MODES OF PAYMENT FOR IMPORTS

Bangko Sentral ng Pilipinas increasingly liberalized the acceptable modes of payment for
imports and exports under a succession of new regulations provided that the commodities to be
imported or exported are not classified as prohibited or regulated which requires special
clearance from the government agencies concerned.

For monitoring purposes , the BSP requires the pre-registration of imports under Documents
against Acceptance(D/A) and Open Account(O/A) arrangements before an importer can obtain
the required foreign exchange from the banking system for payment.

Export payment terms vary from Cash in Advance to Open Account.Commercial banks may
sell foreign exchange to service payments for imports under the following arrangement without
prior Central Bank approval direct remittance, letters of credit, documents against acceptance,
open account and documents against payment.

Other arrangements not involving payments using foreign exchange are allowed without the
need prior Central Bank approval. These include self-funded(no dollars) imports which are
funded from importers own foreign currency deposit accounts or those sent by suppliers abroad
for which no payment in foreign exchange will be made as well as importations on consignment
basis. These refer to importations by export producers of raw materials and accessories/supplies
from foreign suppliers abroad for the manufacture or processing of products destined for export
to said foreign suppliers/buyers.

Commercial banks may sell foreign exchange to service payments for imports under any of the
following arrangements without prior CB approval subject to the provisions of Section 9 to 12 of
CBP Circular 1389(April 13,1993)


1. Letter of Credit (L/C)
(Sec 9, Central Circular No.1389,April 13,1993)

A document issued by a bank per instructions by a buyer of goods, authorizing the seller
to draw a specified sum of money under specified terms usually the receipt by the bank of
certain documents within a given time.

Letter of Credit is abbreviated as an LC or L/C and often is referred to as a documentary
credit(abbreviated as DC or D/C) or simply as credit(as in the UCP 500 and UCP 600)

The English name of letter of credit derives from the French word accreditif, a
power to do something which in turn is derivative of the Latin word acrreditivus,
meaning trust.This in effect reflects the modern understanding of the instrument.



Letter of credit are classified into two:

1.Commercial Letter of Credit- issued to finance a transaction, they may be negotiable or non-
negotiable, confirmed or unconfirmed, documentary or clean, cumulative or non-cumulative.
2.Travellers letter of credit which are issued to provide the traveler with needed en route.
Related to letters of credit are trust receipts no governed by the Trust receipt Law under
Presidential Decree No.115

Commercial Letter of Credit
A Letter of Credit is a written undertaking by the bank given to the seller at the request of the
buyer to effect payment of a stated sum of money within a prescribed period of time and against
stipulated documents.
L/C provides a convenient and secure means to execute international commercial
transactions. It ensures payment when the terms and conditions have been met.
L/C gives protection to both parties involved since the seller must present documents
evidencing shipment of goods before he can collect payment from the issuing bank while
the buyer will have to pay the bank first before he can get the shipping documents needed
to release the goods.

Essential conditions of letters of credit
To be issued in favor of a determined person and not to order.
To be limited to a fixed and specified amount or to one or more indeterminate amounts
but all within a maximum sum the limit of which must be exactly stated

Requirements for Opening L/C
All L/Cs must be opened on or before the date of shipment with maximum validity of one(1)
year. Likewise, only one L/C should be opened for each import transaction.For purposes of
opening an L/C, importers shall submit to the commercial bank the following documents:

a. The duly accomplished L/C application
b. Firm offer/proforma invoice which shall contain information on specific quantity of the
importation, unit cost and total cost, complete description/specification of the commodity
and Philippine Standard Commodity Classification statistical code.
c. Permits/clearances from appropriate government agencies whenever applicable
d. Duly accomplished Import Entry Declaration(IED) Form which shall serve as basis for
payment of advance duties as required under Presidential Decree 1853

Amendments of L/Cs
L/C amendments need not to be referred to the Central Bank for prior approval. However,
amendments extendin the total validity period of an L/C for more than one (1) year, if payment
of the L/C is to be sourced from the banking system, shall be referred to the Central Bank for
prior approval.


Negotiations of L/Cs\
L/C shall be negotiated in accordance with the terms and conditions set forth in the L/C and
shall be governed by the Uniform Customs and Practices on Documentary Credit.

Other Types of L/C

Standby L/C
A Standby L/C is a guarantee from the Bank in favor of the beneficiary for the
fulfillment of a contract. It is similar to a performance bond or bid. In issuing a standby
LC, the bank gurantees the performance of its clients specific act to the beneficiary of
the LC.This special type of LC does not involve the movement of goods.

A Guarantee of Payment
It is an L/C in which the issuing/opening bank guarantees payment of the obligation in
case of failure of client to comply with certain specified requirements or in case of
default in payment by the client.

