Meaning of Import and Export Letter of Credit (LC)
An import and export letter of credit (LC) is a financial acclaim issued by the State Bank of India SBI bank as a guarantee letter for the payment issued to the importer or exporter in an international trade transaction. When the State Bank of India SBI bank issues the import or export LC, it sanctions the quoted amount and ensures the timely commitment of the payment to an importer or exporter through the letter of credit (LC). It is the most customary mode of payment for international trading of goods.
The letter is a constitution of three entities; State Bank of India SBI bank, the business owner and the import or export trader. It secures both the avenues of buyer’s and seller’s perspective. The buyer has the credit to purchase the goods and impart the requisite services while assuring the customer of its timely payment as well. It helps in the smooth functioning of the international business operations.
Types of Import and Export Letter of Credit (LC)
There are different types of financial contracts issued by the State Bank of India SBI bank. Their acceptance varies according to the different markets and functioning of the business. One of them is import and export letter of credit (LC). Different types of import and export letter of credit (LC) have their own features and are used during different business scenarios. If the trade happens within the country it will fall under the purview of inland letter of credit LC or domestic letter of credit (LC). Whereas, when the goods are shipped outside of one’s country or received from another country, the State Bank of India SBI bank issues import and export letter of credit (LC). The various types of import and export letter of credit (LC) are defined hereunder.
Standby Letter of Credit LC (SBLC)
The standby letter of credit is a type of import and export letter of credit LC that acts as a financial contract made in the favor of the seller by the buyer’s bank authorities. It is called the standby letter or credit as it acts as a standby mechanism of payment to the seller when the buyer fails to do so. It is an alternative plan set aside in case of payment failure by the buyer the State Bank of India SBI bank will initiate payments to the beneficiary.
Back-to-Back Letter of Credit LC
This type of import and export letter of credit (LC) issued by the State Bank of India SBI bank is an intermediary letter of credit issued for the non-disruption of the trading services. In the back-to-back import or export letter of credit LC a second LC is opened by the main beneficiary for a 2nd beneficiary against the security of 1st /original LC. It is intended to be used when one of the suppliers fails to deliver the goods and services for any reason and a second credit is issued to another seller to deliver the unfulfilled services. Generally, the back-to-back import or export letter of credit LC is opened for the suppliers.
Transferable Letter of Credit LC
A transferable import and export letter of credit (LC) is utilized as an added financial assistance in which the State Bank of India SBI bank transfers the money, at the bequest of the original beneficiary to the 2nd beneficiary. There is an aforementioned amount approved in the transferable letter of credit (LC) to be given to another seller or supplier at the request of the original seller or beneficiary. However, it will not be transferred any further to more suppliers/sellers.
Revocable Letter of Credit LC
The revocable import and export letter of credit LC issued by State Bank of India SBI bank can be revoked or amended at any time by the bank or the buyer, without the consent of the beneficiary.
Irrevocable Letter of Credit LC
The irrevocable LC is another type of export and import letter of credit (LC) whose terms and conditions cannot be changed or cancelled at any point without prior notice or consent of the parties involved. The beneficiaries, issuing State Bank of India SBI bank and confirming bank has to agree before any terms of Irrevocable Letter of Credit LC can be modified. This is a more acceptable and safer option from the beneficiaries’ point of view.
Usance Letter of Credit LC
This type of import and export letter of credit (LC) issued by the State Bank of India SBI bank gives the buyer a pre-decided time limit to make payment after the presentation of the documents. It allows the buyer to defer the payment for an agreed period and is therefore also called deferred letter of credit LC.
Sight Letter of Credit LC
Unlike the deferred import and export letter of credit (LC), the sight letter of credit (LC) needs to make payment to the beneficiary immediately after receipt of the necessary paperwork. If all the documents are in place State Bank of India SBI bank is obliged to honor the letter of credit immediately.
Revolving Letter of Credit LC
It is a type of export and import letter of credit (LC) by the State Bank of India SBI bank consisting of an approved credit amount for multiple freights. This import and export letter of credit (LC) is on renewable terms for increasing the credit limit or for the available timeline. This is beneficial for sending shipments regularly in case of the same sellers.
Confirmed Letter of Credit/ LC
A confirmed letter of credit is a type of import and export letter of credit (LC) that is issued when there is financial insecurity regarding the issuing bank or terms and conditions of the country. There are consents taken from the advising banks to confirm the credit payments to the seller from the issuing bank. It is like adding a guarantee to the import and export letter of credit (LC) by an advising bank at the request of the issuing bank. State Bank of India SBI bank can also act as issuing bank and advising bank depending on the role it undertakes in the documentation of the import and export letter of credit (LC)
Red Clause Letter of Credit
In this type of import and export letter of credit (LC) issued by the State Bank of India SBI bank, the seller is entitled to certain advance from the overall LC limit even before shipment of goods or presentation of all requisite documents to the issuing bank. A special type of Red Clause letter of credit LC is Green Clause letter of credit LC that allows advances for specific reasons like warehousing / storage of goods before shipment.
