Letters of Credit in Asia Hugo Verschoren Senior Product Manager Trade Finance Services ING Group Amsterdam International Business Week October 2012
WHAT IS A LETTER OF CREDIT? 2 2
What is a Letter of Credit? Independent undertaking of a bank At the request of the buyer (= applicant) To make payment to the seller (= beneficiary) Against presentation of documents evidencing delivery of goods or services Conforming to the terms and conditions of the Letter of Credit 3 3
Outline 4 4 4
Outline BUYER 1 SELLER 5 1 Negotiation of contract between buyer and seller 5 5
Outline ISSUING 2 BUYER 1 SELLER 6 2 Application for opening of the Letter of Credit 6 6
Outline 3 ISSUING 2 BUYER 1 SELLER 7 3 Risk analysis 7 7
Outline 3 ISSUING 4 ADVISING 2 BUYER 1 SELLER 8 4 Opening of the Letter of Credit 8 8
Outline ISSUING 4 ADVISING 3 5 2 BUYER 1 SELLER 9 5 Analysis authenticity, risk and compliance 9 9
Outline ISSUING 4 ADVISING 3 5 2 6 BUYER 1 SELLER 10 6 Notification (= advising), possibly with confirmation 10 10
Outline ISSUING 4 ADVISING 3 5 2 6 BUYER 1 SELLER 7 11 7 Analysis of the Letter of Credit 11 11
Outline ISSUING 4 ADVISING 3 5 2 6 BUYER 1 SELLER 7 8 12 8 Shipment of goods 12 12
Outline ISSUING 4 ADVISING 3 5 2 9 6 BUYER 1 SELLER 7 8 13 9 Presentation of documents 13 13
Outline ISSUING 4 ADVISING 3 10 5 2 9 6 BUYER 1 SELLER 7 8 14 10 Checking of documents 14 14
Outline ISSUING 4 ADVISING 3 10 5 2 11 9 6 BUYER 1 SELLER 7 8 15 11 Payment 15 15
Outline ISSUING 4 12 ADVISING 3 10 5 2 11 9 6 BUYER 1 SELLER 7 8 16 12 Remittance of documents 16 16
Outline ISSUING 4 12 ADVISING 3 13 10 5 2 11 9 6 BUYER 1 SELLER 7 8 17 13 Checking of documents 17 17
Outline ISSUING 4 12 ADVISING 3 13 14 10 5 2 11 9 6 BUYER 1 SELLER 7 8 18 14 Payment 18 18
Outline ISSUING 4 12 ADVISING 3 13 10 5 14 2 15 + 11 9 6 16 BUYER 1 SELLER 7 8 19 15 Documents against 19 16 payment 19
Outline 3 ISSUING 2 BUYER 13 15 + 16 4 12 14 1 8 10 11 9 SELLER ADVISING 6 7 5 1. Contract negotiation 2. Application for opening 3. Risk analysis 4. Opening 5. Analysis risk, auth. & compl. 6. Advising 7. Analysis 8. Shipment 9. Presentation of documents 10. Checking of documents 11. Payment 12. Remittance of documents 13. Checking of documents 14. Payment 15. Documents against 16. Payment 20 20
Letters of Credit Are also known as Documentary Credits or LCs Can be Advised: without engagement of the advising bank Confirmed: with engagement of the advising bank (the advising bank takes over the engagement of the issuing bank) Can be payable at sight Can have a deferred payment period Instead of the funds, the beneficiary will receive Either a deferred payment undertaking Or an accepted Bill of Exchange (Draft) Alternatively, beneficiary can request for a discount (without extra credit limits!) Are always subject to UCP600 21 21
THE ASIAN KITCHEN AND LETTERS OF CREDIT 22 22
The Asian kitchen and Letters of Credit Importer s view Typically, Asian exporters use a letter of credit in their favour as a source for financing LCs in their favour, issued by a reputable bank are widelike accepted by Asian banks as a collateral for pre-export financing Common practice in China, Hong Kong, India, Viet Nam, Routing the LC to another bank than exporter s bank will therefore be a problem for your supplier 23 23
The Asian kitchen and Letters of Credit Exporter s view Asian banks sometimes have the reputation to refuse payment for minor or even spurious discrepancies, in particular when (commodity) prices are falling Prepare your documents with extra care! Do not take the risk of unpaid LCs due to discrepancies! Call your bank in case you do not understand a condition in an LC or in case of doubt! A Waiver for discrepancies, granted by your buyer is not a valid document and a dangerous procedure! In general, trade payment track record has been very good Confirmed Letters of Credit can shelter you from spurious discrepancies Places like Hong Kong have an important trading community Your sale might be the first leg in a transaction whereby your goods are resold to an second buyer Your documents under your LC might be needed for a second LC (Backto-back) 24 24
About some countries: China Positive evolution over the last years in regulating trade and banks: Provision of the Supreme People s Court on Some Issues in the Adjudication of LC-Related Cases (Effective 1st Jan. 2006) CARPALs About the way legal action around LCs is organised Principle of independence of an LC, when can a Stop Payment Order be issued, which court is authorised in case of disputes, adherence to UCP, The number of court cases and payment injuctions coming from China has decreased substantially Capital adequacy, Asset quality, Risk concentration, Provisioning coverage, Affiliated institutions, Liquidity and Swindle prevention control Rules of the central bank for international banks with regard to the Basel II and Basel III regime 25 25
About some countries: India Reserve Bank of India controls trade flows: Raw material: payment term up to one year Capital Machinery up to 3 years, pricing capped at Libor + 3,5%pa. Indian importers like usance LCs (deferred payment or acceptance) Are discounted by foreign paying banks, with interests payable by the Indian importer Discount from supplier for early payment Interest rates calculated by foreign banks usually more favourable Indian interest rates at about 8% 26 26
About some countries: Viet Nam Going through difficult times again Increasing bad debts Asia Commercial Bank: bank-run Limits on many banks frozen pricing (for confirmation of LCs) rising 27 27
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Thanks for your attention and your hard labour 43 43