UCP 500 and UCP 600

17/09/12

What's that UCP all about ????

The UCP is the work of the ICC (International Chamber of Commerce), a private international organization founded in 1919 and is formulated entirely by experts in the private sector.

To date, it remains the most successful set of private rules for trade ever developed.

• On June 1, 2007 the new Uniform Customs and Practices for Documentary Credits, published as International Chamber of Commerce publication No 600, will take effect. The first version of the UCP was drafted at the ICC congress in Vienna in 1933 (ICC-Publication No. 82). After the first revision in 1951, the UCP were again revised in 1962, latter revision being of particular significance, since for the first time Great Britain and the Commonwealth accepted the UCP. The UCP were again revised in 1974 and 1993; the 1993 revision obtained the blessing of the UNCITRAL (United Nations Commission on International Trade Law) which recommended that the UCP be applied to all documentary credits

The stated goal of the current revision has been identical to previous ones, i.e. - take into account developments in banking, transportation and insurance - review the wording of the UCP to avoid differing interpretations and applications [2]. In a note to its members and the national committees the ICC itself labeled the new revision as "the most comprehensive in the entire history of the rules." Comprehensiveness however did not lead to substantive changes.

The ICC has shortened the number of articles from 49 to 38(39)!!. This change is mostly cosmetic however, since substantive changes are barely noticeable. An exception to the foregoing is the shortening of the time to examine documents from seven to five working days.

Previous publications

UCP Publication Number 500, 1993 Revision.

UCP Publication Number 400, 1983 revision

UCP Publication Number 290, 1974 revision

UCP Publication Number 222, 1962 revision.

UCP Publication number 151, 1951 revision.

UCP Publication number 82 created in 1933.

Lets see what's existing now in UCP 600 and we can go and enquire about UCP 500 ?

And also we need to study deeper about the changes between UCP 500 and UCP 600

And also the necessity for alteration and reducing from 49 to 39 articles ???

Article 1- 5

Article 1 - 5 Definition, Interpretation, independence of credits and underlying contracts.

Article 6 - 10Article 6 - 10 Availability, expiry date and place, obligations of issuing and confirming bank, advising credits and amendments.

Article 11 - 17

Article 11 - 17 Pre-Advised Credits, nominated bank, reimbursement arrangements, complying presentations and discrepant documents, waiver, original documents and notices

Article 18 Commercial invoice Article 19 - 27 Transport Documents Article 28 Insurance documents Article 29 - 37 Extension of Expiry Date, tolerances, partial drawings and partial shipments, Disclaimers

Article 38 - 39 Transferability of Credits and Assignment of Proceeds. The most important substantive changes are: The criterion that documents have to appear to comply "on their face" is only mentioned in Article 14 a UCP 600. This leaves open that one has to consult the back side of the document. The criterion of inconsistency (Article 13 a UCP 500 "Documents which appear on their face to be inconsistent with one another") was watered down to read now (see Article 14 d UCP 600): "Data in a document, when read in context ... need not be identical to, but must not conflict with...

UCP 500UCP 500

Uniform Customs and Practice for Documentary Credits,

International Chamber of Commerce, Paris, France

Publication No. 500.

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UCP 500

Buyer / Applicant

Seller / Beneficiary

Advising Bank

IssuingBank

UCP 500Uniform Customs and Procedures for Documentary Letters of Credit.

The UCP 500 Letter of Credit - Concept

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UCP 500

Uniform Customs and Practice for Documentary Credits,International Chamber of Commerce Publication No. 500.

Article 1: Application of UCPThis article states that all Letters of Credit, including Standby Credits, are issued subject to UCP 500 provided that the Letter of Credit specifically indicates this to be the case.

Article 2: Meaning of Credit This article is saying that a Letter of Credit is any instrument issued by a financial institution subject to UCP 500 that contains a conditional undertaking to effect payment provided that its terms and conditions have been complied with.

Article 3: Credits vs ContractsCredits, by their nature are separate transactions from the sales or other contract(s) on which they may be based.

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UCP 500 UCP 500

Article 4: Documents vs. Goods / Services / PerformanceIn Credit operations all parties concerned deal with documents, and not with goods, services and/or other performances to which the documents may relate.

