Workbook

Workbook
For
Letters Of
Credit
Version 1.0
2001 by i-flex solutions limited
All rights reserved. No part of this work may be reproduced, stored in a retrieval
system, adopted or transmitted in any form or by any means, electronic,
mechanical, photographic, graphic, optic recording or otherwise, translated in any
language or computer language, without the prior written permission of i-flex
solutions limited (i-flex).
Due care has been taken to make this workbook as accurate as possible. However,
i-flex makes no representation or warranties with respect to the contents hereof
and shall not be responsible for any loss or damage caused to the user by the
direct or indirect use of this workbook. Furthermore, i-flex reserves the right to
alter, modify or otherwise change in any manner the content hereof, without
obligation of i-flex to notify any person of such revision or changes.
All company and product names are trademarks of the respective companies with
which they are associated.
Document Control
File Name Workbook-Letters of Credit

Creation Date: 10th May 2001 By : Umesh Aurora/ Rajesh kumar
Review Date: March 15th 2002 Rajesh Ganesan / Ravi Handigol
Last Saved On: 30th August 2002 Group: FC-COL Banking Products Group
Table of Contents
Trade Finance 3
Introduction to International Trade 3
Need for Intermediary for facilitating International Trade 3
Letter of Credit (Documentary Credit) 5
Defining a Letter of Credit 5
Why Letter Of Credit? 5
Types of LC 6
How Are The Transactions Under LCs Regulated? 7
LC Transmission Methods 8
Documents 8
Operations under LCs 9
Trade Finance Cycle 10
Parties involved in Trade Finance 12
INCO Terms 14
Commonly used terminologies 15
SWIFT Messages related to LC 16
Shipping Guarantees 18
Export Finance 18
Pre shipment Finance: 19
Post Shipment Finance: 19
Packing Credit 19
Letter of credit in FLEXCUBE 20
Module Overview: - 20
Module Static Maintenance 21
Maintaining Branch Parameters 22
Product Maintenance 22
Contract Input 26
Flow Charts for LC Product Maintenance and Contract Input 32
Workbook -Letters Of Credit
3
Trade Finance
Introduction to International
Trade
As natural resources are unevenly distributed in different countries, a country
cannot produce everything it needs. Some countries are good at producing
agriculture products, while some specialize in manufacturing and some in
technology.
This results in transfer of goods and technology between countries around the
Globe. The products will be moved from one country to another by means of
various modes of transport like aircraft, railway, truck, ship or a combination
of two or more modes of transport. This buying and selling of goods is
international trade and is participated in by different parties located at different
places.
Need for Intermediary for

facilitating International Trade
However in the above scenario there is every likelihood of the trading parties not
knowing each other very well giving rise to a problem of trust and risk for both
the buyer and the seller. In fact, trade will be difficult between parties who do not
know each other well. Exchange of goods and its value does not take place at the
same time in international trade. Both seller and buyer carry a definite risk;
seller , a non-settlement risk, and buyer, a non-receipt of goods risk.
Unknown/partly known parties - commercial laws and regulations governing the
countries are the additional risks involved.
Seller Wants Buyer Wants

Assurance that he will To pay for the goods only after they are shipped/
be paid by the buyer received.
as per contractual
obligations as soon as
he ships the goods.
Convenience of Assurance regarding quality of goods and its delivery
receiving payment in time and compliance of his specific requirements
his own country in the
currency of his choice
_______________________________________________________________________________
i-flex solutions ltd.
4
Information and Information about the seller and regulations
assurance of Buyer pertaining to the transaction
having complied with
all regulations of the
country for import of
goods
Information and Information and assistance in documentation and
assistance in other aspects of complex international trade
documentation and requirements
other aspects of
complex international
trade requirements
Financial assistance Financial assistance for purchasing the goods.
for this transaction
Banker steps in to perform the role of an intermediary to facilitate the trade

transaction.
Banks Role as a Facilitator:

A bank is acceptable as an intermediary to both buyer and seller.
A bank is a financial institution and therefore has the necessary expertise
in handling international trade transactions.
A bank is able to supply trade and credit information, which is very
important to both buyer and seller.
Banks use a mechanism called Documentary Letter Of Credit whereby
buyers bank guarantees payment to the seller if he complies with terms
and conditions set by the buyer. The buyer gets possession of the
purchased goods on making the payment.
The Buyer and Seller pay and receive moneys in their currencies.
Banks Role as a Financer:

Often the buyer, or the seller (or manufacturer) will need finance to allow
completion of a deal. For example an importer (buyer) may wish to pay for the
goods he imports only after he has had a chance to sell some of them. On the
other hand the exporter (seller or manufacturer) may need finance to buy the raw
materials to produce the goods he is selling. Once the Bank has decided it will
finance a transaction, it may be able to use the various trade documents that exist
in International Trade to secure the lending.
Method of settlement of International Trade Transactions

Settlement of International trade transactions can happen by various methods.
_______________________________________________________________________________
5
1. Cash in Advance or Clean advance

2. Payment by Documentary Credit (LC)
3. Documentary Collection
4. Open account payment or Deferred Payment
Letter of Credit (Documentary

Credit)
Defining a Letter of Credit
Letter of Credit is an arrangement by means of which a bank (Issuing Bank)
acting at the request of a Customer (Importer / Applicant), undertakes to
pay to a third Party (Beneficiary/ Exporter) a predetermined amount by a
given date according to agreed stipulations and against presentation of
stipulated documents.
A letter of credit is a Bankers Undertaking on behalf of a constituent to pay to a

third party against compliance of stipulated conditions. It basically facilitates
settlement of trade payments.
An import LC is an LC issued by the importers bank and is forwarded to the

exporters bank or the sellers bank. An export LC is an LC that is received by the
exporters bank or the sellers bank from the importers bank.
The use of LC assures that seller receives the payment in his own country. The
buyer is assured that the payment is made against submission of universally
acceptable title to goods by sellers.
Why Letter Of Credit?
LC structure provides seller with an independent Bank undertaking the payment.

