letter of credit and
takes the responsibility to make the payments on receipt of the documents from the
beneficiary or through their banker.
 Beneficiary : Beneficiary is normally stands for a seller of the goods, who has to receive
payment from the applicant. A credit is issued in his favour to enable him or his agent to
obtain payment on surrender of stipulated document and comply with the term and
conditions of the L/c.
If L/c is a transferable one and he transfers the credit to another party, then he is referred to
as the first or original beneficiary.

 Advising Bank : An Advising Bank provides advice to the beneficiary and takes the
responsibility for sending the documents to the issuing bank and is normally located in the
country of the beneficiary.
 Confirming Bank : Confirming bank adds its guarantee to the credit opened by another bank,
thereby undertaking the responsibility of payment/negotiation acceptance under the credit,
in additional to that of the issuing bank. Confirming bank play an important role where the
exporter is not satisfied with the undertaking of only the issuing bank.
 Nominated Bank: The Negotiating Bank is the bank who negotiates the documents
submitted to them by the beneficiary under the credit either advised through them or
restricted to them for negotiation. On negotiation of the documents they will claim the
reimbursement under the credit and makes the payment to the beneficiary provided the
documents submitted are in accordance with the terms and conditions of the letters of
credit.

• Reimbursing Bank : Reimbursing Bank is the bank authorized to honor the
reimbursement claim in settlement of negotiation/acceptance/payment
lodged with it by the negotiating bank. It is normally the bank with which
issuing bank has an account from which payment has to be made.
Second Beneficiary : Second Beneficiary is the person who represent the first or
original Beneficiary of credit in his absence. In this case, the credits belonging to
the original beneficiary is transferable. The rights of the transferee are subject to
terms of transfer.

Bill of Lading
• Bill of Lading is a document given by the shipping agency for the
goods shipped for transportation form one destination to another and
is signed by the representatives of the carrying vessel.
Certificate of
Origin
• The Certificate of Origin is required by the custom authority of the
importing country for the purpose of imposing import duty. It is usually
issued by the Chamber of Commerce and contains information like seal of
the chamber, details of the good to be transported and so on.
Commercial
Invoice
• Commercial Invoice document is provided by the seller to the buyer. Also
known as export invoice or import invoice, commercial invoice is finally
used by the custom authorities of the importer's country to evaluate the
good for the purpose of taxation.
Major Documents Used in LC: According to UCP. 600

Bill of
Exchange
•A Bill of Exchange is a special type of written document under which an exporter ask
importer a certain amount of money in future and the importer also agrees to pay the
importer that amount of money on or before the future date.
Insurance
Certificate
•Insurance Certificate certifies that goods transported have been insured under an open
policy and is not actionable with little details about the risk covered. It is necessary that
the date on which the insurance becomes effective is same or earlier than the date of
issuance of the transport documents.
Packing List
•Packing List contains details about the packing materials used in the shipping of goods. It
also include details like measurement and weight of goods
Inspection
Certificate
•Certificate of Inspection is a document prepared on the request of seller when he wants
the consignment to be checked by a third party at the port of shipment before the goods
are sealed for final transportation.
Documents Used in LC: According to UCP. 600

How Does Letter of Credit Operate?
• Step 1 – Exporter and importer sign the sales contract
• Step 2 – Importer requests his bank (issuing bank) to issue a LC in favor of the
exporter after submitting pro forma invoice
• Step 3 – Issuing bank sends the LC to advising bank in the exporter’s country
• Step 4 – Advising bank authenticates and advises the LC to the exporter
• Step 5 – Exporter ships the goods
• Step 6 – Exporter prepares and collects documents then presents to the
nominated bank for negotiation/payment/acceptance

How Does Letter of Credit Operate? (cont’d)
• Step 7 – The nominated banks checks the documents and pays the seller if
documents are in order
• Step 8 – Nominated bank sends the documents to issuing bank
• Step 9 – Nominated bank claims reimbursement from the issuing bank or
from a bank specified in the LC
• Step 10 – Issuing bank delivers documents to the importer after
settlement of payment
• Step 11 – Importer exchanges the documents of title with the carrier, or
carrier’s agent for the goods