Article 5: Instructions to Issue / Amend Credits• Instructions for the issuance of a Credit must be complete and precise.• In order to avoid confusion, Credit should not include excessive detail, • The Credit must state precisely the documents that are to be presented.

Article 6: Revocable v. Irrevocable CreditsA Credit may be either (i) revocable or (ii) irrevocable.

Article 7: Advising Bank’s LiabilityA Credit may be advised to a beneficiary through another bank (the Advising Bank) without engagement on the part of the Advising Bank…

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UCP 500

Article 8: Revocation of a CreditA revocable Credit may be amended or cancelled by the issuing bank at any moment and without prior notice to the beneficiary.

Article 9: Liability of Issuing and Confirming BanksAn irrevocable Credit constitutes a definite undertaking of the Issuing Bank.

Article 10: Types of Credit All Credits must clearly indicate whether they are available by sight payment, by deferred payment, by acceptance or by negotiation.

Article 11: Teletransmitted and Pre-Advised CreditsWhen an Issuing Bank instructs an Advising Bank by an authenticated teletransmission to advise a Credit or an amendment to a Credit, the teletransmission will be deemed to be the operative Credit instrument.

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UCP 500Article 12: Incomplete or Unclear InstructionsIf incomplete or unclear instructions are received to advise, confirm or amend a Credit, the bank requested to act on such instructions may give preliminary notification to the Beneficiary only and without responsibility.

Article 13: Standard for Examination of DocumentsBanks must examine all documents stipulated in the Credit with reasonable care, to ascertain whether or not they appear, on their face, to be in compliance with the terms and conditions of the Credit… Documents not stipulated in the Credit will not be examined by banks.

Article 14: Discrepant Documents and NoticeWhen the issuing bank authorizes another bank to pay, incur a deferred payment undertaking, accept Draft(s), or negotiate against documents which appear on their face to be in compliance with the terms and conditions of the Credit, the issuing bank and the confirming bank, if any, are bound:

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UCP 500

Article 15: Disclaimer on Effectiveness of Documents“Banks assume no liability of responsibility for the form, sufficiency, accuracy, genuineness, falsification or legal effect of any document’s…

Article 16: Disclaimer on the Teletransmission of DocumentsBanks assume no liability or responsibility for errors in translation and/or interpretation of technical terms, and reserve the right to transmit Credit without translating them.

Article 17: Force MajeureBanks accept no liability or responsibility for consequences arising out of the interruption of their business by Acts of God…

Article 18: Disclaimer for Acts of an Instructed PartyWhen a bank requests one of its correspondent banks to “give effect to the instructions of the applicant” they do so “for the account of and at the risk of such applicant.

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UCP 500

Article 19: Band-to-Bank Reimbursement ArrangementsWhen an issuing bank transmits a Credit through a correspondent bank with which they do not have an account…

Documents

Article 20: Ambiguity as to Issuers of DocumentsTerms such as ’first class,’ ‘well known,’ ‘qualified,’ independent’, ‘official,’ ‘competent,’ ‘local,’ and the like shall not be used to describe the issuers of any document’s to be presented under a Credit.

Article 21: Unspecified Issuers of Contents of DocumentsWhen documents other than transport documents, insurance documents and commercial invoices are called for, the Credit should stipulate by whom they are to be issued and their wording or data content.

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UCP 500

Article 22: Issuance Date on Documents v. Credit DateDocuments may be presented showing an issuance date prior to the issuance date of the Credit unless the Credit stipulates otherwise.

Article 23: Transport DocumentsA Bill of Lading services three purposes; a contract between the shipper and carrier to transport goods; a receipt by the carrier for the goods being shipped; and it normally transfers title of the goods represented by it.

Article 24: Non-Negotiable Sea WaybillThe main difference between a negotiable bill of lading and non-negotiable document is the way the bill of lading is consigned. A negotiable bill of lading is consigned “to order of” a named party. Title is passed by surrender of an endorsed original bill of lading. A non-negotiable bill of lading has a direct consignment to a named party. Title is passed by surrender of either an original or non-negotiable copy of the B/L or Waybill.

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UCP 500

Article 25: Charter Party Bill of LadingA charter party bill of lading is one where a shipper has contracted with a shipping line to charter a vessel for the movement of cargo. The Credit must stipulate that charter party bills of lading are acceptable.