As the beneficiary of a LC, the exporter has the assurance that if he presents the
documents in accordance with the terms and conditions of the LC, he will receive
proceeds from the correctly tendered documents. The financial standing of the
buyer is replaced by that of the issuing bank who undertakes to pay, accept or
negotiate against presentation of documents drawn in conformity with the LC
terms. An irrevocable confirmation by way of an LC will place the onus on the
nominated bank and provide the best security for the exporter.
_______________________________________________________________________________
6
Buyer, on the other hand, knows that payment will not be made unless the seller
presents documentary evidence covering goods and their shipment. The importer
will receive the documents that were specified by him and embodied in the LC by
the issuing bank. He is assured that he will be debited with the value of the LC
only if all his instructions have been complied with. He is able to conserve
capital, as he does not have to pay cash in advance. His ability to do business
abroad is increased as the LC assures the supplier of payment. Because of
assurance of payment, he can negotiate better price and terms. He can broaden his
sources of supply. It enables him to meet a suppliers request for payment by way
of DC. However, he is not necessarily guaranteed that the documents will provide
him with the goods that he contracted to purchase, although this risk can be
reduced as shown under Extra Measures explained later in the document.
Types of LC
Irrevocable LC can neither be cancelled nor modified by the importers
bank without consent of all parties involved. If nothing is mentioned in
the LC it is to be treated as Irrevocable LC.
Revocable LC can be revoked or modified by the importers bank at any
time before payment. Most banks do not favor revocable letters of credit.
Confirmed LC is a letter of credit confirmed by a bank other than the

issuing bank. This LC carries an undertaking from the advising/nominated
bank to pay on presentation of documents as per LC terms to the
beneficiary. This undertaking is over and above the opening bank and
hence affords additional protection to the beneficiary and naturally attracts
added charges.
An unconfirmed LC is a guarantee of only the opening bank.

Revolving LC is an LC whose duration may revolve weekly or monthly
and is often used when an importer must make frequent and known
purchases. By this LC, the need for application to open an LC and the
charges thereof can be avoided by the buyer as the LC gets Renewed
periodically (as against opening a new LC each time).
Transferable / Non - Transferable LCs - The beneficiary of an LC can
have it transferred in favor of another seller / supplier. Only one such
transfer is permitted. The Transferring Bank (which may or may not be
the advising bank) will affect the transfer at the request of the beneficiary.
If the LC is transferable, the LC may mention which bank is authorized to
transfer the LC or may say Freely Transferable which means that
_______________________________________________________________________________
7
beneficiary can approach any bank to affect the transfer of LC. If nothing
is mentioned in the LC it is considered non transferable.
Red Clause / Green Clause LCs - Under Red-clause LC, advance is made
before presentation of documents to enable the exporter to purchase/
process goods to be shipped. This is to be repaid with interest by the
Beneficiary from the proceeds of documents negotiated under LC. The
Buyer however is liable in case of non-payment by the seller. In Green
clause, credit finance is available for storage facility before shipment

Standby Letter of credit - It possesses all the elements of a documentary
credit and subject to UCP (all international Trade transactions are covered
under UCP which is issued by the regulatory body, namely International
Chamber of Commerce). It is often used in lieu of performance / Bid
Bond / Financial / commercial standby guarantee. Essential difference
between commercial letter of credit and standby letter of credit is, one
evidences delivery of goods and services (commercial LC ) and the other
relates to the apparent performance / non-performance of an obligation of
the applicant (Standby LC)
How Are The Transactions Under

LCs Regulated?
International Chamber of Commerce (ICC)

Uniform Customs and Practice for Documentary Credits. (UCPDC)
UCP500
These are rules framed by the ICC and are revised periodically to match the
requirements as they evolve over a period of time. Latest revision took place in
1993 and detailed codes published as publication No 500. Almost all countries in
the world are members of ICC and subscribe to this uniform code.
ICC Brochure No.525 (URR)

The Brochure specifies the rules and guidelines related to Bank-to-Bank
reimbursements under Documentary Credit
_______________________________________________________________________________
8
LC Transmission Methods
The opening bank can send LCs to the advising bank in the following ways.
By mail or
By courier or
By telex or
By SWIFT
Documents
While handling documents under LC provisions of UCPDC should be complied
with (meaning interpretation of documents and the matter within is strictly
governed by what is defined as per UCPDC)
Most Commonly Used Documents in International Trade are..

