A letter of credit is a legal written document issued by the importer/buyer’s bank in the favor of the exporter/seller to assure that the seller would be paid on-time by the buyer for their delivered goods & services. In the event of buyer defaults in fulfilling the terms & conditions of the contract or paying a certain amount in an ongoing trade transaction, the issuing bank will make the payment to the exporter. To put it in simple words, it serves as a commitment of guaranteed payment from the buyer to the seller.
A Letter of credit is a legal guarantee from a bank or financial institution regarding on-time payment to the exporter in the event of the buyer’s failure to perform terms & conditions or pay a certain amount for delivered goods & services. A bank guarantee is a commercial instrument where the bank only pays the amount if the buyer does not fulfill the contractual obligations mentioned in the contract. To know more check out our detailed blog on "What is the difference between bank guarantee and letter of credit?"
There are many benefits of availing letter of credit services some of them are here as follows
The bank’s charges or interest rates for letters of credit can vary depending on the type, size, volume, or nature of the business as well as the buyer’s relationship with the bank, financial stability or types of goods, etc.
The period to get a bank credit letter depends on the issuing bank that is offering the loan. Generally, the process takes approx 10-15 working days or it can extend to some more days in getting approval from the bank.
The loan is a lump sum amount that needs to be repaid in a pre-decided period while a documentary credit is a credit or loan limit issued by a bank to the buyer with an option of withdrawing small amounts from the total issued limit. Moreover, LCs involve a guarantor ie. Bank.
Recommended Read: Letter of Credit Guide
Let’s assume, a Company XYZ purchases the goods worth $100,000 from an overseas supplier called Company ABC. On the demand of ABC, the Company XYZ approaches its Bank for issuing bank credit letters in the favor of ABC. After shipping goods, the Company ABC asks for the payment of $100,000 from XYZ’s bank by presenting shipping documents. The XYZ’s Bank pays company ABC, it turns out to Company XYZ to reimburse the issuing bank.
A letter of credit also known as documentary credit is a legal undertaking issued by an importer’s bank or a private institution to ensure timely and full payment to the exporter. If the importer defaults, it is reimbursed by the issuing bank.
A documentary credit is a payment term, also known as a payment guarantee letter as it backs an international transaction with the involvement of a legal authority like Banks or Private financial institutions for both importers and exporters.
Generally, both the parties to the contract i.e. Importers and Exporters pay for the charges of letter of credit. The charges include a pre-described percentage of the invoice value underwritten which can be from 0.1% to 2.0% of the commercial invoice value per month.
The lenders charge generally 2 percent along with the documentation fees which need to be paid by the borrower at closing or 2.5% for amounts below $50,000 in case of Standby LCs.
The working capital limit for a bank credit letter agreement is decided based on the yearly consumption of raw material to be purchased. Bank verifies the sources of funds with the customer for the retirement of LC opened for buying capital goods.
Issuance of a letter of credit can be LC 90 days, LC 60 days, or more rarely, LC 30 days. It simply stands for the funds promised in the bank credit letter (LC) are due in 90, 60, or 30 days.
LC 30 days means that the funds of bank credit letter (LC) are payable 30 days after BL. If the BL date is 1 June, the payment will be done on 1 July.
You need to make sure that the LC agreement consists of the Date of Issue. It also includes flexibility to make shipment before the latest date of shipment, presentation of documents before the expiry date of documentary credit(LC), and verification of expiry location of bank credit letter.
A letter of credit is opened by the buyer’s bank at the request of the buyer.
A letter of credit is a safe, reliable, and trustworthy trade finance service for both sellers and buyers. In case of the buyer defaults, the bank pays the seller. On the other hand, the buyer is assured of releasing payment to the seller only after fulfilling terms & conditions.
You need to contact your bank for the issuance of an LC. Or you can also approach private financial institutions offering these types of services.
Letters of credit are essential payment guarantee letters for international transactions since they ensure exporters that the payment will be received on-time. It reduces the associated risk of non-payment for the delivered goods.
LC means documentary credit, an instruction from the applicant to the issuing bank for paying the seller a sum of money after certain conditions are fulfilled. TT stands for Telegraphic Transfer, Telex Transfer or Wire Transfer, the transfer of funds from one bank account to another by electronic modes.