Article 26: Multimodal Transport DocumentA multimodal transport document is one that covers more than one kind of conveyance.

Article 27: Air Transport DocumentAir transport documents are issued in the form of an Air Waybill. A significant difference between an Air Waybill and Ocean Bill of Lading is that the former are always straight consignments whereas Ocean Bills of Lading may be either straight or negotiable

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UCP 500Article 28: Road, Rail or Inland Waterway Transport Documents Frequently letters of credit issued for the purpose of accommodating shipments within North America will call for some type of “domestic” transport document.

Article 29: Courier and Postal ReceiptsSmall or lightweight shipments are frequently sent via courier such as Airborne, Federal Express, DHL, etc.

Article 30: Transport Document Issued by Freight ForwardersSometime a freight forwarder receives cargo from several different shippers and consolidates them into a single container shipment.

Article 31: On deck,” “Shipper’s Load and Count,” Name of ConsignorTransport documents which do indicate that the goods may be carried “on deck”; bear a clause such as “shippers load and count”; or indicate a consignor other than the beneficiary.

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UCP 500

Article 32: Clean Transport DocumentsA clean transport document is one that does not indicate any defect in the goods such as “damaged.”

Article 33: Freight Payable/Prepaid Transport DocumentsAll Letters of Credit that require presentation of a transport document must indicate whether the freight has been prepaid or is being sent “freight collect”.

Article 34: Insurance DocumentsInsurance is a contract between the insurance company and the shipper, consignee or party having an insurable interest in the merchandise

Article 35: Type of Insurance CoverCredits should stipulate the type of insurance required and, if any, the additional risks which are to be covered.

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UCP 500

Article 36: All Risk Insurance CoverFrequently a Credit requires that the insurance document cover “all risks.” Banks will accept an insurance document that bears an “all risks” clause or notation even though the insurance document contains wording elsewhere that certain risks are excluded.

Article 37: Commercial InvoiceThis is the only document where the merchandise description must correspond exactly with that indicated in the Credit. Must appear on their face to be issued by the Beneficiary named in the Credit, and must be made out in the name of the Applicant.

Article 38: Other DocumentsThis article covers weight certificates on transport documents other than by sea.

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UCP 500Article 39: Miscellaneous DocumentsAllowances in Credit Amount, Quantity and Unit Price. Banks will accept documents which show that the quantity of goods being shipped has a variance of 5% more or less than that stipulated in the Credit.

Article 40: Partial Shipments/DrawingsPartial shipments are allowed, unless the Credit stipulates otherwise. Sometimes a shipper may load goods on the same carrier at different times or even different ports. So long as the transport documents indicate that the goods were all shipped on the same carrier, for the same journey, show the same destination, then a bank may not treat thee as partial shipments.

Article 41: Installment Shipments/DrawingsIf a shipper (beneficiary) fails to make a drawings and/or shipment within a specified time frame then the entire Letter of Credit ceases to be available for any future drawings.

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UCP 500Article 42: Expiry Date and Place for Presentation of DocumentsAll Credits must stipulate an expiry date and a place for presentation of documents for payment.

Article 43: Limitation on the Expiry Dateevery Credit which calls for a transport document should also stipulate a specified period of time after the date of shipment during which presentation must be made… If no such period of time is stipulated banks will not accept documents presented to them later than 21 (calendar) days after the date of shipment

Article 44: Extension of Expiry DateIf the expiry date of the Credit and/or last day of the period of time for presentation of documents falls on a day on which the bank… is closed the stipulated expiry date shall be extended to the first following day on which such bank is open.

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UCP 500

Article 45: Hours of PresentationBanks are under no obligation to accept presentation of documents outside their banking hours.

Article 46: General Expressions as to DatesUnless otherwise stipulated in the Credit, the expression ‘shipment’ used in stipulating an earliest and/or latest date for shipment will be understood to include the expressions such as ‘loading on board,’ ‘dispatch,’ ‘accepted for carriage, and the like.

Article 47: Date Terminology for Periods of ShipmentWhen Credits refer to dates such as “from X date to Y date” and the like, then banks will interpret that to mean that both “X” and “Y” dates are included.

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UCP 500

Article 48: Transferable CreditA transferable Credit is one under which the beneficiary may request that the Credit be made available to a third party. A Credit is considered transferable only if it is expressly designated as “transferable” by the issuing bank.