Documentary Credit Transaction

Exporter Importer
1.International Sales Contract
Carrier at
Departing
Port
Carrier at
Arrival Port
Nominated Bank Issuing Bank
Advising Bank
2.
Application
3. SWIFT
Message
4. LC
5. Goods
6.
Transport
Docs
7. Carriage of
Goods
8. LC and
Transport
Docs
9. Payment
10. LC and
Transport
Docs
13. LC and
Transport
Docs
11.
Payment
12.
Payment
14.
Transport
Docs
15.
Goods
Documentary Credit Transaction

Types of Documentary Credit
• Revocable Letter of Credit
A revocable letter of credit may be revoked or modified for any reason, at any time by the
issuing bank without notification. It is rarely used in international trade and not considered
satisfactory for the exporters but has an advantage over that of the importers and the issuing bank.
• Irrevocable Letter of Credit
In this case it is not possible to revoked or amended a credit without the agreement of the
issuing bank, the confirming bank, and the beneficiary. Form an exporters point of view it is
believed to be more beneficial. An irrevocable letter of credit from the issuing bank insures the
beneficiary that if the required documents are presented and the terms and conditions are
complied with, payment will be made.
• Confirmed Letter of Credit
Confirmed Letter of Credit is a special type of L/c in which another bank apart from the
issuing bank has added its guarantee. Although, the cost of confirming by two banks makes it
costlier, this type of L/c is more beneficial for the beneficiary as it doubles the guarantee.

Types of Documentary Credit (cont’d)
• Sight Credit and Usance Credit
Sight credit states that the payments would be made by the issuing bank at sight, on
demand or on presentation. In case of usance credit, draft are drawn on the issuing bank or
the correspondent bank at specified usance period. The credit will indicate whether the
usance draft are to be drawn on the issuing bank or in the case of confirmed credit on the
confirming bank.
• Standby Letter of Credit
Initially used by the banks in the United States, the standby letter of credit is very
much similar in nature to a bank guarantee. Unlike a traditional letter of credit where the
beneficiary obtains payment against documents evidencing performance, the standby letter
of credit allow a beneficiary to obtains payment from a bank even when the applicant for the
credit has failed to perform as per bond.

• Transferable Letter of Credit
A transferable documentary credit is a type of credit under which the first beneficiary which
is usually a middleman may request the nominated bank to transfer credit in whole or in part to the
second beneficiary. This type of L/c is used in the companies that act as a middle man during the
transaction but don’t have large limit.
The first beneficiary or middleman has rights to change the following terms and conditions of the
letter of credit:
 Reduce the amount of the credit.
 Reduce unit price if it is stated
 Make shorter the expiry date of the letter of credit.
 Make shorter the last date for presentation of documents.
 Make shorter the period for shipment of goods.
 Increase the amount of the cover or percentage for which insurance cover must be effected.
 Substitute the name of the applicant (the middleman) for that of the first beneficiary (the buyer).

• Back to Back Letter of Credit
Back to Back Letter of Credit is also termed as Countervailing Credit. A credit is known as
back-to-back credit when a L/c is opened with security of another L/c. The back to back
import LCs shall be opened on usance basis for a period not exceeding 180 days.
The parties to a Back to Back Letter of Credit are:
1. The buyer and his bank as the issuer of the original Letter of Credit.
2. The seller/manufacturer and his bank,
3. The manufacturer's subcontractor and his bank.
The need for such credits arise mainly when :
 The ultimate buyer not ready for a transferable credit
 The Beneficiary do not want to disclose the source of supply to the openers.
 The manufacturer demands on payment against documents for goods but the beneficiary of
credit is short of the funds

Back-To-Back Letter of Credit Transaction
Exporter/
Beneficiary
Importer/
Applicant
Exporter/
Beneficiary
Issuing Bank
Nominated
Bank
Advising
Bank

Commitment
Charges
• The fee charged by the L/c opening bank during the commitment period is referred to
as commitment fees. Commitment period is the period from the opening of the letter
of credit until the last date of negotiation of documents under the L/c or the expiry of
the L/c, whichever is later.
Usance
Charges
• Usance is the credit period agreed between the buyer and the seller under the letter
of credit. This may vary from 7 days usance (sight) to 90/180 days. The fee charged by
bank for the usance period is referred to as usance charges.
Retirement
Charges
• The advising bank charges an advising fee to the beneficiary unless stated otherwise
The fees could vary depending on the country of the beneficiary. The advising bank
charges may be eventually borne by the issuing bank or reimbursed from the
applicant.
Fees & Charges related to Documentary Credit

