Letter of Credit Presentation

Documentary Letter of Credit
BANKCONSULT
Human Resource Consultants providing services in Talent
and Performance Management, Recruitment and Skill Development
mehboobur_rehman@yahoo.com
18 August 2010
Mehboobur Rehman Lead Executive

Consultant - BANKCONSULT
Training Course on
DOCUMENTARY LETTER OF CREDIT
PRESENTED BY
MEHBOOBUR REHMAN
Former
Head Of Human Resources
STANDARD CHARTERED BANK
CREDIT AGRICOLE INDOSUEZ BANK
COMMERCIAL BANK OF CEYLON LIMITED
TRANSCOM LIMITED
Currently Lead Executive Consultant / BANKCONSULT
BankConsult
BANKCONSULT
OBJECTIVE OF THIS TRAINING COURSE
1.
To provide the participants through a transactional approach, with a

clear understanding of the importance of international trade and
payment system and the significance of Balance of Trade and
Payment.
2.
The course will bring into greater focus the various types of
Documentary Letter of Credit and the generally accepted international
standards of procedures adopted by the contracting parties.
3.
Emphasis will also be made on how letters of credit are used to settle
international trade transaction and examine in detail the role of the
international banking system, dealing with both the crucial aspect of
procedures and the wider management implication of the subject.
4.
Two questions of paramount importance are applied, Is the

Instrument workable and Are the Documents in order.
18 August 2010

BANKCONSULT
MAJOR CONCERNS IN INTERNATIONAL TRADE
BankConsult
1.
Unknown Market.
2.
Unknown Contracting Parties
3.
Dispute Resolution and Jurisdiction of Laws.
4.
Country Risk
a.
Political Risk
b.
Economic Risk
c.
Bank Risk
5.
Exchange Rate Volatility
6.
Force Majeure Situation
18 August 2010

THE TRADE MAP
BANKCONSULT
International Environment:
Economic Factors
Industry Trends
Market Practice
Buyers Country
Buyer / Importer
Political stability
Currency strength
Interest rate
Govt Incentives
Govt Regulations
Relative bargaining &

financial strength.
Goods:
Type
Annual volumes
Avg Transaction size
Frequency
Balance sheet
consideration.
Prefered payment
mode.
Access to funds
18 August 2010
Seller / Exporter
Sellers Country
Relative bargaining &

financial strength.
Political stability
Currency strength
Interest rate
Export subsidy
Credit policy
consideration.
Payment
Currency
Tenor
Payment mode
Trade terms
Financing techniques
Prefered payment
mode.
Access to funds

NETWORK OF TRADE RELATIONSHIP

Supplier
Customer
Customer
Supplier
Supplier
Raw Materials
supplies
BANKCONSULT
Finished Goods
BankConsult
Buyer
Importer
18 August 2010
Customer
Seller
Exporter

SIMPLE CASH-TO-CASH CYCLE

Cash
Sales
Procurement
Sale of Finished
Goods
Purchase of Raw
Materials and Supplies
BANKCONSULT
Marketing
Production
Work in Process
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MOVEMENT OF GOODS FROM SELLER TO BUYER
BankConsult
18 August 2010
Receipt
Seller
Exporter

Storage
Transit
Shipment
Buyer
Importer
Storage
Receipt
Sellers Suppliers
Storage
Storage
BANKCONSULT
Shipment
Delivery
Buyers Customers
ANKCC
ONSULT
BBANK
ONSULT
NEEDS OF THE CONTRACTING PARTIES

IN AN INTERNATIONAL TRADE
BUYER
SELLER
Creates Demand
Has Goods
1.
Assurance Of Timely
Delivery
1.
Assurance Of Timely
Payment
2.
Assurance Of Quality
2.
3.
Competitive Pricing
3.
Payment In His Own

Currency
Exchange Rate Volatility
4.
Sellers credibility
4.
Buyers Credibility
18 August 2010

What Precedes an International Trade Transaction ?
BANKCONSULT
Sales
Contract
BankConsult
Contract can be
Formal
Informal
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10
INTERNATIONAL TRADE NEGOTIATIONS

Sales / Purchase Contracts
The following are most common clauses in an international contract of sale
Which conditions to apply
Delivery
Definitions of the terms
Warranty
Conclusion of the contract
Default
Assignments
Liquidated damages
Trade terms Incoterms
Quality and quantity
Force majeure
Pre-shipment inspections
Transfer of risk
Price and payments
Shipping documents
Patent rights and indemnity
Dispute settlement
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11
DIFFERENT MODE OF INTERNATIONALTRADE SETTLEMENT
CASH IN ADVANCE
BANKCONSULT
OPEN ACCOUNT
BankConsult
COLLECTION
DOCUMENTARY CREDIT
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12