Article 49: Assignment of ProceedsThe beneficiary may request the paying/negotiating bank to “assign” all or part of the proceeds to a third party. Unlike a transferee, an assignee is entirely dependent on the beneficiary to perform in order to receive payment. In addition, an assignee is not entitled to receive any notification of amendments or even cancellation of the Credit. The main advantage to an assignee is that it will be assured that payment will be made directly to them instead of to the first beneficiary.

The UCP 500 is the global standard for

issuing, advising, presenting documents,

and negotiating Commercial Letters of

Credit in over 200 countries. It is the “gold

standard” for international transaction

settlement.

UCP500 Articles not incorporated into UCP600 text:

Article 5[Instructions to Issue/Advise Credits]

Article 6 [Revocable v. Irrevocable Credits]

Article 8 [Revocation of a Credit]

Article 12[Incomplete or Unclear Instructions]

Article 38[Other Documents]

Who is Affected?LC Operations

Sales

Legal

Trainers

Applicants, Beneficiaries, Freight Forwarders and Carriers

Fewer articles. UCP600 contains 39 articles. The UCP 500 has 49.

The term "reasonable time" replaced with a definite number of days (5) for examining and determining compliance of documents;

A new provision concerning addresses of the beneficiary and the applicant;

An expanded discussion of "original documents“;Re-drafted transport articles aimed at resolving

confusion over the identification of carriers and agents

A new section of “definitions”, containing terms such as “honour”and “negotiation.”

Honour means:

i) to pay at sight if the credit is available by sight payment

ii) to incur a deferred payment undertaking and pay at maturity if the credit is available by deferred payment,

(iii) to accept a bill of exchange (“draft”) drawn by the beneficiary and pay at maturity if the credit is available by acceptance.

Negotiation means the purchase by the nominated bank of drafts (drawn on a bank other than the nominated bank) and/or documents under a complying presentation, by advancing or agreeing to advance funds to the beneficiary on or before the banking day on which reimbursement is due to the nominated bank.

Kindly Look at it !!!! UCP500 Articles not incorporated into UCP600

text:

Article 5[Instructions to Issue/Advise Credits]

Article 6 [Revocable v. Irrevocable Credits]

Article 8 [Revocation of a Credit]

Article 12[Incomplete or Unclear Instructions]

Article 38[Other Documents]

Content of Articles 2, 6, 9, 10, 20, 21, 22, 30, 31, 33, 35, 36,46 and 47 were merged or otherwise incorporated in other ways within the text of the UCP 600.

The phrase "reasonable time" for acceptance or refusal of documents has been replaced by a firm period of five banking days.

The number of articles reduced to 39.New provisions allow for the discounting of deferred

payment credits.Banks can now accept an insurance document that

contains reference to any exclusion clause.New sections on "definitions" and "interpretations"

have been added to clarify the meaning of ambiguous terms.

Credit must state if reimbursement is subject to the ICC rules for bank to bank reimbursements.

• An applicant or beneficiary address appearing in any stipulated document need not be the same but must be within the same country as the address stated in the credit and contact details such as fax, phone, email and the like, when stated as a part of the applicant or beneficiary address will be disregarded…unless the address and contact details appear as part of the consignee or notify party details on a transport document subject to the transport document articles of the UCP 600. In that case they must appear as stated in the credit.

• The word "clean“ need not appear on a transport document even if a credit has a requirement for that transport document to be “clean on board”.

The flight stamp shown on an airway bill will be considered as the date of shipment, whether requested in the credit or not.

The turndown notice has two new options: (i) to hold documents pending applicant waiver or receipt of additional instructions from the presenter or (ii) that the bank is acting in accordance with instructions previously received from presenter.

At least one original of each document stipulated in a credit must be presented.

The concept of a revocable credit was removed from UCP.

What is affected? Import letters of Credit Export Letters of credit Standby Letters of Credit LC Applications and Agreements LC Systems and Standard Letters Impact on SWIFT messages (notices of

refusal, subject to URR 525?)

Who is affected?LC Operations Work Procedures/Standard of Care

Staff Training in Multiple Locations

LC Systems and Standard Letters

What to do with existing LC’s after July 1, 2007?