The LC expiry date refers to the last date of submitting the exported documents with the bank for negotiation.
It is a short-term credit facility provided by the bank to the seller after confirming the original documents.
According to the rules of the documentary credit, it should be issued in an irrevocable form so that it cannot be cancelled without the consent of the beneficiary.
Yes. A letter of credit is used as collateral by the seller on a loan or purchase.
It is discounting of export bills / invoices under a usance Letter of credit. This discounting is done on a post acceptance basis (in other words, after acceptance to pay on due date has been received from the LC issuing bank). Given the risk assumption is on the LC issuing bank, financier needs to have some credit appetite on the issuing bank. Funds are made available to exporters bank via banking channels.
Export LC Bill Discounting refers to discounting of export documents (bills or invoices) under a Letter of Credit wherein the discounting bank assumes the risk of the LC issuing bank. Factoring, on the other hand, refers to discounting of export documents that are not under a Letter of Credit. In other words, Factoring is done for documents against acceptance or where documents have been sent directly to the buyer and the financier takes risk on the buyer.
No, however KYC and basic credit check and internal approvals are required to be done with the discounting bank. The discounted proceeds will be remitted to the existing working capital banks.
Yes, pre-shipment finance can be availed as LC is treated as a proof of an order. However, pre-shipment finance is dependent on the borrower's credit and therefore the financier's risk is on the borrower (and not on LC issuing bank thus the borrower will need to be a client of the bank). Pre-shipment finance may be extended by the exporter's bank only.
One-time approvals are generally needed to on-board a client with the financier which requires basic credit information, KYC, details of counterparties, LC issuing banks and business background and any additional information that might be specifically required for a customer. For each transaction, the financing bank's details (and clauses if any) will need to be incorporated into the LC. It is strongly advised to pre-discuss each transaction to avoid issues later.
There are a few factors that determine the acceptability and pricing of the transaction. These are :
Some basic credit check including KYC will be done by the bank. However, as the risk assumption is on the LC issuing bank, generally speaking, credit limits are not required to be in place. Some banks may put in place some credit limits to protect themselves against commercial disputes etc. Therefore, it would depend from financing institutions to financing institution.
No, you must obtain a credit facility (Non-Fund - Based Credit Limits) with your bank before availing Supplier's credit
Following are the key steps involved in the process of supplier's credit:
Following is the list of Documents Required
Import funding for capital goods is provided by the overseas Banks of Indian origin or foreign banks as well. Maximum tenor for the loan is 3 years which is provided on 6/12 Months Libor Reset basis. In this type of loan the importer needs to pay the amount of interest at regular reset intervals up to 3 years and Principal + Interest for the last reset at the end of 3 years.
For opening of an LC the importer needs to have Non- fund based limits with his bank. After the Non- fund based limits are sanctioned by the issuing bank, the issuing bank will open the LC by charging their commission. If funding is required, the LC tenor needs to be extended to allow for Supplier's Credit.
Yes, Supplier's Credit can only be availed where an LC exists. Suppliers credit is totally a LC Backed product for which the client should have Non-fund based limits with his bank.
"Buy Now, Pay later"
In Usance LC, Exporter need payment at sight which is paid by importer's bank and importer pays their bank on maturity. In Deferred payment mode the exporter gives some credit period, after maturity importer has to make payment to the exporter.
For Import of Machinery (which can also be categorized as Capital good), an importer can avail financing for upto 3 years under Supplier's credit Or Buyer's credit (against SBLC) Route. For import of Raw materials, financing is available for upto 1 year only under the same two routes (Supplier's Credit or Buyer's Credit).
We arrange financing against LCs. Only banks can issue LCs and you will need an intermediary party in between who will be the issuer of an LC which is backed by another LC.
Yes, LC can be discounted at sight or after a certain credit free period agreed by the concerned parties. The funds will be remitted to the beneficiary upon the agreed date.
In this case, the applicant can open a confirmed LC under which the funds will be remitted to the Supplier as soon as the documents are presented on the desk of the funding bank (that is, before the issuing bank receives the underlying documents).
