LATEST VERSION OF UCP 600
According to the UCP 600 rules introduce
to the global to follow the letter of credits transactions to happened smoothly.
UCP 600 rules introduced by International
Chamber of Commerce’s (ICC) for the sake of global trade.
As
per UCP 600, Letter of Credits (LC) is defined as “an agreement by which a bank
consents to pay the beneficiary upon the occurrence of a delivery of goods or
export of goods, against presentation of LC documents to Bank as per LC terms”
Most important points of UCP 600 / simplified UCP 600
·
According to the UCP 600 (article 1)
all the documentary credit including letter of credits and stand by
credits need to follow the UCP 600. This applied all over the world in the form
of “SWIFT”
·
As per UCP 600 (article 3), revocable LC are not
acceptable and only acceptable irrevocable LC only, LC documents should be
signed in writing only and handwritten signatures are acceptable while computer
generated signature, electronic signatures are not acceptable,
·
LC availability by
sight, deferred payment or acceptance (Filed 41A) should be mentioned in the LC
as per UCP 600 (article 6). Also need
to mention the expiry date of LC (field 31D). According to the UCP 600 LC
documents should be presented to the Bank on or before LC expiry date (31D)
·
LC cannot cancel or
amend without the agreement of the issuing bank, UCP
600 (article 10)
·
Commercial Invoice UCP
600 article 18 -below points to be considered when preparing a Commercial
Invoice
o Issued by Beneficiary
o Address to be applicant
o LC currency and invoice currency should be same
o Not required to signed unless specified
o LC amount should not exceed unless tolerance
o Description of goods should be same as per LC
·
Partial drawing and
partial shipments are allowed in UCP 600 article 31
IS LC payments are secured or not?
UCP 600 governed and protect the all the
parties such as Beneficiary, applicant and Banks (intermediary Bank, Advising
Bank, Applicant Bank, confirming Bank, etc). The use of LCs to effect payment
is widespread in international trade without any hassle. This is because they
offer security of payment for and receipt of goods to contractual
counterparties who may be in different jurisdictions to each other – and who
may be contracting to buy and sell goods which are located in a third
jurisdiction, or which are in transit and many more. A feature common to all
types of LCs (including LC and SBLC) is that money is raised on the documents,
not on delivery of the goods as per UCP 600.This is the main reason to LC is
more secure for international trade.
In addition to the UCP 600, ISBP
(International Standard Banking Practice to be read in conjunction with UCP 600
but not incorporated into the LC. This defines terms not defined in UCP 600,
such as “shipping documents” and “shipping marks” which will also help in
securing the LC transactions.
How to work with LC in Simple
There are few steps in LC process which
need to follow in all the cases regardless of mode of transport.
1.
Beneficiary and
applicant agree sales contract.
This also known as
buyer and seller agreement for the sale of goods or services and payment mode
should be in Letter of Credit (LC).
2.
Applicant requests
Issuing Bank to issue the LC.
In this LC process,
Applicant needs to determine the sales contract and prepare the Irrevocable LC
application (as per UCP 600). Both parties should agree the LC terms and
conditions before application process. In this process applicant can negotiate
with beneficiary in various corrections and coordination for the LC terms and
conditions. This will enable them to not to have any dispute in the latter
stage.
3.
LC issued by Applicant
Bank.
Once LC is issued,
by applicant Bank, applicant can email the swift to beneficiary and beneficiary
can follow up with advising Bank in case delay.
4.
LC advised by
Beneficiary Bank
Once LC issued, it
will automatically transmit to advising Bank and Bank will advise to
Beneficiary.
5.
Seller export/
deliver the consignment
As per the sales
agreement seller/beneficiary arrange the consignment and ship/deliver the goods
before the last date of shipment as per LC and UCP 600.
6.
Presentation of LC
documents
Seller is
responsible to prepare LC documents according to the LC and UCP 600, and to
present to Bank within the required deadline/time frame. Specially, before LC
expiry and before the presentation period.
7.
Bank verify the LC
documents
If the LC documents
are complied to LC terms and condition and UCP 600, documents are forward to
applicant Bank for verification. If Bank decide to LC documents are complied,
payment will be effect to advising Bank according to the payment terms such as
at sight or by differed payment.
8.
Buyer collect the LC
documents
In order to release
the goods from port buyer need to collect the required LC document from Bank.
What are the types of LC?
We have outline below all the types of LC
as per UCP 600.
·
Documentary Credit –
Letter of Credit - LC
According to the UCP 600, Documentary credit
is also known as Letter of credit or LC is an obligation by the issuing bank to
pay the agreed amount to the beneficiary in other words seller on behalf of applicant
also known as buyer.
·
Standby Letter of
Credit - SBLC
UCP 600 defined SBLC is similar to Bank
Guarantee. It is a secondary rather than a primary obligation to pay, usually
triggered by non-performance or default. Under SBLC documents presentation is
not required and SBLC comes in to play when the subject matter becomes defaults
or noncompliance as per the SBLC requirement. In all other case, SBLC act as a
Bank Guarantee.
·
Irrevocable LC and
or revocable LC
Revocable LC are not acceptable under UCP
600 rules. This can be amend and or cancel by the issuing bank at any time and
for any reason without informing beneficiary and considered as less security to
Beneficiary. In other words, Irrevocable LC are more secure and cannot cancel
or amend without getting beneficiary’s consents as acceptable by UCP 600.
·
Transferable LC
Transferrable LC is understandable by its
name is transferable to other party.
·
Sight LC
Sight LC defined in UCP 600, to pay at
sight if the credit is available by sight payment in the LC.
·
Usance LC
Sight LC defined in UCP 600, to incur a
deferred payment undertaking and pay at maturity if the credit is available by
deferred payment in the LC.
·
Back-to-back Letter
of Credit
UCP allowed the back – to back LCs, one
issued by the buyer’s bank to an intermediary and the next issued by the
intermediary’s bank to the beneficiary , usually to conceal the ultimate
seller’s identity from the ultimate applicant.
·
Revolving LC
Revolving LC can be cover considerable amount
in value in multiple shipmen over the period. Revolving LC are mostly used where
regular shipments are made from the same seller over a period of time. Instead of
issuing many LC s in each single shipment, revolving types of LC can be issued.
·
Confirmed LC
Confirmed LC is not the different types
of LC and the same issued LC will become confirmed LC with additional guarantee
and often required this type of additional guarantee because of creditworthiness
of the issuing bank and the condition of the country were issuing the LC. This is
just an additional security to the LC given by beneficiary’s Bank in the
beneficiary’s country. However, before getting confirmed LC you need to consider
the cost of confirmation. Cost of LC confirmation is usually high.
·
Silent Confirmed LC
Silent confirmation is required when
applicant Bank does not allow to arrange the usual confirmed LC and then you
have right to negotiate with beneficiary Bank to arrange the silent
confirmation to the LC. Applicant Bank is silent in this case all arrangements
are done by beneficiary’s Bank.
·
Discounting an LC
LC can be discount and get the money
before LC maturity at the negotiation with Beneficiary’s Bank. However, you
will not get the full amount of LC and charges are deducted by Beneficiary’s
bank and net amount will be credited to the account.
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