CASH IN ADVANCE AND OPEN ACCOUNT TRADE SETTLEMENT
BANKCONSULT
CASH IN ADVANCE
1.
The buyer puts the funds at the
disposal of the seller prior to shipment
of goods
2.
The seller receives export value in
advance from the buyer
OPEN ACCOUNT
1.
An arrangement between the buyer
and the seller where the seller delivers
the goods before payment is made
2.
The buyer receives the contracted
goods before making payment
3.
Seller:
a.
No risk as far as the seller is
concerned as he has already got
the money and he can use the
funds immediately
3.
Buyer:
a.
Advantageous for the buyer as he
pays for the goods after satisfying
himself about delivery time,
quantity and quality
4.
Buyer;
a.
High risk as far as the buyer is
concerned as he has not yet
received the contracted goods
and has also tied up his capital
4.
Seller:
a.
The risk element for the seller is
very high. He must therefore
check the credibility of the buyer
before agreeing to open account
terms
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COLLECTION
COLLECTION
DOCUMENTARY
COLLECTION
BANKCONSULT
Document against
Payment
BankConsult
CLEAN
COLLECTION
The seller draws only a
draft on the buyer for the
value of goods and
services
2.
Seller presents his draft

to his banker
3.
The bank sends the draft

for collection
Document against
Acceptance
1.
Sight draft
1.
Usance draft
2.
Shipping documents
2.
Shipping documents
3.
Delivery of
documents to buyer
only against payment
3.
Shipping documents
released upon acceptance
of draft
4.
Draft accepted and
5.
Paid on maturity
18 August 2010
1.

14
COLLECTION
( Operational mechanics )
CONTRACT OF SALE
Applicant
Beneficiary
Drawer
Drawee
Shipment of goods
Importer
Exporter
Customer
FLOW OF MONEY - $$$$$$$
FLOW OF DOCUMENT
Collecting and / or
Presenting Bank
FLOW OF DOCUMENT
BANKCONSULT
Customer
Remiting Bank
Correspondent Bank
FLOW OF DOCUMENT
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15
INCOTERMS
What Is An In-co-term ?
Who Needs The Incoterms ?
BANKCONSULT
What Is The Purpose Of Incoterms ?
BankConsult
Are There Any Regulations Governing The

Incoterms ?
18 August 2010

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BANKCONSULT

INCOTERMS
( International Commercial Terms )
1.
EXW
Ex Works (Named Place)
2.
FCA
Free Carrier (Named Place)
3.
FAS
Free Alongside Ship ( Named port of shipment )
4.
FOB
Free On Board (Named port of shipment )
5.
CFR
Cost And Freight ( Named Port of Destination )
6.
CIF
Cost Insurance and Freight ( Named Port of Destination )
7.
CPT
Carriage Paid to ( Named Place of Destination )
8.
CIP
Carriage And Insurance Paid To ( Named Place of Destination )
9.
DAF
Delivered At Frontier ( Named Place )
10.
DES
Delivered Ex Ship ( Named Port of Destination )
11.
DEQ
Delivered Ex Quay ( Named Port of Destination )
12.
DDU
Delivered Duty Unpaid ( Named Place of Destination )
13.
DDP
Delivered Duty Paid ( Named Place of Destination )
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INCOTERMS
Categories
Group
Incoterms Explanation
BANKCONSULT
Point of Responsibilities Exporter / Importer
BankConsult
DEPARTURE
EXW - Ex Works (Named Place)
MAIN CARRIAGE
UNPAID
FCA - Free Carrier (Named Place)

FAS Free Alongside Ship (Named Port of Shipment)
FOB Free On Board (Named Port of Shipment)
MAIN CARRIAGE
PAID
CFR Cost and Freight (Named port of Destination)

CIF Cost Insurance and Freight (Named port of Destination)
CPT Carriage Paid To (Named place of Destination)
CIP Carriage and Insurance Paid to (Named place of Destination)
ARRIVAL
DAF Delivered at Frontier Named Place)

DES Delivered Ex Ship (Named port of Destination)
DEQ - Delivered Ex Quay (Named port of Destination)
DDU Delivered Duty Unpaid (Named place of Destination)
DDP Delivered Duty Paid (Named place of Destination)
18 August 2010

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INCOTERMS
BANKCONSULT
FOR MARITIME AND INLAND WATERWAY TRANSPORT ONLY
Group F
FAS - Free alongside ship (named port of shipment)

FOB - Free On Board (named port of shipment)
Group C
CFR - Cost and Freight (named port of Destination)

CIF - Cost Insurance and Freight (named port of
Destination)
Group - D
DES - Delivered Ex ship (named port of Destination)

DEQ - Delivered Ex Quay (named port of Destination)
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19
INCOTERMS
International Commercial Terms
Cost / Invoice Loading
EXPORTING
COUNTRY
IMPORTING
COUNTRY
Flow Of Goods And Its Accompanying Costs
DAF
CIF DES
SHANGHAI
CHINA
FAS
FOB
FCA
Factory
BANKCONSULT
EXW
BankConsult
Inland Transit
Freight
CFR
CPT
CIP
SEA / MARINE JOURNEY
Transit Risk Port of

(Transit Insurance) Loading
DEQ
SAVAR
EPZ/ BDesh
Warehouse
Inland Transit
DDP
DDU
Transit Risk
Port of
(Transit Insurance)
Destination
Marine Insurance
18 August 2010

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DEFINITION - LETTER OF CREDIT UCPDC-600 (Art-2)
Credit means any arrangement, however named or described,

that is irrevocable and thereby constitutes a definite undertaking
of the issuing bank to honor a complying presentation
BANKCONSULT
In simple terms, a documentary credit is a conditional bank

undertaking of payment.
Expressed more fully, it is a conditional undertaking given

by a bank (Issuing Bank), at the request of the customer
(Applicant), or on its own behalf, to pay a seller
(Beneficiary), against stipulated documents, provided all
the terms and conditions of the credit, are complied with.
18 August 2010

21
What Is the Major & Primary Purpose of a
LETTER OF CREDIT
2 Fundamental purpose
BANKCONSULT
1. To disable the payment and delivery mechanism

from the control of the Buyer and the Seller.
BankConsult
2. To enable the Banks to take control of the payment

and delivery by means of control documents.
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BANKCONSULT
SECONDARY PURPOSE OF A LETTER OF CREDIT