Supplier's Credit can be availed for a minimum of 30 days upto maximum of 1 year in case of Raw material & 3 years in case of Capital goods.
To avail Supplier's Credit facility, the applicant should have non-fund-based limits with his bank so that his bank can open a LC in favour of his supplier. Banks usually don't sanction Non-fund based limits to New Businesses because of lack of financial feasibility unless sufficient collateral is pledged. For queries related to Non-fund based limits, please contact your banking branch. If you can manage to obtain LC limits; you can enjoy supplier's Credit facility.
LC is issued in MT700 SWIFT message.
It depends on the condition & clauses prescribed by the funding banks. LC can also be directly advised to the beneficiary bank in case there is no RMA arrangement between funding bank and beneficiary bank. The funding bank needs to agree to this arrangement.
In this case, the funding bank can re-direct the LC to the second advising bank who has RMA arrangement with the beneficiary bank. Alternatively, the funding bank can allow direct advising of the letter of credit with a copy to funding bank.
An amendment needs to be sent by the Issuing bank in favour of the LC stating the extension of LC date of expiry & latest date of shipment.
In this case, following needs to be sent by the Issuing Bank to the Funding Bank
After receiving the aforementioned documents, the funding bank will remit the funds to the beneficiary.
Under Supplier's Credit, the documents are routed through funding bank for due diligence of the transaction & record keeping. Once the documents are couriered by the funding bank, they share a tracking number. It is suggested to factor additional couple of days in the document handling process.
Depending on the various time zones of the funding banks, the arrangement is made at the earliest. For example, if the LC is to be opened by today evening, the arrangement can be done from a funding bank in Asia within an hour, but for arranging a US based Funding Bank the applicant has to arrange the Supplier's Credit at least a day before the LC is going to be issued.
It is your liability to pay on the due date. More importantly, it is the issuing bank's liability to honor their acceptance under the LC. In rare cases of delays, Funding bank charges Overdue Interest over and above Libor plus interest agreed at the time of opening of the LC.
In case of Sight payment, acceptance needs to be sent immediately after receiving the documents by the applicant. In case of credit free period given by the supplier, acceptance can be sent on or before the due date of the payment.
In case of unconfirmed LCs, it is necessary to send the acceptance from LC issuing Bank via MT754/32/99 to the funding bank on or before due date.
Yes, payments of partial shipments are permitted through suppliers credit route.
Yes, payments of transhipment are permitted through Supplier's Credit route.
Yes, Supplier's Credit can be availed in case the LC has been already issued by the Issuing bank. An amendment will be send in the LC via SWIFT enlisting all the necessary clauses of the funding bank.
No, Supplier's Credit is a LC backed facility.
No, you cannot avail Supplier's credit for such transactions.
No, Supplier's Credit cannot be availed for local bill discounting.
In this case, you need to guide the supplier to Field 41c of LC where it is clearly written that he will be paid on sight (or at the end of existing agreed credit period) regardless of the credit period you are availing from the funding bank. This is a fairly standard international way of obtaining financing in such transactions. The supplier can be requested to take an opinion from their relationship bank to clarify that their interests are being protected.
There is no limit for LC amount, however Supplier's credit can be extended for a maximum amount of USD 50 Million per shipment.
Under Supplier's Credit A bank can charge upto L + 250 basis points per annum for discounting of LC.
Yes, you can avail Supplier's Credit through foreign banks also. In this type of transaction, the applicant has to bear the With-holding Tax (WHT) on interest payment
No, Supplier's credit transactions are generally cheaper than borrowings in INR.
There is no prescribed minimum amount for availing Supplier's Credit, but overseas banks generally only entertain the transaction(s) which are above USD 25000.
The funding bank will share a copy of SWIFT MT202 with the issuing bank enlisting the payment confirmation, value date of the remittance along with Interest advice of the payment which is due to be paid on maturity by the applicant.
For Importers
For Exporters
No, Supplier's credit transactions are generally cheaper than borrowings in INR.
No, Foreign currency funding for services are not permissible under RBI guidelines
Banks outside India are known as overseas Bank. These banks can be branches of Indian banks and the foreign banks.
When the importer has Non-fund based limits in the bank along with good credit history.