Sales Training of Sales Team Members

Legal Learning the new rules

LC applications, documents and agreements

Trainers

Must learn new rules

Design and prepare training materials

Identify trainees, schedule and conduct training.

Applicants/Beneficiaries/Freight Forwarders & Carriers

Revocable credits not covered by UCP

Cannot set time limits for acceptance of amendments by beneficiary

Applicants, Beneficiaries, Freight Forwarders & CarriersIssuing Bank must pay for credit complying documents,

if lost in transit.

At least one original of each document must be presented.

Fewer Discrepancies? a document may be considered an original if it appears to be on the document issuer’s original stationery.

Applicant and/or beneficiary address may be different than shown in the credit provided it is within the same country as stated in the credit.

Applicants, Beneficiaries, Freight Forwarders & CarriersThe word “clean” not required to appear on Bill of

Lading, even if a “clean” transport document is required in the LC.

An original document may be used to fulfill a requirement for a “copy” even if a copy of a document was required in the credit.

Transport document articles re-written to make it easier to understand requirement to identify the capacity of the signer of a Bill of Lading (agent, carrier or master).

Banks allowed to discount or “prepay” an acceptance or deferred payment obligation before maturity.

– Contact details such as Telefax, telephone, email and the like, used as part of an applicant or beneficiary address can be disregarded, unless used as part of consignee or notify party details on a transport document.

– A flight stamp or notation shown on an air waybill may now be considered the date of shipment, whether requested in the credit or not.

--Insurance documents containing references to any exclusion clauses are now acceptable.

-- Faster Payment? Number of days required to notify presenter of discrepancies hasbeen reduced from seven (7) banking days following day of presentation of documents to five (5) banking days.

Notable Changes!!!!!New to UCP -Article 2 Definitions:

Advising bank, Applicant, Banking Day, Beneficiary, Complying Presentation, Confirmation, Confirming bank, Credit, Honour, Issuing bank, Negotiation, Nominated bank, Presentation and Presenter.

New to UCP - Article 3 Interpretations:

Mainly conditions taken from UCP 500 Articles 20, 46 and 47

Plus wider application of terminology i.e., "Unless required to be used in a document, words such as "prompt", "immediately" or "as soon as possible" will be disregarded" as opposed to its limited application under UCP 500 sub-Article 46(b).

Article 6 Availability, Expiry Date and Place for Presentation(includes):

(a) A credit must state the bank with which it is available or whether it is available with any bank. A credit available with a nominated bank is also available with the issuing bank.

(d) (i) A credit must stipulate an expiry date for presentation. An expiry date stated for honour or negotiation will be deemed to be an expiry date for presentation.

(d) (ii) The place of the bank with which the credit is available is the place for presentation. If the credit is available with any bank then the place for presentation is that of any bank. A place for presentation other than that of the issuing bank is in addition to the place of the issuing bank.

Article 7 Issuing Bank Undertaking (includes):An issuing bank undertakes to reimburse a nominated bank that

has honoured or negotiated a complying presentation and forwarded the documents to the issuing bank.

Reimbursement for the amount of a complying presentation under acredit available by acceptance or deferred payment is due at maturity, whether or not the nominated bank prepaid or purchased before maturity. An issuing bank's undertaking to reimburse a nominated bank is independent of the issuing bank's undertaking to the beneficiary.

Article 8 Confirming Bank Undertaking (includes):A confirming bank undertakes to reimburse another nominated bankthat has honoured or negotiated a complying presentation and forwarded the documents to the confirming bank.

Reimbursement for the amount of a complying presentation under a credit available by acceptance or deferred payment is due at maturity, whether or not another nominated bank prepaid or purchased before maturity. A confirming bank's undertaking to reimburse another nominated bank is independent of the confirming bank's undertaking to the beneficiary.

Article 9 Advising of Credits and Amendments (includes):

An advising bank may utilize the services of another bank ("second advising bank") to advise the credit and any amendment to the beneficiary.

Article 10 Amendments (includes):The terms and conditions of the original credit (or a credit incorporating previously

accepted amendments) will remain in force for the beneficiary until the beneficiary communicates its acceptance of the amendment to the bank that advised such amendment. The beneficiary should give notification of acceptance or rejection of an amendment. If the beneficiary fails to give such notification, a presentation that complies with the credit and to any not yet accepted amendment will be deemed to be notification of acceptance by the beneficiary of such amendment. As of that moment the credit will be amended.