Bill of exchange on the Bank (Bill of Exchange is an instrument by which the
seller formally asks the opening/confirming bank to pay)
Other important documents
a. Transport documents (Bill of Lading, Air Way Bill, Lorry Receipt etc.)
b. Insurance Documents
c. Commercial Invoice
d. Certificate of Origin
e. Packing List
_______________________________________________________________________________
9
Operations under LCs

Import LCs
Open : This operation is referred to the issuance of LC by the importers bank at
the request of the importer
Open and Confirm: This operation means that the LC is opened by the
importers bank and another bank (known as the confirming bank) will be adding
its confirmation to the LC. The act of confirmation would provide additional
guarantee to the LC.
Export LC
Advice Advising means that the exporters bank or any other bank chosen by the
issuing bank informs the exporter that an LC has been received in his favor and he
may ship the goods and submit the documents as per the terms mentioned in the
LC.
Advice and confirm In this case, the bank not only advises the LC to the
exporter, but also adds its confirmation to the LC.
Pre-advice Pre-advice is basically informing the details of the LC in brief to

the exporter. The main LC could follow after pre-advice.
Confirm In this operation, the bank adds confirmation to the LC.

In case of export bills, liquidation would mean receiving the outstanding money
from the importers bank/confirming bank on the bill maturity date.
Availment in an LC
Availment implies making payment for the LC that has been issued earlier by the
importers bank. If a bill under an LC is paid, it becomes an availment of the LC.
Availment of an LC can be in part or full. After an availment, the liability of the
issuing bank is reduced for the particular LC by the amount that has been availed.
_______________________________________________________________________________
10
Trade Finance Cycle

The trade finance cycle is shown below in three stages.
Stage 1 shows how a letter of credit (LC) moves through various parties. It should
be noted that stage 1 would be absent if the importer and exporter shares a
common understanding and the exporter has faith in the importer for payments.
Thus shipment of goods can take place with or without an LC.
Stage 1
Exporters (2) Issues LC Importers

Bank Bank
(3)Advises LC
(1) Requests LC
ES iEX
Exporter Importer
Contract
(4) Ships the goods
Dd Impo
> rter
DF. porte
/./x r
ew
e
_______________________________________________________________________________
11
Stage 2 shows how a bill of exchange comes into the trade finance cycle. In
simple terms, a bill of exchange is an instrument in writing, which specifies that
the importer or the issuing/confirming bank will make payment on the due date to
the exporter. The bill of exchange may be under an LC (responsibility for
payment is with issuing/confirming bank) or may not be (responsibility to pay
rests solely with the importer, banks have no obligation to pay). (If stage 1 is
absent)
Stage 2 (after shipping of goods)
(3)
Collection/Discount
Exporters Option 2
Bank
(2)Submits documents
and B/E to bank
Importers Bank
Present documents
(4) For acceptance or (5)
P Payment Payment
Draws Bill
Draws Bill
of
of
Exchange
Exchange
and (1)
and
Im
Exporter Importer
Ex
documents
documents
*
*
port port
Documents like bill of lading, invoice, packing certificate etc are submitted along
with the bill of exchange.
er er
_______________________________________________________________________________
12
Parties involved in Trade Finance

Applicant: The party that requests the bank for opening the LC-
usually the importer or the buyer of goods.
Beneficiary: The party to which the LC is favored, usually the exporter

or seller of the goods.
Applicants Bank The bank to which the importer or the buyer makes a
request for issuing the LC. Usually, the importer will have
normal banking relationships with this bank.
Issuing bank The bank that actually issues the LC. In most cases this
will be the same as the applicants bank. In some cases,
the seller might be banking with a bank that may not be
very well known or trustworthy. Under such
circumstances, the buyers bank (the applicants bank)
may request another bank to issue the LC.
Advising Bank Bank that advises or informs the exporter that an LC is

received in his favor.
AdviseThrough
Bank If the LC is to be advised to the Beneficiary through a
bank other than the bank to which the issuing bank has
advised the credit, then that bank is called the Advise
through bank.
Confirming Bank Bank that confirms the LC which constitutes a definite

undertaking of the confirming banks liability to make
payment if the documents presented conforms to that
required in the LC.
_______________________________________________________________________________
13
Reimbursing Bank The importer needs to make payment for the goods that he
has purchased. The buyer instructs his bank to make
payment on due date. Usually the importers bank may
pay directly to the exporters bank. But in some cases, the
importers bank may instruct the exporters bank to claim
the payment from some other bank. This bank that will
pay the money on behalf of the importers bank is known
as the Reimbursing bank.
Before the due date of payment, the exporters bank will

send a reimbursement claim so that the reimbursing bank
can pay on the due date.
Drawer This is the party that draws the bill of exchange-usually

the exporter/ seller.
Drawee This is the party on whom the bill of exchange is drawn-

usually the buyer or the importer OR if the documents are
drawn under an LC then the drawee would be
issuing/confirming bank. The drawee should pay money to
the drawer if the terms and conditions of the trade are
satisfied by the seller.
Remitting Bank This is the Bank which sends the documents to the
Importers Bank.
Discounting Bank The bank that discounts the bills of exchange drawn by the
exporter
Collecting Bank The bank that collects payment from the importer and
sends the same to the exporters bank.
_______________________________________________________________________________
14
INCO Terms
When the buyer and the seller conclude a sales contract, they agree upon terms
regarding the responsibilities for the costs, insurance and freight covering the
goods.
These terms have been standardized and are internationally recognized. This
avoids misunderstandings when these terms are used; they are known as Inco
terms (International Commercial terms) - fully explained in ICC booklet: ICC
Inco terms 2000.
Normally, the Inco terms will appear on documentary credits and principal
documents in standard abbreviation form e.g. FOB, CIF or CFR.
Inco terms represent the responsibility of the seller to a point of delivery e.g., ex-
factory, on board the departing ship, etc.
FREE ON BOARD (FOB)

