Accepting a Letter of Credit :
When the letter of credit is received the proper verification and study of the same by the exporter is of utmost importance. The points to note are as under.
Revocable or Irrevocable Letter of Credit :
It is highly dangerous to get a revocable letter of credit in export trade as the name itself suggests the party opening the letter of credit in export trade can revoke the same at any time. It might be revoked before the goods are produced by the manufacturer or seller procuring the goods or before the goods are dispatched to the place of destination or after the goods are dispatched or when the goods are in transit or when the goods arrived at the destination. Hence, it is always wise to ask for an irrevocable letter of credit to avoid all the risk in the export trade.
Name of the beneficiary and address :
The next important factor is that the name and address of the exporter should be correctly mentioned on the letter of credit. Even a slight variation in the name of the exporter or exporting company or address may lead to undesired results in export trade where the buyer may reject the goods after goods reach the destination on the plea that the goods have not been exported by the company to whom he had placed the order or letter of credit opened. The rejection may be genuine or a mischief to gain time or to get the goods free of payment. Hence, utmost care should be taken to see that letter of credit contains the correct name of the business and address. Sometimes, it may so happen that the letter of credit may contain the address of the Registered Office of the Company from where the agreements and contracts conclude, but the goods may be dispatched by the factory and the factory address will obviously be printed on the documents prepared at the time of dispatch of goods like Invoice, Bill of Lading, Insurance Policy, G.R. Form and Certificate of Origin and may be vice-versa.
Similarly, where a branch is involved, it may also lead to rejection of goods by the buyer.
Whether the letter of credit is transferable or not :
If the letter of credit is transferable then the transfer by the bank has to take place correctly on the letter of credit in favor of the seller.
Other clauses and terms and conditions of letter of credit to be watched are :
EXPIRY DATE :
Letter of credit, If the expiry date is not appearing on the letter of credit, the last date for negotiation of documents should be considered as the expiry date of the letter of credit. The last date of negotiation should be clearly mentioned and should give you enough time to submit documents.
Value of the letter of credit should cover the full value of goods ordered and currency as per the quotation.
Correct quality and quantity or goods quoted and ordered should appear on the letter of credit.
Shipping Particulars :
Letter of credit may sometimes contain that the partial shipment and transshipments during the transit are not permitted. If this is not feasible then the exporter should ask for amendment to the letter of credit before taking any further action.
Legalised Invoice :
The letter of credit may require a legalized invoice which means that the Embassy of the particular country or destination where the buyer resides should discharge the invoice. The Embassy might have their own norms which they would like to follow before discharging the invoice like the inspection of goods before packing.
Consular Invoice :
The letter of credit may require a consular invoice prepared by the consulate of that particular country to which the goods are being despatched and the consular invoice should be duly signed by the consul.
Customs Invoice :
The invoice of the exporter should be certified by the customs authorities for having inspected the goods before loading into the ship or aircraft.
Local Confirmation of The Lefler of Credit :
One should know the difference between having simply a letter of credit only and having a letter of credit from a recognised bank on whom one should have faith. Bank should be sound and should be in a position to honour the letter of credit on due date. In such circumstance the exporter will have two options.
(i) To seek alternative bank when the bank who has opened the letter of credit has not kept up its commitments earlier.
(ii) To have local confirmation of the letter of credit from the local bank or advisory bank or from the exporter's bank.
For turbulant markets like Russia and central Asia, international institutions offer confirmation through EBRD & IRDA. (EBRD-European Bank for Reconstitution and Development.)
Usually the confirming bank will take the responsibility on behalf of the leter of credit opening bank to honour the commitment and this confirmation is on a separate letter and not on the letter of credit. The confirming bank would like to see in such cases the original contract of sale as the letter of credit is only an offshoot of the original contract of sale.
Payment Terms :
One should also see that how the letter of credit opening bank proposes to pay and on what date and within reasonable time.
Banks do not encourage letters of credit with too much of technical and excessive details. Exporters should ensure that by fulfilling any of the conditions the letter of credit would not violate the regulations prevailing in India, such as requiring the exporter to mail negotiable copies of bill of lading directly to the buyer or handing over by the exporter of a negotiable copy of the bill of lading to the Master of Vessel. If such conditions are incorporated, necessary
permission from the authorities should be obtained, just as they need to obtain export licence in respect of goods which are subject to such licence. Failure to act in advance on such conditions would entail unnecessary frustration if the exporters were to approach the bank to negotiate documents with the onerous conditions.
The terms of the credit should not contradict one another and instructions contained therein should be precise and unambiguous.
If letter of credit calls for shipment in one or more lots, it cannot prohibit part shipment in
another place in the same letter of credit.
If the contract price is on FOB terms, the credit cannot call for a bill of lading evidencing freight prepaid amount under the letter of credit.
If the exporter finds it difficult to understand any of the implications of the letter of credit, he should seek the assistance of the bank.
After the exporter is satisfied that the letter of credit terms do not in any way contradict the contract terms and that the conditions in the letter of credit are such as could be conveniently fulfilled by the exporter, he should go ahead with shipment within the valid period and obtain shipping documents drawn in the exact manner as called for in the letter of credit.
In letter of credit business, there is no distinction between a major and a minor discrepancy, as for refusal of documents by credit opening bank, even a discrepancy which is of most minor nature from the point of view of the exporter is a sufficient ground. If the documents submitted are not a perfect tender, the exporter runs the risk of the buyer using such discrepancies as an excuse to delay or default payment for the documents. It should he remembered that buyers abroad often reject documents on very flimsy and extraneous grounds by pointing out even minor discrepancies.
It is of vital importance that the exporters should first ascertain the means, standing and business morality of the buyer by calling for credit reports from banks. For large-sized transactions, even contacts at personal level would be necessary to obtain complete information about the buyer.
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