A provision in an amendment to the effect that the amendment shall become valid unless rejected by the beneficiary within a certain time shall be disregarded.

Article 12 Nomination (includes):

By nominating a bank to accept a draft or incur a deferred payment undertaking, an issuing bank authorizes that nominated bank to prepay or purchase a draft accepted or a deferred payment undertaking incurred by that nominated bank. (See also Articles 7 and 8)

Article 13 Bank-to-Bank Reimbursement Arrangements (includes):

If a credit states that reimbursement is to be obtained by a nominated bank ("claiming bank") claiming on another party ("reimbursing bank"), the credit must state if the reimbursement is subject to the ICC rules for bank-to-bank reimbursements in effect on the date of issuance of the credit.

Article 14 Standard for Examination of Documentation (includes):

A nominated bank acting on its nomination, a confirming bank, if any, and the issuing bank must examine the presentation to determine, on the basis of the documents alone, whether or not the documents appear on their face to constitute a complying presentation.

A nominated bank acting on its nomination, a confirming bank, if any, and the issuing bank shall each have a maximum of five banking days following the day of presentation to determine if a presentation is complying. This period does not depend on any upcoming expiry date or last day for presentation.

A document may be dated prior to the issuance date of the credit, but must not be dated later than the date of its presentation.

The shipper or consignor of the goods indicated on any document need not be the beneficiary of the credit.

Article 14 Standard for Examination of Documentation (Con’t):

Data in a document, when read in context with the credit, the document itself and international standard banking practice, need not be identical to, but must not conflict with, data in that document, any other stipulated document or the credit.

The addresses of the beneficiary and the applicant appearing in any stipulated document, need not be the same as those stated in the credit or in any other stipulated document, but must be within the same country as the addresses mentioned in the credit.

Contact details (telefax, telephone, email and the like) stated as part of the beneficiary’s and the applicant’s address will be disregarded. However, when the address and contact details of the applicant appear as part of the consignee or notify party details on a transport document that is subject to the transport document articles (19, 20, 21, 22, 23, 24 or 25), they must be as stated exactly as in the credit.

Article 16 Discrepant Documents, Waiver and Notice (Includes):

The notice of discrepancy must state that the bank is refusing to honor or negotiate, must cite each discrepancy found and one other of the following options:

That the bank is holding the documents pending further instructions from the presenter, or

That this issuing bank is holding the documents until it receives a waiver from the applicant and agrees to accept it, or receives further instructions from presenter prior to agreeing to accept a waiver, or

That the bank is returning the documents; or

That the bank is acting in accordance with instructions previously received from the presenter.

Article 17 Original Documents and Copies:

This article follows the principles of the ICC Decision for determination of an original document.

Article 18 Commercial Invoice (includes):

"... must be made out in the same currency as the credit; ...”Articles 19-25 represent the new Transport Articles of the UCP (main

changes):First transport article is "Transport Document Covering at Least Two Different Modes of Transport" and replaces UCP500 Article 26 "Multimodal Transport Document".

Further alignment of the signing and identification of capacity;> Refined 'on board' notation requirements;

Re-definition of transshipment i.e., "unloading from one vessel and reloading to another vessel during the carriage from the port of loading to the port of discharge stated in the credit".

For air transport, the flight stamp shown on the air waybill will now be considered the date of shipment whether requested in the credit or not.

Article 27 Clean Transport Document (includes):

The word "clean" need not appear on a transport document even if a credit has a requirement for that transport document to be “clean on board”.

Article 28 Insurance Document and Coverage (includes):

Cover notes will not be accepted.

"... that risks are covered at least between the place of taking in charge or shipment and the place of discharge or final destination as stated in the credit“

An insurance document may contain reference to any exclusion clause .

Note: the change to the position in ISBP paragraph 186.