The Seller must deliver goods on board and provide an export license and pay
export taxes. The Buyer must contract, pay for carriage, pay freight and pay
insurance premium.
COST AND FREIGHT (CFR)

The Seller must contract for carriage, pay freight to named destination, deliver
goods on board and provide buyer with bill of lading and an invoice, obtain
export license and pay export taxes.
In other words, the responsibility of the seller is to ship the good to the port of the
buyer. However, the seller does not bear the cost of insuring the goods.
COST, INSURANCE AND FREIGHT (CIF)

The Seller must do same as CFR plus arrangement for insurance of goods, pay
insurance premium and provide buyer with insurance policy. The Buyer would
accept delivery after documents are tendered to him.
_______________________________________________________________________________
15
Commonly used terminologies

Payment Credit: is a sight credit that will be paid at sight basis against
presentation of requisite documents to the designated paying bank. In this type of
credit the beneficiary may or may not be called upon to draw drafts. In many
countries, due to stamp duties requirement, even on sight drafts, it has become
increasingly customary not to call for drafts under credits available by sight
payment.
Deferred Payment Credit: is a usance credit where, payment will be made by

designated bank, on due dates, determined in accordance with stipulations of the
credit, without the drawing of the drafts.
Acceptance Credit: is similar to Deferred payment credit except for the fact that
in this credit drawing of a usance draft is a must.
Negotiation Credit: is available to the exporter by negotiating the documents

with a bank. This bank may be a specific bank (restricted LC) or could be any
bank (non-restricted or freely negotiable). This restriction condition is stated in
the LC.
Revolving Credit: is one where, under the terms and conditions of the credit, the
amount is reinstated without requiring specific amendment to the credit. The
amount under the credit can revolve in relation to time or value.
_______________________________________________________________________________
16
SWIFT Messages related to LC
i. MT700: Issue of Documentary Credit

This is the SWFIT message that is generated and sent by the LC opening (or
issuing bank) to the Advising Bank (ABK or ATB). This is equivalent of LC
instrument in SWIFT.
ii. MT701: (continuation of) Issue of Documentary Credit

This is a continuation of MT700 where the word length exceeds 10000 words in
MT700 (as per current SWIFT rule)
iii. MT705: Pre-advise SWIFT

This is a short SWIFT advise which is sent to the ABK, when the full instrument
is sent separately (usually through courier). The pre-advice is sent when the mail
LC instrument will take sometime to reach the ABK. Pre-advise is normally not
generated when the LC itself is in the SWIFT form (MT700). A bank may send
pre-advice by SWIFT and LC by mail/ courier to save on SWIFT costs.
iv. MT707: Amendment to LC instrument

The issuing bank sends this to the ABK advising amendments to the LC. Usually
the amendments could be of the following nature:
- Extension of LC expiry date

- Extension of last shipment date
- Increase or decrease in LC value
- Any changes pertaining to the documents
v. MT730: Acknowledgement
This is sent by the advising bank to the issuing bank acknowledging the receipt of
LC
vi. MT740: Authorization to Reimburse

This is used to give authority (by the issuing bank) to the reimbursing bank to
reimburse the negotiating bank (usually the ABK) with specific instructions.
_______________________________________________________________________________
17
vii. MT747 : Amendment Authorisation to Reimburse
This is used to amend the reimbursement instruction consequent to amendment in
the LC (eg. change in amount). It is sent by the opening bank to Reimbursing
bank
viii MT756 Advice of Reimbursement

This message is sent by the issuing bank to the bank from which it has received
documents or
by the reimbursing bank to the bank from which it has received a reimbursement
claim. It may also be sent by the bank nominated to pay/accept/negotiate/incur a
deferred payment undertaking to the bank from which it has received documents.
It is used to advise the Receiver about reimbursement or payment, to that bank,

for a drawing under a documentary credit for which no specific reimbursement
instructions or payment provisions were provided.
The account relationship between the Sender and the Receiver is used unless
otherwise expressly stated in the message.
ix MT750 Advice of Discrepancy

This is sent by the negotiating bank which has found discrepancy (and is
negotiating under reserve) to the issuing bank (seeking its approval)
x. MT734 Advice of refusal

This is sent by Issuing bank to negotiating bank, if the former (issuing bank) has
found discrepancy in the documents sent by the latter, and hence the payment has
to be refused.
Other messages
xi MT760 Issue of Guarantee
xii MT767 Amendment to a Guarantee
xiii MT768 Acknowledgement of a Guarantee Message
xiv MT742 Reimbursement Claim
_______________________________________________________________________________
18
Shipping Guarantees
Nowadays, because of faster means of transport (especially by air), goods often
reach their destination before the documents. When the goods are unloaded from
the ship or plane they are cleared through customs and stored in warehouses
belonging to the shipping company or their agents. They usually allow a grace
period of a few days free storage after which the importer will have to pay
demurrage charges until the day of collecting the goods. Demurrage is a storage
fee and can be classified as a penalty. So the importer will wish to avoid this type
of charge by clearing his goods as soon as possible.
Banks issue a Shipping Guarantee (S/G) on application in favor of the Shipping