Documentation Required for Import and Export Letter of Credit LC by State Bank of India SBI Bank
A letter of credit is issued by the State Bank of India SBI bank authorities by presenting some required documents that permit the use of the approved payments.
Following is the list of documents that need to be prepared for Import and Export Letter of Credit LC:
- General undertaking duly signed and stamped.
- A deposit letter to be written on a letterhead by the depositor of the business enterprise
- Import/Export Code to be presented (IEC)
- OGL cum FEMA declarations
- Deed of partnership for companies as formed in case of the partnership firms or by board of resolutions
- The commercial invoice or the purchase order and proforma invoice.
- Insurance certificate, FOB (free on board) and C&F (cost of the freight of the goods) criteria under an insurance cover whose details should be presented
- Bill of landing confirming the shipment of goods
- Export licenses and Import licences where ever applicable
- Annexure of the letter of credit covering all the details
- Certificate of origin
- Certificate of inspection
- Cargo shipment through any transport mediums (airways, railways, or road) invoice documentation details required.
State Bank of India SBI bank needs to check these documents before honoring the import export letter of credit so that no discrepancies arise later and the trade is completed successfully between the international trade partners.
Fees associated with Import and Export Letter of Credit (LC) issued by State Bank of India SBI Bank
In India a buyer may generally need to pay anywhere between 0.7% – 1.5 % of the total LC value to the banks. A buyer may also have to pay a set fee for the same. If more banks are involved the costs rise as in the case of confirmed letter of credit for import and export. The fees charged under various heads, that needs to be paid to the State Bank of India SBI bank for its services in issuing an import and export letter of credit (LC) are enumerated below:
- Documentation Fees
- Processing Fees
- Temporary overdraft charges (TOD)
- Overdue/Penalty charges
- Commitment charges
- Collateral charges
- Foreclosure charges
- Subsidy charges
- Certificate fees
- Collateral swap fees
Importance and Need of Import and Export Letter of Credit issued by State Bank of India SBI Bank
The business operates on both ends as a vendor and as a seller. The credit payment letter is the most integral part of running a successful business and catering to the international market. It works as a security in international trading and a guaranteed payment tool in the domestic market for a business in terms of money circulation and operations.
The International Chamber of Commerce publishes the Uniform Customs and Practices for Documentary Credits (UCP). This is aimed to set a global standard and norms for the use of import and export letter of credit for international trades. Let’s look at the importance and need for LC.
Importance of Import and Export Letter of Credit issued by State Bank of India SBI Bank
- It manages the financial distance between the buyer and seller in the business
- It acts as the major source and medium of international deals
- It helps the payment backstops between a buyer and sellers
- It works well in favour of abiding by the different trading laws of the countries
- It helps in building trust within businesses creating a smooth flow of work
Need for Import and Export Letter of Credit by State Bank of India SBI Bank
- Import and export letter of credit issued by State Bank of India SBI bank aids in business expansion both at national and international levels. This provides an edge to flourish and prosper in new landscapes with existing business partners or newly established relationships.
- Import and export letter of credit issued by State Bank of India SBI bank is a customized documentation with differing terms and conditions serving as an assurance within the businesses. It acts as a mutual set of clauses agreed between a trader and the customer with crediting amounts, number of transactions (to one or more sellers), and timeframe.
- Flowing credit to a business on fulfilling terms is an added asset to international trading. The issuing bank of the buyer checks all the creditability of the necessary documents concerning the business and the two parties before issuing the credit. The State Bank of India SBI bank or issuing bank is independent of any obligations by offering the two parties its desirable terms.
- Import and export letter of credit issued by State Bank of India SBI bank is a credit certificate which improves the creditworthiness of the buyer or the business owners or importer to maintain the credit limit, re-issue, or worthiness within the exporters and sellers.
- Import and export letter of credit issued by State Bank of India SBI bank acts as a shield to a seller in case the buyer is into any form of financial crisis. Any financial loss or bankruptcy at the buyer’s end will not put the seller at any risk of not getting the payment. The credit issuing bank authorities are under the obligation of the letter of credit for paying the concerned amount to the seller.
- Import and export letter of credit issued by State Bank of India SBI bank serves as a financial claim by the seller in case of any payment dispute between the vendor and seller. The letter of credit abides under the clause of ‘pay now and litigate later’ in the formed terms and conditions document of the letter of credit. The buyer cannot withhold or deny the payment on the terms of low-quality goods as the letter of credit stands as an obligation to the bank and buyer that needs to be fulfilled to the seller.
Example
For instance, State Bank of India SBI bank is the bank that offers the letter of credit in countries such as Asia, Africa, the Middle East, Eastern Europe, and Latin America. Generally, the letter gets issued within two working days. The letter issued by State Bank of India SBI covers the financial risk to the importers residing in place or in case of economically weakened situations.
Import and Export Letter of Credit Vs Bank Guarantee
Meaning of Bank Guarantee (BG)
A Bank guarantee is a financial mechanism that is issued by the banks and Non-Banking Financial Corporations (NBFCs) to meet the requirements of the customer. In case, the customer is unable to pay or fulfill the requirements as per the agreement, the bank authorities step in to pay as per the agreed demands of the letter.
