What are L/C operating processes under structured customs and practices and documentary credit (UCPDC)?
L/C operating processes under structured customs and practices and documentary credit (UCPDC) in Agribusiness is usually an essential procedure. Bangladesh’s export strategy is formulated by the Ministry of Commerce to provide the Ministry of Commerce with the Overall advice and export promotion rewards. The decision has been made to formulate this strategy is intended to span a three-year cycle to make the five plans contemporary and to provide the policy regime with consistency. The policy will, however, be valid until another export program has been revealed. The government can review this Policy once, if necessary, once in every year, and can determine as deemed necessary.
The most significant document for the settlement of a foreign transaction is a letter of credit. It is essentially a promise provided by a bank, at the behest of its customer, to make payment to a third party, known as the beneficiary, for products delivered or services rendered in accordance with the conditions stated. Both aspects of the letter of credit should be carefully studied by the staff to prevent any controversy, uncertainty, and conflicts with customers and about correspondents.
L/C is referred to as the documentary letter of credit because the issuing bank’s undertaking is subject to the presentation of some stated documents.
Meaning of the credit letter (LC):
The well-accepted and most widely used means of credit are letters of credit about payment. It is an undertaking for payment to the beneficiary by the issuing bank, upon presentation of certain stated documents and fulfillment of the terms and conditions referred to in the letter of credit.
Letter of credit is a letter issued by a bank favoring the supplier of products at the instance of its client, in which the issuing bank undertakes to make a payment, as stated in the letter, upon submission of certain documents. Bank-issued letters of credit promote exchange between two parties, both at the national and international levels.
As an intermediary between two trading parties located in two distant locations, commercial banks play an important role.
Suppose, for instance, that the purchaser of such goods is in Dhaka, Bangladesh, and that the seller of the same goods is in the USA. The buyer and the seller do not know each other, and the seller would therefore request payment in advance for the goods to be delivered to the buyer. On the other hand, the buyer thinks that making advance payments to the overseas seller he does not know will not be wise for him.
Under these conditions, unless there is an intermediary who can bridge the lack of confidence between the buyer and the seller, no exchange can take place. This intermediary will play the role of the commercial bank and encourage trust between the two parties. This can be achieved in favor of the seller by issuing an LC at the instance of the buyer.
The issuing bank undertakes to pay the price of the shipment to the seller, provided that the seller submits, through the seller’s bank, the shipment and other title documents as stipulated in the LC. Often known as Documentary Credit, this kind of letter of credit. The buyer is regarded as the importer of goods when an LC is given on behalf of foreign trade and the seller is called the exporter of goods.
Commercial banks worldwide issue credit letters and the modalities for issuing documentary credits are subject to the requirements of the International Chamber of Commerce’s Standard Customs and Practices for Documentary Credits (UCPDC) (ICC). UCPDC provisions are general in all countries, and LC business is handled by all commercial banks in compliance with UCPDC guidelines.
It is important to keep in mind that commercial banks deal with documents and not the underlying goods under letters of credit. If the documents are solely in accordance with the terms of the LC, the issuing bank shall, irrespective of the condition of the goods, make a payment to the seller’s bank.
There are several parties involved in an international LC transaction and they are scattered around various countries. They work within various legal frameworks and jurisdictions. The settlement, by normal legal channels, of any conflict resulting from the terms and conditions of the LC which pose difficulties.
It was against this backdrop that, at the behest of the ICC, the codification and publication of a common set of rules applicable to all documentary credits, regardless of which bank provided them, was framed. From time to time, the text, known as the UCPDC, is updated. In order to ensure that documentary credit is protected by the UCPDC regulations, it is important to declare to the body of the LC that it is being given according to the UCPDC provisions.
Operations of Documentary Letter of Credit
In running the Documentary Letter of Credit, the following five main measures are involved:
- Confirmation and Alteration (if necessary)
- Presentation, And
Issuing a Letter of credit:
Until issuing L/C, a ‘sales contract’ providing for payment by documentary credit is entered into by the buyer and seller located in separate countries. The buyer then instructs the bank-the issuing bank-to issue a credit in favor of the seller or beneficiary, as per the seller’s requirement. Instructions/requests for issuing a loan should be made in the normal form of the issuing bank by the purchaser (importer). The loan application, which includes the complete details of the planned loan, also serves as an arrangement between the bank and the purchaser. The issuance then continues to open the credit to be addressed to the benefit after being persuaded of the requirements found in the application form.