1.
Documentary credits are an arrangement by banks, for

settling international commercial transactions.
2.
Documentary credits provide a form of security, for the

parties involved.
3.
Documentary credits ensure payment, provided that the

stipulated terms and conditions of the credits, are
complied with.
4.
Documentary credits mean, that payment by such means,

is based on documents only, and not on merchandise or
services involved.
18 August 2010

23
RISK FACING THE MAJOR PARTIES IN INTERNATIONAL

TRADE TRANSACTION
THE BUYER
Non delivery
BANKCONSULT
THE SELLER
BankConsult
Non payment
THE BANKS
Non compliance
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RISK FACING THE MAJOR PARTIES IN INTERNATIONAL TRADE TRANSACTION
BANKCONSULT
RISK
IMPACT ON SELLER /
EXPORTER
IMPACT ON BUYER / IMPORTER
PERFORMANCE:
The seller will fail to deliver the
goods as specified
Potential damage to business

reputation; potential financial
loss
Adversely affect ability to perform

under sales contract with own
customer. Potential financial loss.
TRANSACTION:
The goods will fail to arrive at the
destination
Financial loss for the value of the

goods
Same.
PAYMENT:
The seller will fail to receive
payment due to;
1.Non-Acceptance
2.Commercial
3.Political
4.Foreign Exchange transfer
5.Foreign Exchange fluctuation
1.Seller stuck with goods

overseas.
2.Financial loss for value of
goods.
3.Financial loss for value of
goods.
4.Payment delay requiring
additional financing.
5.Financial loss if payment
received in foreign currency
1.Potential damage to reputation.
18 August 2010
2.Potential damage to reputation.

Affect ability to draw in future
3.Same.
4.Same.
5.Financial loss if payment is
made in foreign currency

25
PARTIES TO A LETTER OF CREDIT

The primary parties are the following:
THE ISSUING
BANK
THE CONFIRMING
THE BENEFICIARY
BANK (if any)
BANKCONSULT
Other parties which facilitate the documentary credit operations are
BankConsult
THE APPLICANT
THE ADVISING BANK / THE NOMINATED PAYING /

ACCEPTING / NEGOTIATING BANK and
THE TRANSFERING BANK (if any)
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26
ROLE OF PARTIES IN A LETTER OF CREDIT TRANSACTION

The Buyer
The Seller
Issuing Bank
Advising Bank
Paying Bank
Accepting Bank
BANKCONSULT
Negotiating Bank
Confirming Bank
Transport Companies
Insurance Companies
Other Involved Companies
18 August 2010

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SALES CONTRACT
Banks Interest in the Sales Contract
BANKCONSULT
(The following are the integral part of the Letter of Credit)
BankConsult
1.
Description Of The Goods / Merchandise
2.
Price Specification
3.
Terms Of Sale (Incoterms)
4.
Insurance
5.
Packaging And Markings
6.
Inspection, Warranties And Guarantees
7.
Payment Terms
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BANK LETTER OF CREDIT

Contractual Relationship
Applicant
Beneficiary
Contract of Sale
Importer
Exporter
Letter of Credit contract
Customer
Letter of Credit contract
BANKCONSULT
Customer
Issuing Bank
18 August 2010
Advising Bank
Contract of Agency
Opening Bank
Correspondent
Bank

29
Beneficiary
EXPORTER
Import Customer 2
applies for LC
6
Document Checking
Advising Bank
5 advises LC to
Opening Bank opens LC

Favoring Beneficiary
Contract of Agency
ISSUING BANK
Opening Bank
18 August 2010
Export
Customer
receives LC
Beneficiary after
Authentication
Issuing Bank transmits LC to Advising Bank
Paying, Accepting or Negotiating Bank forwards stipulated documents 9

12 Issuing Bank remits payment to Paying, Accepting or Negotiating Bank

Bank makes payment to Exporter
Importer makes payment to Issuing Bank Or

Issuing Bank Debits Importers account
10
Customer
13
ADVISING BANK
Correspondent
Bank
Document
Checking
Document
Checking
Beneficiary ships Goods to the Importer
Exporter submits stipulated documents
BANKCONSULT
Contract of sale
Customer
11
BankConsult
Applicant
IMPORTER
Issuing Bank advises Importer upon receipt

of stipulated Documents
Document
Checking
BANK LETTER OF CREDIT

( Basic Mechanics of Letter of Credit Operations )
30
UNDERLYING CONTRACTS
UCPDC 600 / Article-5
Credits Vs Contracts
BANKCONSULT
BUYER
SELLER
BANK
18 August 2010
DOCUMENTS
BANK

31
TYPES OF DOCUMENTARY LETTER OF CREDIT
BANKCONSULT
DOCUMENTARY LETTER OF CREDIT
BankConsult
OPEN TO RISK
RISK COVERED
REVOCABLE
LETTER OF CREDIT
IRREVOCABLE
LETTER OF CREDIT
1. Can be amended or
cancelled by the
issuing bank at any
time
1. Cannot be revoked
amended or cancelled
without the consent of all
parties
2. Without prior notice

to beneficiary
2. Gives the seller

(beneficiary) greater
assurance of payment
3. Risky from
beneficiarys view
4. Maximum flexibility
from buyers view
18 August 2010
3. Definite undertaking of
the Issuing bank subject
to submission of
stipulated documents
ADDITIONAL RISK
COVERED
CONFIRMED
IRREVOCABLE
LETTER OF CREDIT
1. In addition to the
commitment of the
Issuing bank the
confirming bank makes
its own independent
commitment of
payment
2. Beneficiary obtains
double assurance of
payment
3. It is more costly
32
CONFIRMATION
1. What is confirmation?
BANKCONSULT
2. Why is it required?
3. Who requires confirmation?
4. Who bears the cost of confirmation?
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33
LETTER OF CREDIT SETTLEMENT