The money credits issued under bank guarantees work well within business enterprises. It helps in running operations such as sale and purchase of goods as in raw materials, manufacturing machinery, equipment, and improving services. To know more read our blog on Bank Guarantee
Import and Export Letter of Credit (LC) Vs Bank Guarantee issued by State Bank of India SBI Bank
A letter of credit LC is an assured payment that the trader’s bank, like State Bank of India SBI bank, gives to the seller after the presentation of the valid documentation. It is a confirmed payment avenue given to the seller in spite of any discrepancy in providing the goods and services.
A State Bank of India SBI Bank guarantee is the guaranteed payment given to a third party as authorized on behalf of the customer. It is a way of assisting the financial needs of the customer to successfully run the business operations.
A Bank guarantee is initiating the required payment to the beneficiary even after not fulfilling the agreement. The letter of credit provides the said credit after fulfilling the agreement terms with the beneficiary.
How to Apply for Import and Export Letter of Credit to State Bank of India SBI Bank
Import and Export letter of credit is varied across different types of work, within industries, and marketplaces in countries. The import and export letter of credit gets issued by the buyer’s bank by agreeing upon certain terms and conditions of trading with both parties. All the requisite documents highlighting the details of the buyer and business should be presented for approval and honoring of the import and export letter of credit.
Following is the procedure to apply for the import and export letter of credit in international trading scenarios:
- The importer, authorizing bank, and exporter should agree to all the conditions of the sales agreement to make transactions easier.
- The bank initiates drafting the letter of credit after the sales agreement terms and conditions are agreed upon by the importer, exporter, and the bank. The finalized letter is then sent to the bank authorities of the exporter and its reviewing bank.
- When the draft gets approved by the exporter’s bank, the business operations with respect to the shipment of goods and services proceed as mentioned in the outline of the letter of credit.
- All the necessary documents are submitted to its reviewing bank which are then thoroughly checked and should align with the terms and conditions mentioned in the letter of credit.
- All the submitted documents after a thorough evaluation are then submitted back to the importer’s bank.
- When all the documentation with the signed contract and the letter of credit agreed upon by both parties is submitted to the importer bank, the transfer of funds is initiated to the exporter bank as per the letter of credit.
- This approved financial assistance helps the importers receive the shipment of goods for a smooth flow of import-export business trading.
A Word of Caution for Import and Export Letter of Credit
Some of the precautions that need to be taken for the import and export letter of credit:
- The business owner or the buyer should be a regular banker with a verified beneficiary.
- The letter of credit issued for overseas trading should be confirmed and preferably from an Indian Bank, like State Bank of India SBI Bank.
- The freight of the goods as decided in the terms and conditions should be checked whether it is pre-paid or included.
- The State Bank of India SBI bank charges need to be paid individually by both the buyer and the seller in their respective countries. In this case, the buyer is required to open the beneficiary’s account in its bank.
- All the expenses in the business operations need to be mentioned in the applicant’s and beneficiary’s accounts.
Benefits of Import and Export Letter of Credit issued by State Bank of India SBI Bank
- It acts as a payment reassurance to the seller as confirmed from the buyer’s end by default.
- It is a medium of building trust and dependability between two parties for business within domestic and international sectors.
- It is an official and customized form of document that can be outlined to specific terms and conditions.
- The letter is a well-drafted frame of financial credit and timelines set for both the business parties to operate.
- It helps in smooth fund transfers easing out complex international transactions.
Limitations of Import and Export Letter of Credit issued by State Bank of India SBI Bank
- It has a limitation of paying a certain amount of fee which limits the business choices.
- The approval of the letter of credit can sometimes take more than the stipulated time from both the importer and exporter sides.
- It does not qualify on parameters such as quality of goods and delivery time-frame.
- It doesn’t fit under certain criteria such as unstable exchange rates, supply-chain imbalance, or political instability.
Import and Export Letter of Credit and Fraud
The import and export letter of credit document is sometimes a part of fraudulent activities such as investment schemes, false documentation, or non-shipments of goods as presented as being done.
In such cases, a letter of undertaking (LOU) that acts as a provisional financial guarantee by the State Bank of India SBI bank is allowed to the client. This LOU helps in raising short-term credit from any foreign branch of some other bank. The foreign bank requires a marginal fee to be paid for the LOU and a credit limit will be approved.
Conclusion
Import and Export letter of credit (LC) acts as financial collateral which is a very valuable asset in banking, startups, and business. It acts as the strongest back-up in the running of business given by the bank authorities to its client or the buyer which serves as a financial security to the seller. There are various types of import and export letter of credit issued by various banks, depending on suitability. It is favorable for its creditworthiness, money circulation, and timelines as per the agreed particulars; in the contract by both parties. Import and export letter of credit LC helps you create a good impact as well as a strong foothold in international markets. Please contact us to know more on how BankKeeping can help you manage your banking needs.