Letter of Credit Advising:
Advising through a bank is evidence of the credit’s obvious credibility to the seller. The credit advisory process consists of submitting the original credit to the receiver to whom it is sent. Until forwarding, the advisory bank is required to check the signatures of the issuing bank’s officers and to ensure that the terms and conditions of the credit are not in breach of current exchange control regulations and other export regulations. No liability is borne by the advisory bank in such an act of advice. The advising bank can, however, use the services of another bank (the second advising bank) to inform the recipient of the loan and of any changes to the recipient.
Credit Confirmation and Amendment:
The beneficiaries are not always willing to depend on the issuing bank’s credit standing, especially when the beneficiary is unaware of the bank. Consequently, the recipient may request that the borrower advise the issuing bank to have its loan checked by the certifying bank, typically in the country of the recipient. In addition, the parties involved in L/C, particularly the seller and the buyer, are not always able to fulfill the full terms and conditions as anticipated for some real and obvious reasons. The credit should be amended in such a case. However, without the consent of the issuing bank, the confirming bank (if any), and the beneficiary, a credit cannot be changed or canceled.
Submission of documents:
In order to deliver the requested goods to the buyer, the seller is satisfied with the terms and conditions of the credit proceeds and must subsequently submit to the issuing or nominated bank, on or before the specified expiry date of the credit, documents showing the dispatch of the goods and satisfying other terms and conditions of the L/C. The issuing or nominated bank checks the documents against the credit after obtaining all the documents. The bank will honor or bargain if the papers are found to be complying.
Here the presenter/beneficiary submits to the nominated or issuing bank the documents and then the bank scrutinizes the documents. If happy, the nominated or issuing bank makes payment to the beneficiary and in case this bank is other than the issuing bank, then sends the documents to the issuing bank. If the issuing bank meets the criteria, the payment is received from the issuing bank by the nominated bank.
Under this agreement, the recipient/submitter shall send to the nominated/issuing bank the documents followed by a draft drawn on the bank (where the credit is available) at the stated tenor. The bank approves the documents and the draft after satisfaction with the documents, and if the bank is other than the issuing bank, then sends the documents to the issuing bank indicating that the draft has been approved, and the refund will be received in a pre-agreed manner at maturity.
Settlement by negotiation:
This settlement process begins with the presentation to the nominated bank of the documents by the recipient/presenter followed by a draft drawn up by the issuing bank or by some other drawee, either in sight or in tenor, as stated in the credit. The bank will buy the drafts and/or papers, advance or consent to advance funds on or before repayment is due, after scrutinizing that the documents satisfy the credit criteria. This bank then sends to the issuing bank the documents and the drafts. As normal, reimbursement will be issued in the manner decided beforehand.
Popular documents under the Letter of Credit Documentary:
Bill of Exchange/draft:
- The draft must carry the right reference number for the documentary.
- The draft must be a date before the expiry of the L/C and within the stipulated time for negotiation.
- It must be dawn or endorsed in the bank’s order.
- It is drawn by the party indicated as the beneficiary of the credit.
- It is drawn on the party indicated as the credit withdrawal.
- It is a market that quotes the L/C number as drawn under the proper L/C of the bank.
- The tenor is consistent with that defined in the L/C.
- In terms of credit, the sum is the same as the amount listed.
Bill of Lading (B/L):
- The complete set of B/L, including the original edition, is presented.
- “Shipped on board” is labeled.
- It is drawn in favor of the bank that endorses the bank order and is dated after the L/C is issued.
- The B/L is safe
- If the terms of sale are C& F, “Freight Prepaid” must be labeled B/L.
- A short B/L is not appropriate.
- Charter Party B/L is not permitted if not stated in the L/C
- The stale B/L is not
- Alternative (if any) as per L/C words.
- The invoice is signed by the exporter/receiver.
- As per L/C words, the necessary number of copies of the invoice is put.
- A summary of the products is given in full with measurement/weight.
- Value and price of the products to be counted in L/C terms
- The L/C number, the name of the ship with the shipping label, the date of shipment, the importer’s L.C.A.F/ license numbers, the indent number, etc. shall be accurately quoted in the invoice.