Importer must have non fund based limit with the bank to be able to issue a guarantee. Banks that provide such facility would insist on the importer(s) to have a bank account with them (as this is a credit based facility).
Importer must have Current account with their Issuing bank.
Overseas banks are banks which provide funds to importer's bank against import documents and the importer bank transfers the funds to exporter's bank.
The customer has to pay with-holding tax (WHT) on the interest amount remitted to non-resident party overseas. It has to be deposited with the Indian tax authorities. The WHT is not applicable where Indian banks arrange for supplier’s credit through their offshore offices.
Flat charges are kept considering the monthly volume and ticket size of transactions which can vary for lower amount transactions.
Being specialized in Trade Finance business we pool transactions and take it to overseas bank and negotiate for better prices so it is rare to have better pricing. In case you get better rates than us, please inform us and we can further negotiate it on your behalf.
Overdue interest is to be paid that varies from bank to bank.
Supplier's Credit is usually cheaper than Cash Credit / Direct Payment.
No, you cannot borrow foreign funds if the import of goods is not related to your core business.
Supplier's credit is a cost effective procedure. Overseas funding banks enjoy lesser borrowing cost than our local banks, which enables them to lend funds at cheaper costs.
We are specialized in this service. We make pool of transactions and reach out to overseas bank, which allows us to obtain competitive rates. Additionally, by reaching out to many banks, we are able to secure the lowest funding quotation on your behalf.
Normally, two banks cannot extend funding for the same transaction based on different timelines. However, given that it is not double financing, and if the funding banks agree, it is possible in this case to get the LC discounted by the supplier by his bank on sight & discounted by the funding bank at the end of 120 days. For this arrangement field 41c available with will be amended by writing 'Any Bank'in place of the name of any specific Funding Bank.
RBI issued a notification on Dec 17, 2018 wherein it allowed a borrower operating in an SEZ to obtain Trade credits for purchases within the SEZ or from other SEZ entities. What this means is that any entity operating inside an Special Economic Zone (SEZ) can avail Supplier's Credit for the following
Keeping in mind the physical movement of goods is within the territory of India, documentary flow needs to be monitored to avoid unnecessary delays in funding and payment. While vanilla Supplier's Credit is still a viable option, in our opinion, the most preferred route for transaction is Reimbursement against Acceptance Financing under the LC. In this case, neither the LC needs to be advised through the negotiating bank, nor do documents be needed to be routed through the negotiating bank. The reimbursing bank extends financing under scanned copy of purchase documents along with authentic messages via SWIFT messaging system.
Following are the key differences between raising funds in INR & Foreign Currency.
Yes, while supplier's credit (or RA financing) is not possible without LC, client can avail SBLC backed Buyer's credit facility if underlying import documents are routed through banking channel. For this, the client will need their bank to issue an SBLC to overseas funding bank for availing Buyer's Credit.
SBLC Backed Buyer's Credit refers to loans for payment of imports into India arranged on behalf of the importer through an overseas bank. The offshore branch credits the NOSTRO (in some cases funds are directly remitted to the beneficiary) of the bank in India and the Indian bank uses the funds and makes the payment to the exporter's bank as an import bill payment on due date. The importer reflects the SBLC Backed buyer's credit as a loan on the balance sheet.
No, you must obtain a credit facility (Non-Fund - Based Credit Limits) with your bank before availing Supplier's credit
Following are the key steps involved in the process of supplier's credit:
Import funding for capital goods is provided by the overseas Banks of Indian origin or foreign banks as well. Maximum tenor for the loan is 3 years which is provided on 6/12 Months Libor Reset basis. In this type of loan the importer needs to pay the amount of interest at regular reset intervals up to 3 years and Principal + Interest for the last reset at the end of 3 years.
For opening of an LC the importer needs to have Non- fund based limits with his bank. After the Non- fund based limits are sanctioned by the issuing bank, the issuing bank will open the LC by charging their commission. If funding is required, the LC tenor needs to be extended to allow for Supplier's Credit.
Yes, Supplier's Credit can only be availed where an LC exists. Suppliers credit is totally a LC Backed product for which the client should have Non-fund based limits with his bank.