Article 35 Disclaimer on Transmission and Translation (includes):

If a nominated bank determines that a presentation is complying and forwards the documents to the issuing bank or confirming bank, whether or not the nominated bank has honoured or negotiated, an issuing bank or confirming bank must honour or negotiate, or reimburse that nominated bank, even when the documents have been lost in transit between the nominated bank and the issuing bank or confirming

Article 36 Force Majeure:

A bank assumes no liability or responsibility for the consequences arising out of the interruption of its business by Acts or God, riots, civil commotions, insurrections, wars, acts of terrorism** or by any strikes or lockouts, or any other causes beyond its control.

A bank will not, upon resumption of its business, honour or negotiate under a credit that expired during such interruption of its business.

** Note: addition of the coverage for "acts of terrorism"

Article 38 Transferable Credits (includes):

a. A bank is under no obligation to transfer a credit except to the extent and in the manner expressly consented to by that bank.

b. This section contains definitions for "Transferable credit", "Second beneficiary", “First beneficiary", "Transferring bank" and "Transferred credit.”

k. Presentation of documents by or on behalf of a second beneficiary must be made to the transferring bank.

•Export FIANCING

Export Financing Exporters naturally want to get paid as quickly as

possible, while importers usually prefer to delay payment until they have received the goods. Because of the intense competition for export markets, being able to offer attractive payment terms customary in the trade is often necessary to make a sale. Exporters should be aware of the many financing options open to them so that they choose the most acceptable one to both the buyer and the seller.

Export credit can be broadly classified into

• Pre-shipment finance and • post shipment finance. • Preshipment

finance refers to finance extended to purchase, processing or packing of goods meant for exports

• Financial assistance extended after the shipment of exports falls within the scope of post shipment finance

PACKING CREDIT• As loan or cash credit against pledge or hypothecation.• Verification of Exporter-Importer Code No. issued by

DGFT.• Party should not be in the RBI Caution

list or ECGC Special Approval List.• Export is not to a listed country• Verify order/LC• Up-to date knowledge of export policy• Commodity should not be in the negative list.• Commodity should have a good market• Terms of contract• No FEMA violation• Borrower should be credit worthy.

• Working capital may be defined as funds required to carry the required level of Current assets to enable the industry to carry on its operations at the expected levels uninterruptedly..

• The guidelines set by Nayak Committee for computation of WC finance quantum for village, tiny and other SSI industries to a minimum extent of 20% of Projected/ Accepted Turnover to continue Guidelines with regard to specific activities / industries / situations to continue (Sugar / tea industries, Rehabilitation cases, Export Financing etc.) Banks may consider Cash Flow approach of financing in order to close the gap between the sanctioned limits and the utilization levels …

Quantum of finance:• FOB value of goods minus profit and credit

margin Cost of production less margin (can be more if the domestic cost is more than the FOB value and the difference is accounted as incentives like duty draw-back etc. subject to export production finance guarantee of ECGC).

• In the case of exports on CIF value basis PC can be granted towards insurance and freight also

• Period of finance: to coincide with the date for shipment and normally up to 180 days

Clean Packing Credit• Granted to credit worthy parties where advance

payment is required to be made to the supplier. • Quantum determined based on the likely purchase

pattern of the exporter with their suppliers. • Period of CPC is determined based on the

facts of each case (but not later than the period of contract /LC.

• A higher margin of say 25% should be stipulated, collected each time and remitted along with PC to the supplier.

• CPC should be converted as PC or Bills

EXPORT FINANCE

• PRE SHIPMENT finance : Deals with the finance schemes available before the shipment has been made.• POST SHIPMENT finance : on the

contrary deals with credit available after the goods have shipped.

Both stages are crucial for the exporter

Pre-shipment finance

• PSF.. Offer liquidity to the exporter to produce raw materials, carry out processing, packing, transporting and warehousing of the goods to be exported.

• Pre-Export Finance: provision of funds to cover the period between signing of purchase orders and payment (short-term, working capital)

• –Pre-export finance typically covers:• Cost of inland transport to port• Purchase of raw materials for processing

• Cost of processing• Storage costs

Illustrative procedure (commodities)

• Exporter provides title to or pledges products to bank• –Products that have yet to be produced• –Products that have been produced (warehouse

receipt)• Bank provides credit facility• Payment• –Trader takes delivery• –Bank receives payment directly from buyer• »Escrow account• »Evidence account

Methods of Pre-Export Finance• Open Account: –Exporter ships goods without any guarantee of

payment, thereby financing importer–Risk of transaction dependent on relationship/importer integrity.