- As specified in the invoice, the quality and quantity of the products must comply with the L/C terms.
- The invoice refers to the name of the importer and the L/C issuing bank.
Certificate of origin
- A certificate of origin may be issued by the Chamber of Commerce & Industry of the locality of the exporter or by the supplier as provided for in the L/C.
- As per the indication given in the L/C, the goods must originate from the region.
Certificate of Inspection
- The certificate must adhere to the specifications of the Documentary Credit inspection.
- Unless approved by the documentary credit, it contains no adverse declaration as to the products, specifications, standard, packing, etc.
List for Packing
A list of the contents of each box, carton, etc., and other relevant information is needed for a comprehensive packing list. This refers to the provisions of the Documentary Credit.
Document for Insurance
- As required by the Documentary Credit, it is the policy/certificate/declaration under cover notice.
- As specified in the Documentary Credit, it covers the specified risks, and the risks are clearly defined.
Uniform Customs and documentary credit activities
The Uniform Customs and Practices for Documentary Credit (UCPDC) is a set of rules drawn up by the International Chamber of Commerce (ICC) to refer to all transactions carried out by banks in the form of letters of credit. The object of the rules is to ensure continuity in the type of a letter of credit, as well as in the practice and practices followed by banks in the handling of instruments. A standardized code is very important in order to provide a shared understanding of the meaning of the words and terminology. These uniform procedures and traditions are generally recognized and credit card letters are subject to this set of rules everywhere.
Unless the parties to a transaction mutually consent to apply the codes, the UCPDC formulated by the ICC is a set of laws, but it has no force of law and should not be construed as the law applicable in all situations. If by express reference, a party to a credit wishes to exclude from the LC contract the applicability of uniform customs, it may do so and is not bound by uniform customs in such cases. The Bank shall govern its operations with regard to the issuance, advice, and confirmation of credits in accordance with this Code, and shall recognize all obligations arising thereunder. Even the courts of all countries have based their rulings on letters of credit on those laws. The regulations also made all the types of letters of credit and all the practices and procedures found in relation to them by banks standardized.
The ICC UCP does not have legislative authority, but today it is recognized as a fundamental codification of best practice by the world banking community. In addition, the UCP is adopted by banks everywhere by comparison into practically every documentary credit and other letters of credit. It covers the most realistic aspects of credit transactions, including issuance, confirmation, and payment, the existence and scope of the obligations of bank undertakings and banking undertakings, the conditions to be complied with in credit transaction documents, and the laws applicable to transferable credit transactions.
The UCP rules are contractual beings that apply after they have been voluntarily incorporated by the parties. In general, the LC application forms contain a declaration that the loan will be subject to UCP 600, which is considered legally to reflect the willingness of the parties to apply the understanding of the loan to the rules of the UCP. There is, however, an agreement between the ICC body and the SWIFT body in which the LC informed through SWIFT or obtained through SWIFT is immediately within the UCPDC system. The provisions cannot cover all cases, except where the UCP is relevant, and national legislation and guidelines are required to cover the cases/areas.
The UCP 500 revision process was actively initiated at the International Chamber of Commerce in Paris in April 2003, and a new revision, i.e. UCPDC 600 [2007 revision] was adopted in November 2006 and released for implementation on 1 July 2007 for the global trading and banking communities. The new edition of UCP 600 is the product of the Banking Commission’s more than three years of intensive work. In comparison to UCP500, which has 49 articles grouped under seven large heads, the current edition of UCP 600 has been reorganized and contains 39 articles without any sub-heads. UCP 600 reflects increased clarity of language in terms of.
In general, in UCP 600, the articles indicated in the future form in UCP 500 are restructured into the present form. At the beginning of the draft version of UCP 600, essential meanings of the UCP and all interpretative issues put in the scattered form under UCP 500 were accumulated into two separate documents. The ‘parties’ concept has been replaced by’ banks ‘. The 2007 revision dropped the common phrase used in various UCP 500 posts,’ unless otherwise expressly stipulated in the credit.’
The idea of letters of credit in UCP 600 is taking on a new type. The revocable letter of credit has been excluded from the framework of the current UCP, and L/C applies instead to an irrevocable letter of credit or a definite undertaking. It appears to be right to remove revocable LC from the reach of the UCP draft. The revocable LC is in violation of the fundamental security function of the letter of credit, i.e. it cannot provide the beneficiary with the required protection in relation to the receipt of payments.