"Buy Now, Pay later"
In Usance LC, Exporter need payment at sight which is paid by importer's bank and importer pays their bank on maturity. In Deferred payment mode the exporter gives some credit period, after maturity importer has to make payment to the exporter.
"Buy Now, Pay later"
In Usance LC, Exporter need payment at sight which is paid by importer's bank and importer pays their bank on maturity. In Deferred payment mode the exporter gives some credit period, after maturity importer has to make payment to the exporter.
For Import of Machinery (which can also be categorized as Capital good), an importer can avail financing for upto 3 years under Supplier's credit Or Buyer's credit (against SBLC) Route. For import of Raw materials, financing is available for upto 1 year only under the same two routes (Supplier's Credit or Buyer's Credit).
We arrange financing against LCs. Only banks can issue LCs and you will need an intermediary party in between who will be the issuer of an LC which is backed by another LC.
Yes, LC can be discounted at sight or after a certain credit free period agreed by the concerned parties. The funds will be remitted to the beneficiary upon the agreed date.
In this case, the applicant can open a confirmed LC under which the funds will be remitted to the Supplier as soon as the documents are presented on the desk of the funding bank (that is, before the issuing bank receives the underlying documents).
Supplier's Credit can be availed for a minimum of 30 days upto maximum of 1 year in case of Raw material & 3 years in case of Capital goods.
To avail Supplier's Credit facility, the applicant should have non-fund-based limits with his bank so that his bank can open a LC in favour of his supplier. Banks usually don't sanction Non-fund based limits to New Businesses because of lack of financial feasibility unless sufficient collateral is pledged. For queries related to Non-fund based limits, please contact your banking branch. If you can manage to obtain LC limits; you can enjoy supplier's Credit facility.
LC is issued in MT700 SWIFT message.
It depends on the condition & clauses prescribed by the funding banks. LC can also be directly advised to the beneficiary bank in case there is no RMA arrangement between funding bank and beneficiary bank. The funding bank needs to agree to this arrangement.
In this case, the funding bank can re-direct the LC to the second advising bank who has RMA arrangement with the beneficiary bank. Alternatively, the funding bank can allow direct advising of the letter of credit with a copy to funding bank.
An amendment needs to be sent by the Issuing bank in favour of the LC stating the extension of LC date of expiry & latest date of shipment.
In this case, following needs to be sent by the Issuing Bank to the Funding Bank
After receiving the aforementioned documents, the funding bank will remit the funds to the beneficiary.
Under Supplier's Credit, the documents are routed through funding bank for due diligence of the transaction & record keeping. Once the documents are couriered by the funding bank, they share a tracking number. It is suggested to factor additional couple of days in the document handling process.
Depending on the various time zones of the funding banks, the arrangement is made at the earliest. For example, if the LC is to be opened by today evening, the arrangement can be done from a funding bank in Asia within an hour, but for arranging a US based Funding Bank the applicant has to arrange the Supplier's Credit at least a day before the LC is going to be issued.
It is your liability to pay on the due date. More importantly, it is the issuing bank's liability to honor their acceptance under the LC. In rare cases of delays, Funding bank charges Overdue Interest over and above Libor plus interest agreed at the time of opening of the LC.
In case of Sight payment, acceptance needs to be sent immediately after receiving the documents by the applicant. In case of credit free period given by the supplier, acceptance can be sent on or before the due date of the payment.
In case of unconfirmed LCs, it is necessary to send the acceptance from LC issuing Bank via MT754/32/99 to the funding bank on or before due date.
Yes, payments of partial shipments are permitted through suppliers credit route.
Yes, payments of transhipment are permitted through Supplier's Credit route.
Yes, Supplier's Credit can be availed in case the LC has been already issued by the Issuing bank. An amendment will be send in the LC via SWIFT enlisting all the necessary clauses of the funding bank.
No, Supplier's Credit is a LC backed facility.
No, you cannot avail Supplier's credit for such transactions.
No, Supplier's Credit cannot be availed for local bill discounting.
In this case, you need to guide the supplier to Field 41c of LC where it is clearly written that he will be paid on sight (or at the end of existing agreed credit period) regardless of the credit period you are availing from the funding bank. This is a fairly standard international way of obtaining financing in such transactions. The supplier can be requested to take an opinion from their relationship bank to clarify that their interests are being protected.