Article 2 (Honour) / Article 7 (Undertaking)
Settlement means fulfilling the commitment of the issuing bank with
regard to effecting payment subject to satisfying the stipulated letter
of credit terms.
SETTLEMENT IS DONE IN FOUR SEPARATE ARRANGEMENTS.
1. SETTLEMENT BY PAYMENT (Sight Draft)
BANKCONSULT
2. SETTLEMENT BY DEFERED PAYMENT (No Draft)
BankConsult
3. SETTLEMENT BY ACCEPTANCE (Usance Draft)

4. SETTLEMENT BY NEGOTIATION (Sight) / (Usance Draft)
18 August 2010

34
UCPDC 600 / Article-2

IMPORTER
EXPORTER
BANKCONSULT
Issuing
Bank
PAYS
(Draft)
Advising
Bank
ACCEPTS
(Draft)
18 August 2010
PAYS
ACCEPTS
(Draft)
(Draft)
NEGOTIATES
(Draft)

35

SPECIAL TYPES OF DOCUMENTARY LETTER OF CREDIT
REVOLVING CREDIT
RED CLAUSE CREDIT
1.
1.
2.
3.
GREEN CLAUSE CREDIT
1.
1.
3.
BANKCONSULT
2.
3.
It has a special clause authorising the

advising or the confirming bank to make an
advance to beneficiary before presentation
of documents
It may be the full amount or partial amount
The clause is incorporated at the specific
request of the applicant
BACK TO BACK CREDIT
2.
BankConsult
The amount of the credit is renewed or

reinstated without specific amendment
It can revolve in relation to time or value
The credit of this nature can be cumulative
or non-cumulative
The back to back credit is opened on the

strength of the first (mother) credit
First credit is a security for the second
credit
Shipment and validity of the credit is earlier
than the first credit
2.
It has a special clause which not only

authorises the advising bank to grant
preshipment finance but also storage cost
prior to shipment
It is useful in situation where shipping
space is not readily available
TRANSFERABLE CREDIT
STANDBY LETTER OF CREDIT
1.
1.
2.
2.
3.
The credit can be transferred by the

original beneficiary to one or more parties
Original beneficiary becomes the
middlemen and the transferee, actual
supplier of goods
The credit can be transferred only once
3.
4.
18 August 2010
It is very similar in nature to a guarantee

The beneficiary can claim payment if
principal does not comply with its
obligation
Payment is usually realised against
payment of a sight draft and written
statement that the principal has failed in its
obligation
It is subject to UCPDC-600

36
BANKCONSULT
TRANSPORT DOCUMENT
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37
TRANSPORT DOCUMENT IN INTERNATIONAL TRADE
Goods can move by

Broad Mode
of Transport
BANKCONSULT
Specific Mode
of Transport
BankConsult
Nature of
Document
Negotiability
18 August 2010
LAND
SEA
Road
Rail
Truck
Receipt
Railway
Receipt
Not
Negotiable
River
Barge
Receipt
SEA
Marine
Bill of
Lading
AIR
AIR
Airway
Bill
Not
Not
Quasi
Not
Negotiable Negotiable Negotiable Negotiable

COMBINED
MODE OF
TRANSPORT
COMBINED
MODE OF
TRANSPORT
Combined
Transport
Document
Not
Negotiable
38
Depending on the nature of the goods and the type of

transport(s), to be used to carry the goods, an appropriate
document is issued
BANKCONSULT
Two important things to remember: (2 situations)

DOCUMENTS TRAVEL FASTER THAN THE GOODS
GOODS TRAVEL FASTER THAN THE DOCUMENTS
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39
DEVELOPMENT OF THE BILL OF LADING

1855 - BILL OF LADING ACT
1893 THE HARTER ACT
1904 AUSTRALIAN SEA-CARRIAGE OF GOODS ACT
1908 THE NEW ZEALAND AND SEAMEN ACT
BANKCONSULT
1910 CANADIAN WATER CARRIAGE ACT
BankConsult
1924 BRITISH CARRIAGE OF GOODS BY SEA ACT

1924 THE HAGUE RULES
1968 THE HAGUE VISBY RULES
1971 BRITISH CARRIAGE OF GOODS ACT 1924 (AMENDED)
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MARINE BILL OF LADING

DEFINITION OF BILL OF LADING
Bill of lading means a document which evidences a contract of

carriage by sea and the taking over or loading of the goods by
the carrier, and by which the carrier undertakes to deliver the
BANKCONSULT
goods against surrender of the document. A provision in the

document that the goods are to be delivered to the order of a
named person, or to order, or to bearer, constitutes such an
undertaking.
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41
MARINE BILL OF LADING
BANKCONSULT
Marine bill of lading serves three purpose:
BankConsult
1.
RECEIPT OF GOODS
2.
CONTRACT OF CARRIAGE
3.
TITLE DOCUMENT
18 August 2010
Receipt
Title
Document