The UCP 600 has brought in the idea of ‘Second Advising Bank’ in line with the trend in different countries. In addition to the usual responsibility for verifying the validity of the loan, the advisory bank has additional responsibility for the notification of approval and rejection of amendments. Notable improvements were made to Article No. 14 of the UCP 600 ‘Standard for Review of Documents,’ which deals with the examination of documents. The maximum period allowing documents to be reviewed has been reduced from seven banking days to five banking days, and the word ‘reasonable time’ has been eliminated in relation to the time needed for documents to be examined. The text of Article 16 of UCP 600 has been updated from the latest edition of UCP in respect of the discrepant papers, the waiver, and the note.
The article specifically points out the contents of the notice of refusal that was missing from UCP 500. The notice of rejection shall be conveyed by telecommunication or, if this is not practicable, by other expeditious means and shall be communicated no later than the end of the fifth day following the date of presentation of the notice.
In such cases, the UCP 600 provides a change in the shipping date determination process in the case of a few transport papers. In the case of ‘Sea Bill of lading’ in the presence of both pre-printed wordings and on-board notation on the bill of lading, a substantial adjustment has been made in connection with the determination of the shipping date. In comparison to the UCP 500, the date of the on-board notation should be considered as the date of shipment in such a case. With regard to the determination of the date of shipment of an air transport document, in the presence of an indication of the actual date of shipment, the date of shipment would be the date of shipment if the credit did not include such an indication.
Under the letter of credit process, UCP 600 has 39 papers that specifically state various aspects of foreign trade payments. Article 1 refers to the UCP application as:
“The Uniform Customs and Documentary Credit Procedure, 2007 Revision, ICC Publication No. 600 are rules applicable to any documentary credit (including, to the extent applicable, any standby letter of credit) given that the text of the credit specifically specifies that it is subject to those rules.’ They are binding on both parties unless the credit has been expressly changed or omitted.”
Articles 2 and 3 contain the descriptions and meanings of the different parties and the key terms under the letter of credit. Credits v. In Article 4, contracts are referred to where it has been stated that they are
‘A loan is, by its essence, a transaction which is independent of the sale or other arrangement on which it may be based. Banks, even though any reference to it is included in the loan, are not bound by such a contract in any way. Consequently, a bank’s undertaking to honor, negotiate or fulfill any other obligation under the loan is not subject to the applicant’s claims or defenses arising out of its relationship with the issuing bank or the beneficiary.”
The undertaking of issuing and confirming banks is clearly stated in Articles 7 and 8, while Articles 9 and 10 provide instructions on the notification of credits and their amendments. The issue of the bank to bank reimbursement, which was stated in Article 13, is one of the very important aspects of international trade payment under the LC system, where:
“If a credit indicates that a reimbursement is to be obtained by a nominated bank (claiming bank) claiming a loan from another party (reimbursing bank), the credit must indicate whether the reimbursement is subject to the ICC bank reimbursement rules in force on the date the credit was issued.”
Article 14 of UCPDC 600, where the ‘standard for document review’ has been extensively stated, is a very important aspect. It was stated at the beginning of the article that ‘a nominated bank acting on its appointment, a confirming bank if any, and the issuing bank must examine the submission in order to determine, on the basis of the documents alone, whether or not the documents appear on their face to constitute an appropriate submission.’
‘When a nominated bank acting on its nomination, a confirming bank if any, or an issuing bank determines that a presentation does not comply, it may refuse to honor or negotiate,’ Article 16 has referred to discrepant documents, their waiver and notice, which is very cunningly stated.
The issue of various documents was discussed from Article 18 to 28. Trade invoices, transport documents, bills of lading, insurance documents are important among the documents required. The remaining articles emphasize the extension of the expiry date or the last day of presentation, the tolerance of the amount of credit, the quantity and unit prices, the partial drawings or shipments, the drawings or shipments in installments, the hours of presentation, the disclaimer on the effectiveness of documents, the disclaimer on transmission and translation, the force majeure, the disclaimer on acts of the instructed party, the transferable credits and A All these articles provide the guidelines for international trade that are necessary.