One of the important functions of commercial banks in the world is to undertake import of merchandise into the country and payment of foreign exchange towards the cost of the merchandise to foreign suppliers this called import financing. In such an international trade, because of the distance involved, buyers and sellers do not know each other. Let’s know more about what is import financing.
Besides, both these parties are subject to rules and regulations of their respective countries. It is difficult for them to appreciate each other’s integrity and creditworthiness, and apart from this, it is also difficult to know various regulations prevailing in their respective countries regarding imports and exports.
What is import financing?
Thus, the buyer wants to be assured of goods and sellers to be assured of payments. Commercial Banks, therefore, assure these things to happen simultaneously by opening a Letter of Credit guaranteeing payment to sellers and goods to the buyer.
By opening a letter of credit on behalf of a buyer in favor of a seller, the commercial bank undertakes to make payment to a seller subject to the shipment of goods in strict compliance with the letter of credit terms giving the title to goods to the buyer and submission of documents thereagainst.
Thus, the letter of credit is a conditional guarantee and constitutes one of the most import methods of financing foreign trade.
While the opening letter of credit at the request of the buyer, the bank normally examines the following document for import financing:
- Buyer’s creditworthiness
- Import Trade Regulations
- Exchange Control Regulations
- Supplier’s creditworthiness report
- Marketability of goods.
The buyer must submit the following papers at the time of opening a letter of credit.
- L/C application (a guarantee executed by the third party is also insisted)
- Import License/Import Authorization form or Import Registration certificate as the case may be.
- Indent/Performa Invoice
- Insurance Cover Note
- IMP form and other documents/papers etc.
The request for credit is analogous to that of giving an advance. Hence, similar precautions when granting an advance should be taken while establishing a letter of credit. A suitable margin will have to be fixed considering all factors including Bangladesh Band’s restrictions if any.
The nature of the commodity to be imported, its marketability, durability, and stability of prices will be taken into consideration to determine the margin for opening a letter of credit.
The letter of credit duly signed by two officers, whose signatures are on record with a foreign correspondent, is forwarded to the beneficiary through their own branch or the correspondent bank in the seller’s country.
The correspondent bank in the seller’s country. The correspondent bank will advise the letter of credit to the beneficiary without any engagement of its part.
At times, the beneficiary of a letter of credit does not accept a letter of credit (issued by issuing bank) as they are not aware of the creditworthiness of the issuing bank. They, therefore, insist that such letters of credit be further confirmed by a bank in the seller’s country. At the request of issuing a bank, the correspondent bank in the seller’s country will add its confirmation and advise the letter of credit to the beneficiary.
Thus, the corresponded bank becomes both the confirming as well as the advising banker and steps into the shoes of the issuing banker by undertaking obligations that are identical to those of the issuing banker. The obligations are to effect payment to the beneficiary if documents conform to the letter of credit terms.
The beneficiary, i.e., seller, on receipt of the letter of credit verifies:
- That letter of credit terms is in conformity with the original contract of sale terms.
- that no derogatory terms are added to the letter of credit,
- that he is in a position to ship the consignment within the shipment date stipulated in the letter of credit,
- That letter of credit ensures him payment upon the tendering of the export documents.
If certain terms and conditions are not acceptable to the beneficiary, they approach the importer for necessary amendments.
There may be two types of exporters.
- Merchant/Trade exporter
- Manufacturer Exporter
If the supplier is a merchant exporter, he will immediately start packing and shipping the goods. If he is a manufacturer exporter, he will start manufacturing the item.
In either case, he will ship the goods when ready and obtain a full set of Bill of Lading from the shipping company and submit the same to the foreign negotiating bank acting as an agent of L/C opening bank along with all other documents that are called for in the credit.
The shipping documents usually obtained for import financing and they are:
- Bill of Lading or Air Consignment Note or Post Parcel Receipt or Truck Receipt
- Bill of exchange
- Commercial Invoice
- Certificate of origin
- Packing list
- Weight certificate
- Consular invoice, where necessary
- A copy of the declaration of a shipment made to the insurance company (to be submitted with original shipping documents)
- Pre-shipment inspection certificate from an internationally reputed surveyor
- Analysis certificate where the specification of a commodity is given.
If the credit is unrestricted then the beneficiary can go to any bank for the purpose of negotiating his documents. Usually, they go to their own bankers.
If the credit is restricted then the beneficiary gets his documents collected through his banker who forwards them to that banker to whom negotiations are restricted.
The negotiating banker scrutinizes the documents carefully with a letter of credit terms in the following forms:
- Documents are presented before the expiry date.
- All documents called for under the credit are submitted and are in order.
- The invoice corresponds with the details of all other documents submitted under the bill.
- The insurance policy is properly stamped, and that it is made out and endorsed in conformity with the conditions laid down in the letter of credit
- The reimbursement clause is clear and does not violate exchange Control Regulations have been complied with.
- Other Exchange Control Regulations have been complied with.
If documents tendered to comply with the letter of credit terms then the negotiating bank pays the value to the beneficiary and forwards the original documents by airmail to the opening/issuing bank with a duplicate copy by subsequent airmail.
In the meantime, negotiating bank reimburses itself in terms of reimbursement instructions. Generally, reimbursement takes the following forms.
- By claiming the amount from opening/issuing bank.
- By claiming the amount from confirming bank
- By claiming the amount from any other bank so mentioned in the letter of credit either in the same country or any other third country.
If there are discrepancies in the documents, the negotiating bank has got the following there alternatives to choose from.
Reject the documents outright and send them on a collection basis.
Send a cable to the opening/issuing bank pointing out discrepancies and seeking their instructions to effect payment. The negotiating bank will effect payment only after receiving the instructions from the opening/issuing banker that documents are acceptable to the importer in spite of discrepancies.
Where the importer refuses to accept the documents the opening/issuing bank should advise the negotiating bank by cable/telex with instructions in regard to the disposal of goods and the documents.
Take an independent decision to negotiate documents in spite of discrepancies and the amount for the documents negotiated is held under reserve, thereby, taking a risk and at the same time securing its position by effecting payment against the reserve, (Making payment against reserve means effecting payment against an acceptable letter of indemnity whereby the exporter agrees to reimburse the negotiating bank in case documents are rejected by the importer). Normally this type of facility is not allowed.
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