There is no limit for LC amount, however Supplier's credit can be extended for a maximum amount of USD 50 Million per shipment.
Under Supplier's Credit A bank can charge upto L + 250 basis points per annum for discounting of LC.
Yes, you can avail Supplier's Credit through foreign banks also. In this type of transaction, the applicant has to bear the With-holding Tax (WHT) on interest payment
No, Supplier's credit transactions are generally cheaper than borrowings in INR.
There is no prescribed minimum amount for availing Supplier's Credit, but overseas banks generally only entertain the transaction(s) which are above USD 25000.
The funding bank will share a copy of SWIFT MT202 with the issuing bank enlisting the payment confirmation, value date of the remittance along with Interest advice of the payment which is due to be paid on maturity by the applicant.
For Importers
For Exporters
No, Supplier's credit transactions are generally cheaper than borrowings in INR.
No, Foreign currency funding for services are not permissible under RBI guidelines
Banks outside India are known as overseas Bank. These banks can be branches of Indian banks and the foreign banks.
When the importer has Non-fund based limits in the bank along with good credit history.
Importer must have non fund based limit with the bank to be able to issue a guarantee. Banks that provide such facility would insist on the importer(s) to have a bank account with them (as this is a credit based facility).
Importer must have Current account with their Issuing bank.
Overseas banks are banks which provide funds to importer's bank against import documents and the importer bank transfers the funds to exporter's bank.
The customer has to pay with-holding tax (WHT) on the interest amount remitted to non- resident party overseas. It has to be deposited with the Indian tax authorities. The WHT is not applicable where Indian banks arrange for supplier’s credit through their offshore offices.
Flat charges are kept considering the monthly volume and ticket size of transactions which can vary for lower amount transactions.
Being specialized in Trade Finance business we pool transactions and take it to overseas bank and negotiate for better prices so it is rare to have better pricing. In case you get better rates than us, please inform us and we can further negotiate it on your behalf.
Overdue interest is to be paid that varies from bank to bank.
Supplier's Credit is usually cheaper than Cash Credit / Direct Payment.
No, you cannot borrow foreign funds if the import of goods is not related to your core business.
Supplier's credit is a cost effective procedure. Overseas funding banks enjoy lesser borrowing cost than our local banks, which enables them to lend funds at cheaper costs.
We are specialized in this service. We make pool of transactions and reach out to overseas bank, which allows us to obtain competitive rates. Additionally, by reaching out to many banks, we are able to secure the lowest funding quotation on your behalf.
Normally, two banks cannot extend funding for the same transaction based on different timelines. However, given that it is not double financing, and if the funding banks agree, it is possible in this case to get the LC discounted by the supplier by his bank on sight & discounted by the funding bank at the end of 120 days. For this arrangement field 41c available with will be amended by writing 'Any Bank'in place of the name of any specific Funding Bank.
RBI issued a notification on Dec 17, 2018 wherein it allowed a borrower operating in an SEZ to obtain Trade credits for purchases within the SEZ or from other SEZ entities. What this means is that any entity operating inside an Special Economic Zone (SEZ) can avail Supplier's Credit for the following
Keeping in mind the physical movement of goods is within the territory of India, documentary flow needs to be monitored to avoid unnecessary delays in funding and payment. While vanilla Supplier's Credit is still a viable option, in our opinion, the most preferred route for transaction is Reimbursement against Acceptance Financing under the LC. In this case, neither the LC needs to be advised through the negotiating bank, nor do documents be needed to be routed through the negotiating bank. The reimbursing bank extends financing under scanned copy of purchase documents along with authentic messages via SWIFT messaging system.
Following are the key differences between raising funds in INR & Foreign Currency.
Yes, while supplier's credit (or RA financing) is not possible without LC, client can avail SBLC backed Buyer's credit facility if underlying import documents are routed through banking channel. For this, the client will need their bank to issue an SBLC to overseas funding bank for availing Buyer's Credit.