42
TYPES OF BILLS OF LADING

1. Marine Bill of Lading
2. Short Form Bill of Lading
3. Combined Transport Bill of Lading
4. Bill of Lading Issued Under a Charter Party
5. Bill of Lading Issued by a Freight Forwarder
BANKCONSULT
6. Transhipment Bill of Lading

7. Liner Bill of Lading
8. Original Bill of Lading
9. Through Bill of Lading
10. Clean Bill of Lading
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TYPES OF BILL OF LADING

Marine Bill of Lading:
A marine bill of lading is a document issued by the shipping company for port
to port shipment of goods only. It is a long form of document with its
attendant clauses found on the reverse of the document.
Short Form Bill of Lading:
BANKCONSULT
A short form or (blank back) bill of lading is a document which is similar to

the marine bill of lading without the standard mass of small print/clauses on
the reverse side. However there is an approved short form clause on the
face, which incorporates the carriers standard condition with full legal effect.
BankConsult
Combined Transport Bill of Lading:

Combined Transport Bill of Lading is a document, where goods are
transported by two or more mode of transport, but one mode must be ocean
transport
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44
CHARTER PARTY BILL OF LADING

A contract between the ship owner and the charterer, is known as the
charter party.
A charter party is a document under which a vessel is hired or chartered.
BANKCONSULT
There are basically two types of charter party

DEMISE CHARTER:
NON DEMISE CHARTER:
1.
1.
The ship owner provides the vessel

and her crew.
2.
The charterer supplies merely the

cargo for a particular voyage or
period of time of specified dates.
3.
The ship owner continues to

manage their own vessel both under
voyage and time charter
2.
3.
The charterer is responsible for

providing the cargo and the crew.
The ship owner merely provides the
vessel.
The charterer appoints the crew,
thus taking over full responsibility
for the operation of the vessel and
pays al expenses incurred.
A demise charter party is for a
period of time which may vary from
few weeks to several years.
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45

Bill of Lading Issued Under a Charter Party:
BANKCONSULT
Charter party bill of lading is a document issued by the charterer, who does
not own the vessel. It is a contract whereby the ship owner agrees to place the
ship, or part of it, at the disposal of a merchant or other persons (known as
the charterer) for the carriage of goods from one port to another port, on
being paid freight, or to let the ship for a specified period, the ship owner
remuneration being known as the hire money.
BankConsult
Bill of Lading Issued by a Freight Forwarder:

A Freight Forwarder bill of lading is a document issued by freight forwarding
company. It is a cargo receipt or a certificate of shipment of a specified
consignment for a particular voyage; the consignment forms a part of a
groupage or consolidated international consignment.
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46

Transhipment Bill of Lading
1.
Transhipment Bill of Lading permits cargo to be transhipped from one
vessel to another enroute to reach the final destination.
Liner Bill of Lading
1.
Liner Bill of Lading is a negotiable document which embodies the Hague
Visby Rules and is used in the liner cargo trade.
BANKCONSULT
Original Bill of Lading

1.
Original Bill of Lading is the top copy of the Bill of Lading Document
containing the shipping company signature and is a copy required by
Banks for financial settlement purpose.
Through Bill of Lading
1.
Through Bill of Lading is a document, acknowledging cargo has been
shipped between two specified ports plus inland portion of the transit.
Clean Bill of Lading
1.
Clean Bill of Lading is a document which has no superimposed clauses,
expressly declaring a defective condition of the cargo, packaging or
missing goods. A document acceptable to the Banks.
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47
BANKCONSULT
SOME COMMON TERMINOLOGIES RELATING TO BILL OF LADING
BankConsult
On-board
On-deck
Clean
Dirty
Received For Shipment
Since Shipped (On-board Notation)
Liner Vessel
Tramp Vessel
Jettison
Arrest Of Vessel
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48
BANKCONSULT
AIRWAY BILL
AIRWAY BILL
WHAT IS AN AIRWAY BILL ?
An Airway Bill is the document that accompanies goods
carried by the airline, throughout the transit.
BANKCONSULT
It is an Air Consignment Note.
BankConsult
It is not a Document of Title or transferable / negotiable

instrument.
Overall it is a
1.
2.
18 August 2010
Receipt for the Dispatch of the goods and

A Prima Facie evidence of the conditions of carriage.

50
AIRWAY BILL
PURPOSE OF AN AIRWAY BILL
The main function of an Airway Bill is
1.
2.
Contract of carriage and

A receipt of goods
BANKCONSULT
At destination airports the Airway Bill serves as a basic

document for verification to
1.
2.
3.
Consignee;
Customs clearance and
Delivery to consignee
Additionally it is a source document for clearance and delivery

charges accounting
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51
AIRWAY BILL
Number And Allocation Of Copies
BANKCONSULT
Usually there are 12 copies of each Airway Bill for distribution to the
BankConsult
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
Shipper
Sales agent
Issuing carrier (Airline Operator)
Consignee
Delivery receipt
Airport of destination
Third carrier (if applicable)
Second carrier (if applicable)
First carrier
Extra copy for carrier (when required)
Invoice and
Airport of departure
Copies 1, 2, and 3 are originals

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52
BANKCONSULT
BILL OF EXCHANGE
( Draft )
18 August 2010

53
BILL OF EXCHANGE
Definition
A bill of exchange is an unconditional order in writing, addressed by
one person to another, signed by the person giving it, requiring the
BANKCONSULT
person to whom it is addressed, to pay on demand, or at a fixed or
BankConsult
determinable future time, a sum certain in money, to or to the order

of a specified person or to bearer
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54