Co./Agent, usually using their pre-printed forms, authorizing them to release the
goods to the importer against the issuing banks undertaking to deliver the
original bill of lading /transport document.
The advantages of S/Gs to the importer are:
Avoids demurrage charges

Gains prompt possession of goods
The disadvantages of S/Gs to the importer are:
Loses protection of LC in case of any discrepancies in the documents

when they arrive
Port authorities may restrict the number of S/Gs outstanding per importer
Export Finance
This is a working capital facility available to exporters at concessional rate of
interest. The following kinds of entities are eligible for export finance
Manufacturing Exporters
Merchant Exporters
Sub-Suppliers To The Main Exporter
Exporters Of Services Including Consultancy
_______________________________________________________________________________
19
Deemed Exports
This credit can be in the form of Fund based or Non fund based facility.
Pre shipment Finance:

This is to finance for production of export consignment. This is available from the
moment a confirmed export order is received till the shipment is made. E.g.: EPC
(Export Packing Credit).
Pre-shipment is purely need-based .It means even if a party has total requirement
of an x amount it need not be disbursed all at a time. Pre-shipment finance is
purely based on the working capital cycle of the particular product. The bank
monitors the current requirement and then only releases the finance .
Pre shipment finance is liquidated only through realizations of export bills or

amounts received through export incentives. Pre shipment finance should not
normally remain outstanding beyond the original stipulated shipment date. In
case it remains outstanding , the non-adjusted amount is then transferred as
post shipment finance.
Post Shipment Finance:

This is from the period the goods are shipped to the time when the final export
proceeds are received. E.g.: Bill negotiation, discounting, Rupee advance etc
Non Fund based Back to back LC, Import LC, Bid bonds/Performance
guarantee
Packing Credit
Purpose: Procurement Of Raw Material (Local And Imported/ Processing /
Manufacturing/ Warehousing / Shipping Of Goods Meant For Exports.
For availing of Packing Credit the exporter should submit, original Purchase
Order/Indent From Overseas Buyer/Buyers Agent accepted by the exporter or
Original Facsimile followed by the submission of the original order when
received or
_______________________________________________________________________________
20
original letter of credit or proforma invoice duly accepted by the overseas buyer.
Liquidation of pre shipment packing credit is possible by availing post shipment

packing credit.
Letter of credit in FLEXCUBE

Module Overview: -
The LC module supports the processing of all types of documentary and clean
LCs. It can handle all activities during the lifecycle of an LC. This includes the
generation of messages and advices for all the applicable events, and the update
of account balances. The system also handles the collection of various
commissions and charges defined for an LC.
The Letters of Credit module supports the processing of all types of clean and
documentary LCs. These include:
Import LCs.
Export LCs.
Guarantees.
Shipping Guarantees.
Clean LCs.
Standby Guarantees.
The following are the operations supported on an LC:
Open an import LC or guarantee.

Open and confirm an import LC.
Pre-advice an export LC.
Advice an export LC.
Advice and confirm an export LC.
Confirm an export LC.
Thus, your bank can perform one of the following roles:
_______________________________________________________________________________
21
The issuing (opening) bank for an import LC or guarantee.
The advising bank or for an export LC.
The confirming bank for an export LC.
In addition to amendment of the terms of an LC such as the expiry date, the

amount, the latest shipment date, etc., you can amend the operation on an LC as
follows:
Open to open and confirm of an import LC.

Pre-advice to advice of an export LC.
Pre-advice to advice and confirm an export LC.
Advice to advice and confirm an export LC.
In the LC module, commissions can be collected for the initiation and amendment
events of an LC. Commissions can be collected in advance or in arrears,
periodically or non-periodically. You can choose to accrue commissions at a
regular frequency (daily, monthly, quarterly, half-yearly or annually). Similarly,
the frequency of liquidation of periodic commission can be varied. In
FLEXCUBE various charges such as handling charges, SWIFT charges, etc. can
be processed. The commissions and charges can be collected from any party, and
if necessary, debited from a receivable account and liquidated subsequently.
Module Static Maintenance

All Modules of FLEXCUBE utilize the Core static maintenance of Customer, GL,
Accounts, and Currency etc. The core maintenance is required to be completed
before starting the module level maintenance. For starting operations in
FLEXCUBE there is a list of module specific maintenance, which is required to
be completed prior to starting the Product definition.
The LC module requires certain basic information to be set up before becoming

fully operational. You can maintain details for the following:
Clause details
Document details
Goods
Instruction codes
Free Format Texts
Discrepancy Codes and

_______________________________________________________________________________
22
Parameters for your branch
_______________________________________________________________________________
23
Maintaining Branch Parameters

