Saturday Brain Storming Thought (198) 25/11/2023

TRANSFERABLE LETTER OF CREDIT

A Transferable letter of Credit is a letter that allows the first beneficiary to transfer some or all of the credit to another party, creating a secondary beneficiary

A Transferable letter of credit is often used in business deals to ensure payment to a supplier or manufacturer and is an alternative to making an advance payment

Key Takeaways of a Transferable letter of credit

1) A transferable letter of credit permits an initial beneficiary to transfer some or all of the credit they are due to another party

2) Transferable letters of credit are used in certain business deals to ensure that payment is made to a supplier or manufacturer

3) the parties involved in a transferable letter of credit, in addition to the bank, are the applicant (the buyer of goods or services), the first beneficiary

4) the first beneficiary (such as retailer or broker), and the second beneficiary (such as supplier or manufacturer)

Transferable standby letter of credit

A Transferable standby LC (letter of credit) is a legal document that guarantees a banks commitment to a seller

The guarantee stands even if the buyer defaults on the agreement due to some reasons or circumstances

Transferring bank in LC

Transferring bank in LC is a nominated bank that transfers the credit

A transferring bank can also be a bank authorized explicitly by the issuing bank to transfer the credit

An issuing bank can also be a transferring bank

Transferable LC transferred times

A Transferable LC can only be transferred to one or more second beneficiaries, but it cannot be transferred further

Conformity of transferable LC

1) LCs are based on conditional commitments

2) The banks prepare them at the importers request

3) A transferable LC itself is a confirmation that the payment will be made subject after the specific terms and conditions are fulfilled

4) The issuing bank can confirm the authenticity of an LC

Discounting of Transferable LC

1) LC discounting acts as a financial security for the import or export businesses or both

2) This funding option can be availed to fulfill financial requirements

3) It can be used, when the importer wants to extend the payment term but the exporter insists on immediate payment or when the importer fails to pay on the due date

Safety of Transferable LC

1) Yes

2) A Transferable LC is safe and secure

3) Transferable LC guarantees the supplier that they will receive their dues

4) With a Transferable LC, an importer or an exporter can transact with their international trade partners securely without even knowing them in person

Non-transferable LC

1) A non-transferable LC is a document of credit that a beneficiary cannot assign, either partially or entirely, to any other party

2) It is issued in favor of a particular beneficiary, which is usually the seller in trade deals

3) The letter remains non-transferable to anyone other than the beneficiary for financial security and convenience

Risks associated with a transferable LC

In some cases, the seller may find it challenging to fulfill the terms of LC

1) The seller cannot meet the agreed shipment schedule

2) The stipulations regarding freight costs are not acceptable

3) Exchange rate fluctuations are making the trade less profitable or can even lead to losses

4) The quality of product ordered does not match the agreed terms and expectations

5) The specified documents are difficult or impossible to obtain

6) When problems arise so late in the trade process, the buyers and seller banks try to negotiate

7) Negotiations may result in a delay in executing and completing the transaction

8) If the documents are not in line with the specifications of LC, the buyers issuing bank is not obliged to make the payment

9) As most LCs are irrevocable, it may not be easy to make amendments at time

Transferring LC

The terms and conditions mentioned in the original LC cannot be changed while transferring the LC

Beneficiaries in a transferable LC

A Transferable LC can have a first beneficiary and one or more second beneficiary

Changes allowed in transferable LC

The following can be changed in a Transferable LC

1) The amount of the LC

2) The unit price of the goods

3) The time of shipment

4) The last date for the presentation of documents

5) The expiry date of the LC

Transferable standby LC

A Transferable standby LC is a legal document that guarantees a banks payment commitment to a seller

The guarantee stands even if the buyer defaults on the agreement due to some reasons or circumstances

Back to Back LC

When two or more parties are involved in international trade, the transaction mostly occurs through financial instruments known as LC (letter of credit)

The document provides an extra layer of security due to the assurance of the banks involved in the trade

When the transaction takes place between a buyer and seller keeping an intermediary in the loop, the type of LC used in such cases is known as Back to Back letter of credit

Selling of Transferable LC

LC may be transferable, depending on the bank or financial institution from which the LC is procured

Trade of LC

The supplier will request a LC from the buyer once a trade deal is agreed upon

The buyer then consults it’s bank or financial institution to secure that LC

Similar to applying for a bank loan, there is an application and due diligence process which takes time to complete

Types of LC

1) Commercial – Prominent in international trade

2) Standby – used in insurance

3) Revocable – creates leverage for the issuer

4) Irrevocable – No amendments or cancellations can occur without the consent of all parties

5) Revolving – can be used for series of payment

6) Red clause contains an unsecured loan

Getting money from a transferable letter of credit

1) Any required documentation is submitted to the exporters bank

2) The exporters bank reviews documentation to ensure letter of credit terms and conditions were met

3) If approved, the exporters bank submit documents to the importers bank

4) The importers bank send payment to the exporters bank

Termination of a Transferable letter of credit

An Irrevocable LC cannot be cancelled, nor in any way modified, except with the explicit agreement of all parties Involved ie the buyer, the seller and the issuing bank

For example, the issuing bank does not have the authority by itself to change any of the terms of an ILOC once it is issued

Costings of LC

1) A buyer will typically pay anywhere between 0.75% and 1.50% of the transaction value, depending on the locations of the issuing bank

2) Sellers may find that their fees are structured slightly differently, instead, they may pay a set of small flat fees that vary in cost

LC is an asset

LC is an asset type over which an entity can grant a security interest under Article 9 of the UCC

COMPILED BY:-

Er. Avinash Kulkarni
9822011051

Chartered Engineer, Govt Regd Valuer, IBBI Regd Valuer