BILL of EXCHANGE ANALYSIS
A BILL OF EXCHANGE IS AN UNCONDITIONAL ORDER
IN WRITING
Drawer
TO ANOTHER
Drawee
SIGNED BY THE PERSON GIVING IT
Drawer
TO PAY ON DEMAND
OR AT A FIXED
BANKCONSULT
Not verbal
ADDRESSED BY ONE PERSON
REQUIRING THE PERSON TO WHOM IT IS ADDRESSED
OR DETERMINABLE FUTURE TIME

A SUM CERTAIN IN MONEY
18 August 2010
Not a request
Drawee to perform certain function

At sight payment
After the date of the bill of exchange
After sighting the bill of exchange
The sum (amount) must be definite
TO OR TO THE ORDER OF A SPECIFIED PERSON
The specified person is the payee
OR BEARER
The bearer is the holder of the bill

55
THE DEFINITION - FROM THE VIEWPOINT OF INTERNATIONAL TRADE

Addressed By One Person (Exporter)
To Another (Importer)
Signed By The Person Giving It (Exporter)
Requiring The Person To Whom It Is Addressed (Importer)
To Pay On Demand (Sight Payment )
BANKCONSULT
Or At A Fixed (After The Date Of Bill Of Exchange)
BankConsult
Or Determinable Future Time (After Sighting The Bill Of Exchange)

A Sum Certain In Money (The Amount Of Money Must Be Definite)
To Or To The Order Of A Specified Person (The Specified Person Is The Payee)
Or Bearer (The Bearer Is The Holder Of The Bill)
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56
BILL OF EXCHANGE (Draft)

PARTIES TO A BILL OF EXCHANGE AND THEIR DUTIES
THE DRAWER (Exporter)
The drawer is the party who makes out or draws the bill
BANKCONSULT
THE DRAWEE / ACCEPTOR (Importer)

The drawee is the party on whom the bill is drawn or addressed to on its face
and who by accepting it, becomes the acceptor and payer of the bill
THE PAYEE (Exporter)
The payee (who may also be the drawer) or the endorser to whom the bill
amount is to be paid, is the nominee for the payment of the proceeds
THE ENDORSER
If the person to whom or to whose order the bill is made out, signs his name
on the reverse of the bill this is the act of endorsement
18 August 2010

57
BANKCONSULT
Types Of Bill Of Exchange Used In International Trade
BankConsult
SIGHT
USANCE
BILL OF EXCHANGE
BILL OF EXCHANGE
( SIGHT DRAFT )
( USUANCE DRAFT )
( TENOR Sight)
(TENOR - Usance )
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58
SO WHAT IS
SIGHT OR USANCE
It is the tenor of the draft
BANKCONSULT
WHAT DOES
TENOR MEAN
It means timing
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59
Tenor or timing of the draft can be
30 Days
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60 Days
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90 Days
120 Days (short term trade finance related)
360 Days (Long term project finance related)
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60

The terms of the letter of credit will provide either for
PAYMENT or for ACCEPTANCE

by the BUYER
(When it becomes a trade bill)
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Or for
ACCEPTANCE
by the BANK
(When it will become a Bank Bill)
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61

Banks often holds accepted bills as security, where drawers prefer to
take advances rather than discount the bills
BANKCONSULT
This is self liquidating finance. At encashment the advances plus

interest are liquidated and the balance paid to the drawer
BankConsult
Depending upon the letter of credit terms sight bills are normally paid
on first presentation, provided the documents comply with credit
terms, where the advising bank adds its confirmation to an
overseas irrevocable letter of credit
If there is no confirmation payment may depend upon the opening
banks account being in credit at the time payment is due.
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BANKCONSULT
COMMERCIAL INVOICE
COMMERCIAL INVOICE
BANKCONSULT
PROFORMA INVOICE
1.
Proforma invoice is an invoice issued by the exporter to the
importer giving the description of the goods, unit price, total price
etc, to enable the importer to decide on the offer.
2.
It enables the buyer to take out the necessary import licence and to
make arrangement for the issuance of the letter of credit.
BankConsult
COMMERCIAL INVOICE
1.
Commercial invoice is similar to the proforma invoice.
2.
It is a finalisation of the export contract between the buyer and the
seller
3.
It is the invoice that has to be submitted to the concerned bank
under the letter of credit.
CERTIFIED INVOICE
1.
Certified invoice is a regular commercial invoice which is certified
by the relevant and appropriate authority as stipulated in the letter
of credit.
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BANKCONSULT
CARGO INSURANCE
INSURANCE
Can you eliminate completely all kinds of risk to

goods in international trade ?
BANKCONSULT
Is risk free international trade possible ?
BankConsult
Why not ?
18 August 2010

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INSURANCE
BANKCONSULT
In international trade, merchandise or goods

undertakes a marine adventure.
During the course of the marine adventure, the

goods or merchandise are subjected to the perils of
the sea
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67
INSURANCE
WHY IS IT REQUIRED ?
To Cover
RISK
BANKCONSULT
During Transit
BankConsult
RISK OF WHAT ?
Risk of DAMAGE or LOSS of Goods
Responsibility for cargo insurance provision is the buyers or the
sellers according to the details of the particular export sales
contract, a certificate of insurance will provide cover.
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68
INSURANCE
BANKCONSULT
A typical cargo insurance certificate includes the following data