This is done in LC Branch Parameters available under Bank/Branch Parameters in
the Main Menu. This setup helps in the auto-processing of contracts by the
system. The parameters that are required here are Accrual Level whether it need
to be at product level or at the contract level and whether the batch processing
needs to be Till next working day
Product Maintenance
A Product in simple terms is a category or type of LC. The main objective of
creating a product is to construct a broad framework within which you can define
specific LCs. This helps to minimize your inputs at the contract level and ensures
uniformity.
Main Details
Product Code
Product Description, Slogan, Start & End Date
Specifying the Product Group
Product Type Import, Export, guarantee, shipping guarantee, Standby
Whether Revolving or not
Whether Irrevocable or not
Product Preferences
The re-key requirement fields
Limits monitoring Details
Specifying the Tenor limits
Cash collateral details what percentage it should be
Exchange Rate Variance specification and type of Rate Code to be used

(mid-rate or buy/sell rate)
Accrual details
Commission details the collection mode (advance or arrears), the

calculation frequency and the start date.
Whether expiry advice and closure advice need to be generated.
_______________________________________________________________________________
24
Product MIS details
The transaction related MIS details could be captured. The multiple MIS codes
can be captured as a MIS group and the group can be defaulted at the product
definition level.
Product Branch and currency restrictions

This will apply restrictions to the contracts done under the product with respect to
the branches in which the products can be used and also the currencies in which
the deals can be entered using this product.
Product Customer and account class

restrictions
Deals with Restricted customers cannot be done under this product.
Product Tax details

The taxes applicable are maintained as tax schemes. The relevant tax schemes are
defaulted here for the respective components..
Product Interest and Charges Details

The interest related details are to be maintained here. The name of the
component, the rule to be applied, the event at which the interest is to be applied,
the type of interest whether it is fixed, floating or special, the different rates for
specific currencies etc. are defined.
The charges that are to be collected are maintained as charge classes. The relevant
charge classes are defaulted here.
Role to Head Mapping

The mapping of the accounting roles to the desired GLs is defined here.
Alternatively these can be maintained as a class and the class can be defaulted
here.
Event accounting entry definition

The accounting entries and advices as applicable for each event in the life of
the deal are defined here. Alternatively these can be maintained as a class and
the class can be defaulted here.
_______________________________________________________________________________
25
Documents, Instructions & Free Format Text
Here codes for document and instructions and free formats can be attached to the
product so that they are picked up for all contracts under that product. These FFTs
and Instructions can appear along with the advices that are generated during the
lifecycle of the LCs linked to this product.
Tracers
Tracers are reminders that can be sent to the various parties involved in an LC. In
this screen you can specify your preferences for the tracers that should be
generated for the various exceptions that occur in the life cycle of an LC.
Commission and charges tracers, acknowledgement tracers and confirmation
tracers.
Events
An LC processed in FLEXCUBE, goes through different stages during its life
cycle. These stages are defined as Events. The various events that an LC contract
can go through are as follows:
Event Name Description
ACCR Accrual (of Commission).
AMND Amendment.
AOCF Amendment from open to open and confirm (Import LC

only).
APAC Amend - Pre-advice to Adv and confirm (Export LC only).
APAD Amendment from Pre-advice to Advice (Export LC only).
AVAL Availment.
BADV Booking of an LC with Operation Advise (Export LC

only).
BANC Booking of an LC with Operation Advise and Confirm

(Export LC only).
BCFM Booking of an LC with Operation Confirm (Export LC

only).
_______________________________________________________________________________
26
Event Name Description
BISS Booking of an LC or Guarantee Issue (open or open and

confirm (Import LC and all types of Guarantee).
BPRE Booking of an LC with operation Pre-Advise (Export LC

only).
CANC Cancellation of an LC.
CLIQ Commission Liquidation.
CLOS Closure of an LC or Guarantee.
RASN Re-assign an LC contract.
REIN Reinstate an LC.
ROPN Reopen an LC.
Contract Input
An LC contract is an instruction wherein a customer requests the bank to
issue, advise, or confirm a letter of credit, for a trade transaction. An LC
_______________________________________________________________________________
27
substitutes a banks name and credit for that of the parties involved. The
bank thus undertakes to pay the seller/beneficiary even if the remitter fails to
pay.
An LC Contract would therefore require information on:

Who is the buyer or importer?
Who is the seller or the exporter?
The operation that your branch is performing on the LC
The merchandise traded under the LC.
Specifications for the transportation of the consignment.
The documents that should accompany the LC.
The amount for which the LC is drawn.
Details of the parties involved in the LC.
The type of LC you are processing.
By default an LC inherits all attributes of the product to which it is associated.

This means that you will not have to define these general attributes, each time you
input an LC involving a product.
The details captured in the LC contract screen are: -
Contract Main Screen