Domestic / Inland Letter of Credit Discounting is actually a short-term post shipment credit facility offered by the banks to the clients. In this process, the banks or NBFCs purchases all the documents or bills produced by the client and which are backed by LCs and pay the money to the client against discounting interest for the usance period as per the terms of LC.
Improve your cashflow and receive payments promptly by paying discounting rate of interest at very low rates once documents accepted under the LC are confirmed as compliant. With guaranteed security by LC opening bank, LC Discounting can act as a benefit to all parties involved – buyer, seller and guaranteeing bank.
www.finocred.in provides a marketplace/platform for business owners to sell and Banks/NBFC to Fund invoices raised and backed by LC. It provides the best in class technology to Business-owners looking for discounting their LC and can use this platform to discount the LC at attractive rates. Register yourself with us on our website as a business and we will help you discount your LC at very competitive rates. Bankers looking to Fund for short term (1 to 365 days ) can earn attractive discounting interest. Register yourself with us on our website as a Banker and we will help you park your Funds in this asset class with varying maturity periods.
www.finocred.in is backed by a set of passionate founders, financial and technology experts and industry stalwarts. For details about our team click here
Note : Interest and brokerage for the usance period, actual postage and handling charges will also be collected.
Domestic LCs are usually up to 180 days.
www.finocred.in plays a big role in getting the cheapest discount rates for LCs from various banks across the industry. Discounting interest rates corresponding to deals will be made available to borrowers after confirmation with banker / NBFC before any funding, this ensures that borrower know their interest cost before initiating the discounting.
www.finocred.in provides a platform to connect Borrowers seeking to discount LC and bankers / NBFC and execute transactions between them. www.finocred.in does not guarantee to its bankers and the funding would be subject to the traditional market risk associated with invoice discounting. Please refer to the Risk factors for details.
Any Bank / NBFC
FINOCRED is serious about data privacy and we maintain complete confidentiality of your private and financial data and we are legally bound by our privacy policy to not share the data. We request you to read our privacy policy and term of use for additional details.
Funding comes with its own associated risk. Since it is LC backed funding, applicant bank guarantees the payment to the funding done by negotiating bank. However, we have taken several steps to mitigate the risk – both strategically and operationally. www.finocred.in is a tech platform and it does not assume any credit risk on behalf of the lenders.
The global rule sets which govern standby letters of credit (SBLC) - both the Uniform Customs and Practices current revision 600 (UCP 600) and International Standby Practices current revision (ISP98) - define a SBLC as an “undertaking”. An undertaking provides the named beneficiary with an “independent” assurance of payment from the undertaking’s issuer (issuers are most often banks).
The obligations of the SBLC or “undertaking” supplement, and are in addition to, any other underlying contract/agreement between the issuer’s client (In SBLC terms, the client is most often referred to as the applicant) and the client’s contract counterparty (In SBLC terms, the counterparty is known as the beneficiary).
When the issuer bears a stronger credit rating, a SBLC is also a credit enhancement tool. An applicant’s ability to obtain a SBLC from an issuer reflects good faith as the SBLC supports an applicant’s credit quality.
SBLC issuance process – direct to beneficiary or utilizing an advising bank
A bank’s SBLC substitutes and may enhance or replace the creditworthiness of the applicant for that of the issuer of the standby letter of credit.
SBLC undertakings support/collateralize “any” type of underlying contract, agreement, or obligation between an issuer’s client/applicant and the applicant’s client/counterparty, the beneficiary.
SBLCs are recognized globally as an effective means of securing cross-border and domestic contracts.
Banks following BASEL or Dodd-Frank requirements will classify their issued or confirmed SBLCs as supporting either a “financial” or a “performance” obligation. These two classifications are defined as:
Applicant considerations:
There is a cost associated with SBLC transactions.
Beneficiary considerations:
A beneficiary must determine its credit rating of the issuer. Where an issuer’s credit rating, size or country risks are unacceptable to the beneficiary, a beneficiary may require an acceptable confirming bank.
Once the beneficiary receives a SBLC, it should ensure that SBLC wording complies with the requirements of the underlying contract. Example :
This upfront review will help to assure success if the beneficiary makes a drawing against the SBLC, understanding that when a presentation does not comply with a SBLC’s stated terms/conditions, an issuer is not obligated to pay.