Release under Trust Receipt Agreement
It is a contract between the bank and the importer whereby the goods imported and
consigned to the bank are released to the importer under trust receipt in order that the
same goods maybe sold and the obligation arising out of the issuance of the letter of
credit be fully liquidated.(the seller can get hold of the goods under loan and use the
proceeds to pay his obligation to the bank)

Back to Back L/C: A new letter of credit issued to another beneficiary on the strength of
a primary credit. The second L/C uses the first L/C as collateral for the bank.Used in a
three party transaction.

Clean L/C: A letter of credit that requires the beneficiary to present only a draft or a
receipt for specified funds before receiving payment

Deferred Payment L/C: A letter of credit issued for the purchase and financing of
merchandise, similar to acceptance type letter of credit, except that it requires
presentation of sight drafts payable on an installment basis over a period of time which is
usually more than one(1) year.

Irrevocable L/C: An instrument that once established cannot be modified or cancelled
without the agreement of parties concerned.
Confirmed L/C: An L/C guaranteed by both the issuing and advising
banks of payment so long as sellers documents are in order and the L/C
terms are met. Only applied to irrevocable L/Cs.The confirming bank
assumes the credit risk of the issuing bank.
Non-cumulative L/C: A revolving letter of credit that prohibits the amount not used
during the specific period from being available afterwards.

Restricted L/C: A condition within the letter of credit which restrictys its negotiation to a
named bank.

Revocable L/C: An instrument that can be modified or cancelled at any moment without
notice to and agreement of the beneficiary but customarily includes a clause in the credit
to the effect that any draft negotiated by a bank prior to the receipt of a noticce of
revocation or amendment will be honored by the issuing bank.Rarely used since there is
no protection for the seller.

Revolving L/C: A credit wherein the issuing bank notifies the seller of the merchandise
that the amount involved when utilized will become available again usually under the
same terms and conditions and without the issuance of another L/C.

Straight L/C: A letter of credit that contains a limited engagement clause which states
that the issuing bank promises to pay the beneficiary upon presentation of the required
documents at its counters or the counters of the named bank.

Transferable L/C: A letter of credit that allows the beneficiary to transfer in whole or in
part to another beneficiary any amount which, in aggregate of such transfers does not
exceed the amount of the credit. Used by middlemen. It is used when the first beneficiary
cannot supply the goods and wishes to tansfer in part or all of the Lc to another
beneficiary.Partial of full transfer of LC from first to second beneficiary in case first
beneficiay cannot supply the goods.

Unconfirmed L/C: A letter of credit forwarded to the beneficiary by the advising bank
without engagement in the part of the advising bank.

2. Documents Against Payment (D/P)
An agreement whereby the shipping documents are forwarded by the seller to his bank
for transmittal to a local bank. The documents are released by the local bank to the
importer upon payment. The bank shall act as the collection agent for the seller. There is
a risk to the seller however since the bank cannot guarantee payment.

Under D/P arrangment, commercialk banks shall advise the importer of the
receipt of the complete original shipping documents(inclusive of the CRF
whenever applicable) and shall effect the release of said documents to the
importer upon receipt of payment.
Commercial banks sall remit paynebt to the supplier through the correspondent
bank abroad.

3. Documents Against Acceptance (D/A)
An agreement whereby the draft and shipping documents are forwarded by the seller
to his bank for transmittal to a local bank. The documents are released by the local bank to the
importer upon acceptance of the draft.

Release through Agent
The bank shall act as the sellers agent for the release of the shipping documents. There is a
risk to the seller however since the bank cannot guarantee payment.

Under D/A arrangement, the shipping documents are released to the importer by the local
bank concerned thru the sellers bank upon the importers acceptance of the sellers bill of
exchange obligating the importer to pay for the shipment of some future date.

4. Open Account (O/A) Arrangements
An arrangement whereby the documents are forwarded directly by the seller to the
buyer. The banks participation will be to remit payment to the seller upon instruction by the
buyer upon maturity date. The bank shall act as the buyers agent for the remittance of the
payment to the seller upon maturity date.

Under an O/A arrangement the shipping documents are sent and released by the seller
directly to the importer without coursing the documents thru the banks, upon the importers
promise to pay at some future date after shipment.

Eligible Firms
Producers/manufacturers whether for the domestic or export market, oil firms,
franchised public utility concerns and importers-traders importing raw materials required by
domestic manufacturers are allowed to import under D/A and O/A arrangements.

5. Direct Remittance
An agreement whereby the documents are forwarded directly by the seller to the
buyer. The banks participation will be to remit payment to the seller upon instruction by the
buyer. The bank shall act as the buyers agent for the remittance of the payment to the seller at
sight or upon the buyers presentation of documents to the bank.

Commercial banks may service applications for direct remittance of import payments
effected through modes other than those under L/C, D/P, D/A, or O/A only upon presentation
of the complete original shipping documents as well as copy of the CRP and or imports clearance
for regulated items issued by concerned government agencies, if applicable.