Specifying the operation you are performing on the LC. These can be
further explained as follows:
LC Types Operations allowed
Guarantees Open
Shipping Guarantee Open, Open & Confirm
Import LC Open, Open & Confirm
Export LC Pre-Advice, Advice,
Advice & Confirm
Clean LC Open, Open & Confirm
Standby LC Open, Open & Confirm
Specifying References for the LC.
_______________________________________________________________________________
28
Specifying the terms of the LC - the amount, currency for which LC is

drawn, the language to be used, the date from which the LC is effective,
the date until which the LC is valid, the city, country, or the bank where
the LC expires, the date on which the LC should be closed automatically
by reversing the contingent entries passed when the LC was initiated, the
related LC Reference Number if the LC being processed has to be referred
along with another already opened (for example, an import LC would be a
related LC for a shipping guarantee), the details of the transferee and
assignee (for an export LC), the INCO Terms, Whether the LC is
transferable, Whether it should be automatically closed, the type of the
confirmation instruction that should be sent to the advising/confirming
bank if you are issuing the LC (whether Field 49 of MT 700 should be
Without, Confirm, or May add.)
Specifying Tolerance Limits for an LC.
Specifying Liability details for an LC.
Capturing the customer details beneficiary for an export LC, and
applicant in case of other LCs
Capturing the Draft Details - the tenor, if the draft is a percentage of the
LC amount or a Flat amount, and the value, the Date from which the tenor
of the draft begins, the party on whom the draft is drawn, the Insurance
Policy Number and Insurance Company, the Expiry Date of the Policy, the
draft amounts for the different components (Insurance, Interest, Invoice,
Freight)
Parties Details
The party type of the customer.
The CIF ID assigned to the party.
The country to which the party belongs.
The partys mail address.
The language in which tracers and messages should be sent to the party.
The media through which all tracers and advices should be routed.
The parties involved in an LC depend upon the type of LC you are

processing. The following table indicates the minimum number of parties
required for the types of LC that you can process.
_______________________________________________________________________________
29
LC type Parties applicable Mandatory Parties not

parties allowed
Import LC Applicant/Accountee Applicant and Issuing
Advising Bank Beneficiary Bank
Beneficiary Or
Confirming Bank Accountee
Reimbursing Bank and
Beneficiary
Export LC Applicant/Accountee Beneficiary Advising
Issuing Bank and Bank
Advising Bank Issuing Bank
Beneficiary
Confirming Bank
Reimbursing Bank

parties allowed
Shipping Guarantee Applicant/Accountee Applicant and Issuing
Advising Bank Beneficiary Bank
Beneficiary
Confirming Bank
Advice Through Bank
Reimbursing Bank
Guarantee Applicant Applicant and Advising

Beneficiary Beneficiary Bank
Advise
Through
Bank
Reimburse
ment Bank
Issuing
Bank
Standby Applicant/Accountee Applicant and Issuing
Advising bank Beneficiary Bank
Beneficiary
Confirming bank
Reimbursing bank
Clean LC Applicant/Accountee Applicant and Issuing

Advising bank Beneficiary Bank
_______________________________________________________________________________
30
parties allowed
Beneficiary OR
Confirming bank (for Accountee
confirmed LCs only; could be And
more than one bank) Beneficiary
Good, Shipment and Document Details

Specifying details of the document applicable to the LC
Specifying the clauses for the documents
Specifying shipping details transshipment details, latest date of shipment,

the carrier of goods, location and destination of goods shipped.
Indicating the goods details
Description for a pre-advice if the LC is of that type.
Advices, Instructions and FFTs

Priority, Medium of advice and whether messages should be suppressed.
Specifying instructions and Free format texts for the LC.
Tracers
Tracers are reminders sent to parties in an LC. The types of tracers sent in
FLEXCUBE are Confirmation tracer, Acknowledgement tracer, and
Charge-Commission tracer.
Specifying the number of tracers to be generated, the frequency, and the
medium of sending the tracers.
Others
The screen is primarily used to specify the SWIFT messages to be sent with
the LC
Fields in LC Others S.W.I.F.T. Field of the S.W.I.F.T.

screen Message message
Charges From MT700 Field 71B
Beneficiary
Additional Amounts MT 700 Field 39C
Covered & MT 740
_______________________________________________________________________________
31
Fields in LC Others S.W.I.F.T. Field of the S.W.I.F.T.

screen Message message
Period For Presentation MT 700 Field 48
Charges From Issuing MT 730 Field 71B
Bank
Account For Issuing MT 730 Field 57A
Bank
Date MT 730 Field 32D
Apart from these details there is a set of other details, which can be entered, in the
different buttons available in the contract main screen. These include the
Settlement details, Commission and charges details, MIS details, TAX details,
Contract Linkages; User defined fields and maintaining Collateral details.
Maintaining Collateral Details
Specifying the value of the cash collateral either as a percentage of the LC

amount or as a flat amount
Specifying the exchange rate
Specifying the adjustment details for the collateral an increase or decrease

in the collateral amount.
Linking contracts to Accounts and deposits
Specifying the type of linkage account or deposit
Specifying the details of linkage, the currency, exchange rate, linked amount
Availment of the LC.
The availment can be of the following types: - Payment, Acceptance, and

Negotiation.
_______________________________________________________________________________
32
Apart from these we can Close, Cancel, or reopen an LC. The automatic
processing of LCs is based on the auto-manual flags. The auto processing is done
by the batches at beginning of day and end of day.
WORKFLOW FOR LETTERS OF CREDIT MODULE
PRE REQUISITES CORE MAINTENANCE
LC BRANCH PARAMETERS
STATIC MAINTENANCE
GOODS/COMMODITIES CODES INSTRUCTION CODES CLAUSES MAINTENANCE
FREE FORMAT MAINTENANCE DISCREPANCIES MAINT DOCUMENT MAINTENANCE
PRODUCT MAINTENANCE LC PRODUCT MASTER MAINTENANCE
CHARGES DEFINITION
TAX DEFINITION EVENTS, ACCOUNTING