Ascertainment of Duties and Taxes
The followings are the components used in calculating the cost of
importable goods:
 Cost and Freight
 Assessable Value
 Insurance Cost
 Landing Charges
 Custom Duty
 Supplementary Duty
 Value Added Tax
 Advance Income Tax (AIT)

Ascertainment of Duties and Taxes (cont’d)
• Cost and Freight (CFR) is the actual amount paid by the
importers for the goods and shipment.
• Insurance cost (as a percentage of CFR) is added to the CFR.
• After adding Insurance cost, landing charges is being
calculated.
• Assessable value (AV) is the summation of CFR, Insurance Cost
and Landing Charges.

• Custom Duty is computed on the assessable value.
• Supplementary Duty is also calculated on the assessable value
• VAT is computed after custom duty and supplementary duty
are added to assessable value
• Advance income tax is calculated on assessable value
Ascertainment of Duties and Taxes (cont’d)

Derivation of Duties and taxes
Particulars Amount
Cost and Freight (CFR) 820,000
Add: Insurance Cost BDT 820,000*1% 8,200
828,200
Add: Landing Charges BDT 828,200*1% 8,282
Assessable Value (AV) 836,482
Duties and Taxes:
Custom Duty (25% of AV) BDT 836,482*25% 209,121
Supplementary Duty (20% of AV) BDT 836,482*20% 167,296
Value Added Tax {15% of (AV+CD+SD)} 181,935
Advance Income Tax (3% of AV) BDT 836,482*3% 25,094
Total Duties and Taxes 583,446
If,
CFR = US$ 10,000 or BDT 820,000/-
Insurance Cost= 1%, Landing Charges= 1%
Custom Duty=25%, Supplementary Duty= 20%
VAT= 15%, AIT= 3%

Incoterms
EXW
• Ex works means
that the seller
(exporter)
delivers when he
places the goods
at the disposal of
the buyer
(importer) at the
seller's premises
or another
named place (i.e.
works, factory,
warehouse, etc.)
not cleared for
export and not
loaded on any
collecting vehicle.
FCA
• Free Carrier
means that the
seller (exporter)
delivers the
goods, cleared for
export, to the
carrier nominated
by the buyer
(importer) at the
named place. If
delivery occurs at
the seller's
premises, the
seller (exporter)
is responsible for
loading.
FAS
• Free Alongside
Ship means that
the seller
(exporter)
delivers when the
goods are placed
alongside the
vessel at the
named port of
shipment. This
means that the
buyer (importer)
has to bear all
costs and risks of
loss of or damage
to the goods from
that moment.
FOB
• Free on Board
means that the
seller (exporter)
delivers when the
goods pass the
ship's rail at the
named port of
shipment. This
means that the
buyer (importer)
has to bear all
costs and risks of
loss of or damage
to the goods from
that point.

CFR
• Cost and Freight means
that the seller delivers
when the goods pass the
ship's rail in the port of
shipment. The seller must
pay the costs and freight
necessary to bring the
goods to the named port
of destination but the risk
of loss of or damage to
the goods, as well as any
additional costs due to
events occurring after the
time of delivery, are
transferred from the
seller to the buyer.
CIF
• Cost, Insurance and
Freight means that the
seller delivers when the
goods pass the ship's rail
in the port of shipment.
The seller must pay the
costs and freight
necessary to bring the
goods to the named port
of destination but the risk
of loss of or damage to
the goods, as well as any
additional costs due to
events occurring after the
time of delivery, are
transferred from the
seller to the buyer.
CPT
• "Carriage paid to..."
means that the seller
(exporter) delivers the
goods to the carrier
nominated by him but
the seller (exporter) must
in addition pay the cost
of carriage necessary to
bring the goods to the
named destination. This
means that the buyer
(importer) bears all risks
and any other costs
occurring after the goods
have been so delivered.
Incoterms

Thank You
Adnaan Jamilee
Senior Executive Officer
IDLC Finance Limited

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Dynamics of Documentary Credit

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