The SBLC should be made subject to its preferred international rules such as ISP98 versus UCP600 as the rules align everyone involved with a SBLC and may also assist in the case of a legal matter.
Confirmation and/or advising costs may be due by the beneficiary.
As the issuer is supporting its applicant, it needs to consider the applicant’s credit rating. They also need to consider their ability to complete the underlying contract/agreement, often without reviewing the contract/agreement.
Reputational and/or compliance risks such as money laundering, collusion between an applicant and a beneficiary, supporting an unpopular contract/agreement, etc. should also be considered.
Here is an overview of the most common types of SBLC.
Similar to the commercial LC or a SBLC, a demand guarantee (DG) is an independent and irrevocable “undertaking,” provided by an issuer to a beneficiary, that provides assurance of payment upon receipt of complying document presentations. DGs are often referred to as first demand guarantees. DGs are more common in Europe, Asia, and the Middle East. SBLCs are more common in the Americas, however they remain globally issued and/or accepted. Surety or ancillary guarantees should not be confused with DGs and are not the same as LC undertakings. They are outside the scope of this guide. DGs and SBLCs are extremely similar “undertakings” with the key differences provided by its governing rule set. Like the SBLC, demand guarantees:
Given the long-term expiry nature of SBLCs, they often insert what is commonly referred to as an “Evergreen” or “automatic-extension” clause. The Evergreen Clause allows an SBLC’s expiry date to automatically extend for a fixed period-of-time (e.g. every six months or year).
It also provides an issuer or confirmer and/or the applicant with an exit period (e.g. “unless XX days prior to any then current expiration date, the issuer notifies the beneficiary that the issuer elects not to extend the SBLC”). This allows them the possibility to have the SBLC expiry with a simple cancellation notification and without the need for a beneficiary to agree to an amendment.
However, any cancellation notification must be sent or received by the beneficiary by the notification period indicated in the SBLC’s specific evergreen clause. This is normally anywhere between 30 and 90 days from a then current expiration date.
The applicant, issuer or confirmer is provided with the means to close the SBLC without the need for a beneficiary to consent or otherwise have to agree to an amendment or return an undertaking. (Note: The cancellation is typically sent when the underlying contract is also close to completion, but there remain other reasons for cancellation such as: applicant seeking to replace an issuer for improved costs or other reasons, or an issuer seeking to remove itself from a deal; etc.)
In addition, providing longer-term commitments often requires higher rates/fees. The exit opportunity provided by an Evergreen Clause may keep fees more reasonable.
SBLC undertakings can support “any” type of underlying contract, agreement, or obligation between an issuer’s client or applicant and the applicant’s client/counterparty - the beneficiary - provided the issuer is willing to support the nature of the underlying contract.
The SBLC obligations supplement and are in addition to any other underlying contract/agreement between the issuer’s client, the applicant and the beneficiary. When the issuer bears a stronger credit rating, a SBLC is also a credit enhancement tool.
An applicant could require that a beneficiary must inform them of an intended drawing XX days in advance. The SBLC could require the beneficiary to make this certification and provide some form of documentary evidence; e.g. a copy of an email to ensure it was completed. This notification could allow an applicant to resolve the contract issue negating the need for a drawing.
Conversely, a trusted neutral third party or an applicant could require that a beneficiary’s drawing statement be countersigned or attested by a third party neutral to the applicant and beneficiary; or the applicant or their representative to help ensure that the drawing is warranted (Note: Given the neutrality of a SBLC between an issuer and a beneficiary, having an applicant requirement to countersign or attest to a drawing is discouraged in rules and often prohibited by an issuer and/or a beneficiary).
Most SBLCs have a sight tenor and, as noted throughout this guide, in most cases a SBLC will never receive a presentation or drawing so there is no need to make a payment.
Discounting or prepaying a sight SBLC can be associated with fraud and as such, caution is needed when considering such a possibility.
Yes, and as noted in UCP 600, ISP98 (and URDG 758) and when allowed by applicable law, in certain cases the issuer may issue a SBLC on its own behalf. In these cases, the issuer becomes the applicant and the issuer. This is commonly known as a two party SBLC.