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?
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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
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Outline
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Outline
BUYER
SELLER
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Negotiation of contract between buyer and seller
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5
Outline
ISSUING
BANK
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BUYER
SELLER
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2
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Application for opening of the Letter of Credit
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Outline
ISSUING
BANK
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2
BUYER
SELLER
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3
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Risk analysis
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Outline
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ISSUING
BANK
ADVISING
BANK
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2
BUYER
SELLER
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Opening of the Letter of Credit
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Outline
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ISSUING
BANK
ADVISING
BANK
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5
2
BUYER
SELLER
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Analysis authenticity, risk and compliance
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Outline
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ISSUING
BANK
ADVISING
BANK
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3
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2
BUYER
SELLER
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Notification (= advising), possibly with confirmation
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Outline
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ISSUING
BANK
ADVISING
BANK
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3
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2
BUYER
SELLER
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1
7
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Analysis of the Letter of Credit
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Outline
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ISSUING
BANK
ADVISING
BANK
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3
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2
BUYER
SELLER
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1
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Shipment of goods
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Outline
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ISSUING
BANK
ADVISING
BANK
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3
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2
BUYER
SELLER
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7
1
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Presentation of documents
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Outline
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ISSUING
BANK
ADVISING
BANK
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5
10
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2
BUYER
SELLER
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7
1
8
10
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Checking of documents
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Outline
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ISSUING
BANK
ADVISING
BANK
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5
10
2
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BUYER
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SELLER
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7
1
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Payment
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Outline
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ISSUING
BANK
ADVISING
BANK
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3
5
10
2
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BUYER
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SELLER
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7
1
8
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Remittance of documents
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Outline
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ISSUING
BANK
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ADVISING
BANK
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5
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2
11
BUYER
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SELLER
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7
1
8
13
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Checking of documents
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Outline
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ISSUING
BANK
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ADVISING
BANK
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13
5
10
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2
11
BUYER
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SELLER
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7
1
8
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Payment
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Outline
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ISSUING
BANK
ADVISING
BANK
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3
13
5
10
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+
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9
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BUYER
SELLER
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1
8
15
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Documents against
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payment
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Outline
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ISSUING
BANK
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ADVISING
BANK
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13
10
5
14
15
2
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+
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BUYER
SELLER
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1
8
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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
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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
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THE ASIAN KITCHEN
AND LETTERS OF CREDIT
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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
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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)
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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)”
• 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
• CARPALs
• 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
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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%
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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
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TRADE FACILITATION TOOL:
AT YOUR SERVICE!
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Trade Facilitation Tool
• 5 modules
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Country Profiles
Market Information
Finding Counterparts
Trade Compliance
Customs Calculator
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Trade Facilitation Tool
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Trade Facilitation Tool
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Trade Facilitation Tool
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Trade Facilitation Tool
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Thanks for your attention and your
hard labour
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