Reimbursement Finance (Usance LC Reimbursement at Sight)

Post RBI disallowed LOU and LOC for buyers credit transactions, importers and banks are trying different structures which can assist in  Import finance. Some of these structures are

  1. Suppliers Credit
  2. Buyers Credit Against SBLC (Standby Letter of Credit)
  3. Reimbursement Finance (Usance LC Reimbursement at Sight)

This article is going to talk about Reimbursement Finance, its meaning, process flow, costing, applicable rules, clauses required in LC and issues with the current structure.

What is Reimbursement Finance?

In simple terms, Reimbursement finance is financing done by reimbursing bank (bank other than letter of credit issuing bank and supplier’s bank) on usance Letter of Credit (LC).

In this structure, once the shipment is done under Usance LC (LC with credit), supplier’s bank forwards complying documents to LC issuing bank and claims LC amount from reimbursing bank. Based on reimbursement authorization from LC issuing bank, Reimbursing bank will make payment to supplier’s bank at sight. On maturity, importer will make payment to Local bank and local bank will intern make payment to reimbursement bank.

As per Uniform Rules for Bank-to-Bank Reimbursements under Documentary Credits (“rules”), ICC Publication No. 725

“Reimbursing bank” means the bank instructed or authorized to provide reimbursement pursuant to a reimbursement authorization issued by the issuing bank.

“Reimbursement Authorization” means an instruction or authorization, independent of the credit, issued by an issuing bank to a reimbursing bank to reimburse a claiming bank or, if so requires by the issuing bank, to accept and pay a time draft drawn on the reimbursing bank.

Process Flow

  1. Based on the contract with the supplier, Importer requests the Trade Finance Consultant for quote before LC is issued.
  2. Consultant approaches overseas bank for indicative pricing, which is further quoted to Importer.
  3. If pricing is acceptable to importer, reimbursing bank gives mail confirmation/offer letter to proceed and details to be mentioned in  LC.
  4. Importer submits required documents to local bank based on which LC is issued directly to supplier’s bank along with terms and conditions as provided by Reimbursing bank. Local bank will email or sent MT999 copy of LC to Reimbursing bank.
  5. Supplier does shipment of goods and submits documents as per LC terms to supplier’s bank.
  6. Supplier’s bank forwards the document to LC issuing bank.
  7. LC issuing bank checks the documents for compliance of LC terms and UCP 600. If compliant will provide acceptance to supplier’s bank.
  8. LC opening Bank will send Reimbursing bank MT740, authorising to make payment to supplier’s bank for principal amount and claiming from issuing bank principal, interest and reimbursement charges** on maturity. Additionally, some reimbursing banks ask for scanned copy of documents and/or MT799 (buyers credit like LOU format).
  9. After receiving acceptance from LC issuing bank, supplier’s bank will send reimbursement claim via MT742 to reimbursing bank.
  10. On the basis of MT740 and MT742, reimbursing bank makes payment to the supplier’s bank.
  11. Reimbursing bank will send MT799 (Interest + other charges advice) to LC issuing bank.
  12. On maturity, issuing bank will make payment to reimbursing bank.

**Reimbursement charges: some reimbursing bank insists on reimbursement charges paid before making payment to the supplier’s bank.

MT 740 Authorisation to Reimburse

This message is sent by the issuing bank to the reimbursing bank.

It is used to request the Receiver to honour claims for reimbursement of payment(s) or negotiation(s) under a documentary credit.

The MT 740 authorises the reimbursing bank to debit the account of the Sender, or one of the Sender’s branches if so indicated, for reimbursements effected in accordance with the instructions in the MT 740.

MT 742 Reimbursement Claim

This message is sent by the paying/negotiating bank to the bank authorised to reimburse the Sender for its payments/negotiations.

It is used to claim reimbursement of payment(s) or negotiation(s) under a documentary credit, as relevant to the reimbursing bank.

Cost Involved

  1. Interest Charges: which will be Libor + bps for period from reimbursement to the maturity date.
  2. Reimbursement Charges: $100 – $300 varies from bank to bank.
  3. Forward / Hedging Cost: In few local banks it is mandatory for importers to book for forwards and few leave the option of deciding whether to hedge or not on importers.
  4. Arrangement fee: Fees paid to trade finance consultant for his service.
  5. Other charges: A2 payment on maturity, Form 15CA and 15CB on maturity etc.
  6. Withholding Tax (WHT): For funds arranged from foreign bank, Importer has to pay WHT on the interest amount.

Details Required in Letter of Credit MT700

47A: Additional Conditions

  • Interest for the usance period is to be borne by the applicant At 6 month libor plus XXX pct per annum from date of discounting till maturity prevailing on the date of negotiation.
  • L/c issuing bank to undertake in the LC to pay ABC Bank (Reimbursing bank) on due date with interest at 6 month libor + XXX bps p.a. for the usance Period and reimbursement charges of USD 150. The reimbursement Charges will be paid at the time of sending the reimbursement Authorization to ABC Bank (Reimbursing Bank).
  • Post receipt of acceptance from issuing bank, the negotiating bank may claim at sight from financing bank ABC Bank (Reimbursing Bank swift: abinau2s).
  • We shall reimburse financing bank on due date ie 180 days from shipment for the LC value along with the discounting / usance Interest.
  • Charges: All bank charges outside India other than interest and reimbursement charges of USD 150 of ABC bank are on account to supplier.
  • This credit is subject to UCP 600.
  • This documentary credit is subject to uniform rules for Bank-to-bank reimbursements under documentary credits – ICC Publication no.725.

53A: Reimbursing Bank – BIC: ABC Bank

78: Instruction to Payg/Accptg/Negotg Bank

The negotiating bank is to forward the original set of documents plus one set of non-negotiable documents by courier in one lot strictly in compliance with terms mentioned above directly to XYZ Bank Address (LC issuing Bank) by Courier and we shall remit them as per their instructions.

Applicable Rules

  1. Uniform Rules for Bank-to-Bank Reimbursements under Documentary Credits, ICC Publication No. 725 (“URR 725”)
  2. UCP 600 sub-article 13 (b). UCP 600 article 13 addresses how the applicability of URR 725 is to be indicated, or the process to be followed if URR 725 does not apply.

Issues with the structure

  1. Availability of RMA between LC issuing bank and reimbursing bank
  2. Availability of RMA between the supplier’s bank and reimbursing bank.
  3. Above structure is governed under URR725 but there few contradiction. As stated in URR 725, the key factor is the independence and autonomy of the reimbursement authorisation. It does not depend on the performance of the documentary credit and the reimbursing bank is in no way bound by the terms and conditions of the documentary credit.

Difference between URR725 and Reimbursement Finance

URR725 Reimbursement Finance
Authorization Issued immediately after LC issued Post acceptance of documents
Document Does not depend on LC documents Copy of document and in some cases MT799 is expected from LC issuing bank

Reference

  1. Bank to Bank Reimbursement: An Introduction
  2. Uniform Rules for Bank to Bank Reimbursements (URR725)
  3. UCP 600 Article 13: Bank to Bank Reimbursement arrangements

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