ENTRIES AND ADVICES
INTEREST DEFINITION MAPPING
Revolving or
not
ACCOUNTING ROLES
Irrevocable or MIS DEFINITION

not
PREFERENCES
TYPE - Import, BRANCH/CURRENCY RESTRICTIONS

export, Standby,
Clean, Shipping CUSTOMER RESTRICTIONS
guarantee,
guarantee TRACERS
DOCUMENTS, INSTRUCTIONS & FFT
USER DEFINED FIELDS
_______________________________________________________________________________
33
Flow Charts for LC Product

Maintenance and Contract Input
WORKFLOW FOR CONTRACT INPUT
LC PRODUCT MAINTENANCE
PRE REQUISITES
CONTRACT INPUT LC CONTRACT SCREEN

OPERATION
MAIN PARTIES DOCUMENTS/ LC - OTHERS

TRACERS/ ADVICES/
SCREEN & LIMITS SHIPPING (SWIFT FIELDS)
REMINDERS FFTs
DETAILS
CONTRACT OR CHANGES IN COMMISSIONS/

FX LINKAGES CHARGES/TAX/ MIS/
SETTLEMENT DEFAULTS
PICKED UP FROM PRODUCT
SAVE THE CONTRACT OR PUT

ON HOLD
DELETE THE
CONTRACT
AUTHORIZE
Life Cycle Events

AMEND CONTRACT GENERATE
MESSAGES
AVAILMENT OF LCs
CANCELLATION
CLOSURE OF LCs
REVERSAL
REOPEN THE LC
_______________________________________________________________________________
34
Contract of sale/purchase
Importer Dispatches Goods Exporter
Request for LC
Gets Goods Cr.Customer
Dr.Customer Reimbursement
B/E, BoL, Ins,

Advices LC
Doc.
Letter of Credit
I Bank E Bank
Documents
Funds
December 3, 2002 16
_______________________________________________________________________________

Workbook - Letters of Credit

Загружено:

Сведения о документе

Авторское право

Доступные форматы

Поделиться этим документом

Поделиться или встроить документ

Параметры публикации

Этот документ был вам полезен?

Это неприемлемый материал?

Авторское право:

Доступные форматы

Workbook - Letters of Credit

Загружено:

Авторское право:

Доступные форматы

File Name Workbook-Letters of Credit

Need for Intermediary for

Seller Wants Buyer Wants

Banker steps in to perform the role of an intermediary to facilitate the trade

Banks Role as a Facilitator:

Banks Role as a Financer:

Method of settlement of International Trade Transactions

1. Cash in Advance or Clean advance

Letter of Credit (Documentary

A letter of credit is a Bankers Undertaking on behalf of a constituent to pay to a

An import LC is an LC issued by the importers bank and is forwarded to the

Why Letter Of Credit?

LC structure provides seller with an independent Bank undertaking the payment.

Confirmed LC is a letter of credit confirmed by a bank other than the

An unconfirmed LC is a guarantee of only the opening bank.

How Are The Transactions Under

International Chamber of Commerce (ICC)

ICC Brochure No.525 (URR)

Most Commonly Used Documents in International Trade are..

Operations under LCs

Pre-advice Pre-advice is basically informing the details of the LC in brief to

Confirm In this operation, the bank adds confirmation to the LC.

Trade Finance Cycle

Exporters (2) Issues LC Importers

Stage 2 (after shipping of goods)

Parties involved in Trade Finance

Beneficiary: The party to which the LC is favored, usually the exporter

Advising Bank Bank that advises or informs the exporter that an LC is

Confirming Bank Bank that confirms the LC which constitutes a definite

Before the due date of payment, the exporters bank will

Drawer This is the party that draws the bill of exchange-usually

Drawee This is the party on whom the bill of exchange is drawn-

FREE ON BOARD (FOB)

COST AND FREIGHT (CFR)

COST, INSURANCE AND FREIGHT (CIF)

Commonly used terminologies

Deferred Payment Credit: is a usance credit where, payment will be made by

Negotiation Credit: is available to the exporter by negotiating the documents

SWIFT Messages related to LC

i. MT700: Issue of Documentary Credit

ii. MT701: (continuation of) Issue of Documentary Credit

iii. MT705: Pre-advise SWIFT

iv. MT707: Amendment to LC instrument

- Extension of LC expiry date

vi. MT740: Authorization to Reimburse

viii MT756 Advice of Reimbursement

It is used to advise the Receiver about reimbursement or payment, to that bank,

ix MT750 Advice of Discrepancy

x. MT734 Advice of refusal

Banks issue a Shipping Guarantee (S/G) on application in favor of the Shipping

The advantages of S/Gs to the importer are:

Avoids demurrage charges

The disadvantages of S/Gs to the importer are:

Loses protection of LC in case of any discrepancies in the documents

Sub-Suppliers To The Main Exporter

Exporters Of Services Including Consultancy

Pre shipment Finance:

Pre shipment finance is liquidated only through realizations of export bills or

Post Shipment Finance:

Liquidation of pre shipment packing credit is possible by availing post shipment

Letter of credit in FLEXCUBE

The following are the operations supported on an LC:

Open an import LC or guarantee.