How to Check if Letter of Credit is Workable

In the earlier articles,  we have discussed about LC format MT700, and how to prepare and check documents under LC. This article provides a checklist for exporter after Letter of Credit (LC) is opened before shipment of goods. This will help exporter better understand the details in LC and whether exporter will be able to comply with its terms. If not, exporter should ask to get amendment in relevant clause.

  • Where ever possible exporter should ask for a draft copy of LC to check terms, so as to avoid amendments after LC is opened.
  • Read UCP 600 and ISBP 745 a few times and keep a copy for ready reference.
  • Check earlier LC discrepancies and terms related to it. Whether exporter is now in position to meet those terms. If not, it is better to get those terms are removed/amended in LC.

Exporter should look for below terms/clauses:

  1. Issuing Bank
    • Check name of issuing bank (swift code) and if its a trustworthy bank. How is the experience of others exporters in dealing with this issuing bank.
    • In case of financing requirement, check if exporter’s bank has lines of the issuing bank.
  2. Check all dates in LC
    1. Date of Issue (31C), Date of Expiry (31D) and Latest date of Shipment (44C):
    2. Check if  deadlines mentioned is acceptable. It is advisable to have margin in date of shipment and expiry to avoid requirement of amendment in LC.
    3. Verify the expiry location of the letter of credit. “Field 31D: Date and Place of Expiry” and “Field 41A: Available With … By …”. Both should be preferable in country of exporter.
  3. Presentation Period (48):
    • As per RBI Master Direction “Export of Goods and Services”, exporters are expected to present export documents within 21 days of shipment. Thus LC should preferably mention 21 days.
    • Incase of more than 21 days, banks may handle them  provided they are satisfied with the reasons for the delay. It is advisable to clarify the same with exporter’s bank.
  4. Name and Address of Beneficiary (59) and Applicant (50) are correctly stated.
  5. Description of Goods & Service (45A):
    • Complete description of goods
    • Units and Price
    • Mention of performa invoice or underlying contract should be avoided.
  6. Incoterms (45A):
    • Incoterms and shipment mode must match each other
    • If CIP or CIF incoterm is used, insurance document requirement to be mentioned in 46A.
  7. Insurance (46A)
    • Clause to be covered.
    • Where is the claim payable.
    • Insurance to cover from which point to which point.
  8. Currency and Amount (32B) in Letter of credit should match with sales contract
  9. Negotiation Clause (41A): Is LC restricted or available with any bank? Based on arrangement of exporter with existing bank or negotiating bank, it will help arrange pre shipment &/or post shipment finance.
  10. Payment Terms:
    • Is it available by sight payment, deferred payment, acceptance or negotiation. (41A)
    • Is the tenor stated correctly, number of days from sight or date of invoice, transport document etc. (42C)
  11. Documents Required (46A):
    • List of documents required
    • Number of original and copy required.
    • Type of transport documents required.
    • Type of Insurance documents required.
    • Clause requiring applicant documents : LC should avoid clauses requiring documents that are to be issued, signed or countersigned by the applicant.
    • Beneficiary Certificate: Such clause can be avoided.
  12. Non Documentary Conditions (47A).
    • All documents to require LC number can be avoided.
    • Check if any clause of UCP600 has been excluded or not. If excluded, understand its impact on exporter.
  13. Port of Loading (44E) and Port of Discharge (44F):
    • Advisable to mention Port of loading as Any Port in India (exporter country)
    • Port of discharge is consistent with sales contract.
  14. Letter of Credit Charges (71B):
    • Understand and determine which fees must be paid by the exporter according to the letter of credit conditions.
    • “Courier Fee / Postage Fee”, “Advising Fee”, “Discrepancy Fee”, “Handling Fee / Negotiation Fee”, “Amendment Commission”, “Confirmation Fee”, “Reimbursing Bank Charges”.
  15. Partial Shipments (43P): Whether it is allowed or not and whether the same is as per sales contract
  16. Transhipments (43T):  Preferable, it should be allowed.
  17. Reimbursement Instructions (53A)
  18. Confirmation Status (49): Is it confirmed LC or has an option for adding confirmation and who will bare the cost of the same. This field will have these three options: Confirmed, Without, May Add. If case where the LC is already confirmed where is confirming bank located.

Above is not a comprehensive list. Depending on type of goods exported and countries to which it is exported, requirement of clauses and document may differ.

If you do not understand or have any queries in any of the above clauses or terms, you can get in touch with us.

Reference

  1. RBI Master Direction: Export of Goods and Services

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