1.
Name and address of the insurer.
2.
Name of the assured.
3.
The endorsement of the assured where applicable so that the right to

claim the goods are transferred.
4.
The description of the risk covered.
5.
The description of the consignment.
6.
The sum or sums insured.
7.
The place where the claim is payable together with the name of the agent
to whom claim may be directed.
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INSURANCE
BANKCONSULT
INSURANCE COVER FOR THE GOODS SHOULD EMBRACE THE FOLLOWING
BankConsult
1.
Transportation of the merchandise to the seaport or the airport
2.
Period during which the goods are stored awaiting shipment or

loading.
3.
The time while on board the ship or aircraft, or other conveyance

such as the international road haulage operations
4.
The off-loading and storage on arrival at the destination

seaport or the airport or other specified place.
5.
Transportation to the buyers premises or address.
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INSURANCE
BROKERS NOTE
It is a note, issued by the broker on behalf of the insurance company
and is not acceptable to the Bank
COVER NOTE
BANKCONSULT
It is a note issued by the insurance company and is acceptable to the

Bank, since it is issued by the insurance company. Cover note is
required for issuance for import permit or to open a letter of
credit.
INSURANCE POLICY
It is issued by the Insurance company, giving details of the
risk covered and also exclusion of risks which are not
covered, under the given policy.
18 August 2010

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INSURANCE
COVERAGE OF RISK THROUGH DIFFERENT SPECIFIED CLAUSES
Institute Cargo Clause A

Institute Cargo Clause - B
BANKCONSULT
Institute Cargo Clause C
BankConsult
Strike, Riot and Civil Commotion (SRCC)

War Risk
18 August 2010

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BANKCONSULT
SHIPPING DOCUMENTS
SHIPPING DOCUMENTS
BANKCONSULT
Depending on the nature of the goods or merchandise, a particular form

of document will be required under the letter of credit.
BankConsult
PRIMARY DOCUMENTS
SECONDARY DOCUMENTS
1.
Bill of Exchange (Draft)
1.
Certificate of Origin
2.
Commercial Invoice
2.
Certificate of Inspection
3.
Insurance Document
3.
Certificate of Weight &

Measurement
4.
Certificate of Health
5.
Certificate From Beneficiary
4.
Transport Documents
a.
b.
c.
Bill of Lading
Airway Bill
Combined Transport Document
18 August 2010

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OTHER DOCUMENTS
BANKCONSULT
Depending on the nature of the goods or merchandise and also the

nature of the international trade transaction, several other types of
documents will be called for, some common types of which are the
following
1.
CERTIFICATE OF ORIGIN
2.
CERTIFICATE OF WEIGHT AND MEASUREMENT
3.
CERTIFICATE OF INSPECTION
4.
CERTIFICATE FROM BENEFICIARY STATING ..
5.
CERTIFICATE OF QUALITY
6.
CERTIFICATE OF SHIPMENT
7.
OTHER CERTIFICATES
18 August 2010

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SHIPPING DOCUMENTS
BANKCONSULT
COMMERCIAL INVOICE
BankConsult
1.
The invoice description of goods should match with the

documentary letter of credit.
2.
The invoice should be addressed to the importer.
3.
The invoice should include the exact licence and/or certificate

number required by the credit.
4.
The invoice should show the incoterms (terms of shipment)
5.
Exact number of copies to be submitted.
18 August 2010

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SHIPPING DOCUMENTS
COMMERCIAL INVOICE
BANKCONSULT
Discrepancies (likely errors):

1.
2.
3.
4.
5.
6.
7.
8.
Value exceeds the credit amount

Amount differs from that of the bill of exchange (Draft)
Price of goods not as indicated in the credit
Omission of the price basis and shipment terms.
Inclusion of charges not specified in the credit
Invoice not issued by the exporter
Invoice does not contain declaration required under the credit.
Description of goods differs from that in the credit.
18 August 2010

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SHIPPING DOCUMENTS
BILL OF LADING
BANKCONSULT
Discrepancies (likely errors):
BankConsult
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
Document not presented in full set when required.

Alteration not authenticated
The bill of lading is not clean
Document not endorsed ON-BOARD when so required
The ON-BOARD endorsement is not signed.
Cargo shipped On Deck
Document fails to indicate whether Freight Paid
Document fails to indicate whether Freight Pre-Paid
The rate at which freight is calculated, and the total amount is
not shown when credit requires such data to be shown.
Document is dated later than shipment date stipulated in the
credit.
Is not presented within 21 days after date of shipment.
Other type of BL presented, not specifically authorised (e.g.
Charter Party)
18 August 2010

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BANKCONSULT
HANDLING
DISCREPANCIES IN
DOCUMENTS
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79
DISCREPANT DOCUMENT
Two significant principles guides the handling of documents under
the letter of credit when tendered at he counters of the paying,
accepting or the negotiating bank.
BANKCONSULT
DOCTRINE OF STRICT
COMPLIANCE
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and
Doctrine Of Minor Deviation
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80
BANKCONSULT
PAPERS AND DOCUMENTS

REQUIRED FOR OPENING A
LETTER OF CREDIT
BANKCONSULT
PAPERS AND DOCUMENTS REQUIRED FOR OPENING A

LETTER OF CREDIT
BankConsult
1.
Papers Available In The Bank
2.
Papers And Documents To Be Submitted By The Applicant
3.
General Documents To Be Presented By The Beneficiary Under

Letter Of Credit
4.
Special Documents To Be Presented By The Beneficiary Under

Letter Of Credit
18 August 2010

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BANKCONSULT
PAPERS AVAILABLE IN THE BANK
1.
Letter of Credit Application Form
2.
Letter of Credit Authorisation Form
3.
IMP (Import) Form
18 August 2010

83
BANKCONSULT
PAPERS AND DOCUMENTS TO BE SUBMITTED BY THE APPLICANT
BankConsult
1.
Copy of Valid or Renewed IRC (Importers Registration

Certificate
2.
Income Tax Declaration
3.
TIN (Tax Identification Number Certificate.
4.
Vat Registration Certificate
5.
Membership Certificate of Chamber of Commerce or Any Other

Trade Association
6.
Proforma Invoice or Indent
18 August 2010

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BANKCONSULT
PAPERS AND DOCUMENTS TO BE SUBMITTED BY THE APPLICANT (Continued)
7.
Insurance Cover Note With Money Receipt
8.
Inspection Order Form (IOF) Only for Mandatory Pre-shipment

Inspection for Commercial Goods
9.
Copy of Indentors Valid/renewed IRC in Case of Import Under

Indent
10.
Block List for Import of Pharmaceutical Items
11.
Other Documents (Permission Required From Relevant

Authorities Where Applicable)
18 August 2010

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BANKCONSULT
GENERAL DOCUMENTS TO BE PRESENTED BY THE BENEFICIARY

UNDER LETTER OF CREDIT
BankConsult
1.
Draft ( Bill of Exchange
2.
Transport Documents
a.
b.
c.
d.
e.
f.
Bill of lading
Airway bill
Truck receipt
Railway receipt
Barge receipt
Courier receipt
3.
Certificate of Origin
4.
Packing List / Weight List
18 August 2010

86
SPECIAL DOCUMENTS TO BE PRESENTED BY THE BENEFICIARY

UNDER LETTER OF CREDIT
1.
2.
3.
BANKCONSULT
4.
5.
6.
7.
8.
CRF (clean report of findings only for mandatory pre-shipment

inspection.
Certified invoice and packing certified by pre-shipment
inspection agency
Pre-shipment inspection certificate (commercial inspection
where applicable
Radiation / radio activity and Analysis certificate for food
items.
Undertaking from the beneficiary to refund in case of rejection
for food item
Phytosanitary certificate for raw cotton, tobacco etc.
Fumigation certificate for raw cotton / tobacco only
Quarantine certificate (where applicable.)
18 August 2010

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SPECIAL DOCUMENTS TO BE PRESENTED BY THE BENEFICIARY UNDER
LETTER OF CREDIT (continued)
9.
10.
11.
BANKCONSULT
12.
BankConsult
13.
14.
15.
Certified invoice by customs authority in case of import

by road
Bill of export passed by customs authority in case of
import by road
Certificate of analysis & form-9 for pharmaceutical raw
materials
Certificate issued by JAII confirming the age of
reconditioned car
Registration cancellation certificate in case of
reconditioned car
Quality certificate issued by internationally reputed
surveyor for boiler import.
Other documents / compliance certificate as and when
required,
18 August 2010

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BANKCONSULT
DOCUMENTARY
LETTER OF CREDIT
Wrap Up Session
18 August 2010

89
BANKCONSULT
THE END
BankConsult
Thank You
18 August 2010

90

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Documentary Letter of Credit

Mehboobur Rehman Lead Executive

DOCUMENTARY LETTER OF CREDIT

Documentary Letter of Credit

Documentary Letter of Credit

OBJECTIVE OF THIS TRAINING COURSE

To provide the participants through a transactional approach, with a

Two questions of paramount importance are applied, Is the

Mehboobur Rehman Lead Executive

Documentary Letter of Credit

MAJOR CONCERNS IN INTERNATIONAL TRADE

Unknown Contracting Parties

Dispute Resolution and Jurisdiction of Laws.

Exchange Rate Volatility

Force Majeure Situation

Mehboobur Rehman Lead Executive

Documentary Letter of Credit

Documentary Letter of Credit

THE TRADE MAP

Relative bargaining &

Relative bargaining &

Mehboobur Rehman Lead Executive

Documentary Letter of Credit

NETWORK OF TRADE RELATIONSHIP

Mehboobur Rehman Lead Executive

Documentary Letter of Credit

Documentary Letter of Credit

SIMPLE CASH-TO-CASH CYCLE

Mehboobur Rehman Lead Executive

Documentary Letter of Credit

MOVEMENT OF GOODS FROM SELLER TO BUYER

Mehboobur Rehman Lead Executive

Documentary Letter of Credit

Documentary Letter of Credit

NEEDS OF THE CONTRACTING PARTIES

Payment In His Own

Mehboobur Rehman Lead Executive

Documentary Letter of Credit

What Precedes an International Trade Transaction ?

Mehboobur Rehman Lead Executive

Documentary Letter of Credit

Documentary Letter of Credit

INTERNATIONAL TRADE NEGOTIATIONS

Which conditions to apply

Definitions of the terms

Conclusion of the contract

Trade terms Incoterms

Quality and quantity

Price and payments

Patent rights and indemnity

Mehboobur Rehman Lead Executive

Documentary Letter of Credit

DIFFERENT MODE OF INTERNATIONALTRADE SETTLEMENT

Mehboobur Rehman Lead Executive

Documentary Letter of Credit

Documentary Letter of Credit

Mehboobur Rehman Lead Executive

Documentary Letter of Credit

Seller presents his draft

The bank sends the draft

Draft accepted and

Mehboobur Rehman Lead Executive

Documentary Letter of Credit

Documentary Letter of Credit