• Documentary letter of credit (see UCC Art. 5 and UCP 500): Letter from bank, addressed to exporter, in which bank promises to pay or accept drafts if exporter conforms 100% to conditions within the letter.

• Three parties: • –Issuer: the issuing bank• –Account party (importer)• –Beneficiary (exporter) • •Three agreements• –Trade contract between importer and exporter• –Documentary credit between bank and exporter• –Reimbursement agreement between bank and importer

Documentary Letter of creditRevocable/Irrevocable• –A revocable letter of credit can be cancelled or amended by the issuing

bank; the bank does not need the exporter/beneficiary’s consent.Confirmed/Unconfirmed• –Issuing bank forwards letter of credit to exporter’s bank• –Exporter’s bank promises to pay exporter (confirms l/c)• –In an unconfirmed transaction, the advising bank acts as the issuing

bank’s agent and bears no obligation to exporterBack-to-back• –Typically used by brokers, the letter of credit allows the beneficiary to

assign its rights in one letter of credit to the issuer of a second letter of credit

• –Both letters of credit must require identical documentsTransferable• –The original beneficiary can transfer the letter of credit to third parties

Documentary Letter of credit• Revolving• –Typically used in construction contracts• –Allows beneficiary to draw on the letter of credit, up to a certain

amount, usually without presentation of documents• –The account party replenishes the account“Red clause” letter of credit• –Exporter can use to obtain pre-shipment finance by providing either (i)

a statement of purpose or (ii) an undertaking to provide specified documents.

• –Issuing bank provides exporter with a percentage of the L/C amount• –Advising bank guarantees reimbursement“Green clause” letter of credit• –Similar to “red clause” letters of credit, but pre-shipment finance is

contingent upon the production of warehouse receipts…

Letter of credit SettlementSight payment (sight draft)• –Exporter presents documents and receives paymentDeferred payment (dated draft)• –Exporter presents documents and receives payment at some

specified future timeAcceptance (time draft)• –Exporter (i) presents documents and (ii) draws a usance draft• –Bank accepts bill of exchange for payment on a future date Negotiation• –Exporter may choose a bank and negotiate the payment of a

sight or usance draft• –Bank will either:• »Advance payment with recourse to the exporter• »Advance payment less a fee (discount)• »Pay exporter when issuing bank provides payment

Post shipment Finance

• Provides credit facility from the date shipment of the goods to the time export payment is realized ( expenses between period of shipment dispatch and payment realisation…

Export Finance –Post-Export

Post-Export Finance (medium/long-term)• –Post-Export finance typically covers:• •Account receivables• •Equipment• •Other fixed assets–Methods of Post-Export Finance• •Revolving line of credit• •Term loan • •Finance accounts receivable

Methods of Post-Export FinanceFinance account receivables–Typically used in two instances• •Undercapitalized company with permanent financing

need• •Temporary insufficient cashflow–Banks provide loan secured by:• •Assignment of receivables• •Assignment of commodity inventory–Loan• •Made on a revolving basis against a pool of receivables–Borrower• •Responsible for collecting from customers• •Responsible for 100% loan repayment despite inability to

collect from customers

Export Finance –Forms of Risk

Commercial risk•The risk that either party will not fulfill its

obligationsTransportation risk•The risk that goods become damaged or destroyed

during transportExchange risk• •The risk that currency fluctuations will affect the

value of the transactionPolitical risk• •The risk that government policy changes, wars,

embargoes, etc., will prevent the conclusion or affect the value of the transaction

Indian Case study ; RBI sources !• PRE-SHIPMENT EXPORT CREDIT, Definition:

…any loan or advance granted or any other credit provided by a bank to an exporter for financing the purchase, processing, manufacturing or packing of goods prior to shipment / working capital expenses towards rendering of services on the basis of letter of credit opened in his favour or in favour of some other person, by an overseas buyer or a confirmed and irrevocable order for the export of goods / services from India or any other evidence of an order for export from India having been placed on the exporter or some other person, unless lodgement of export orders or letter of credit with the bank has been waived.

Period of AdvanceThe period for which a packing credit advance may be

given by a bank will depend upon the circumstances of the individual case, such as the time required for procuring, manufacturing or processing (where necessary) and shipping the relative goods / rendering of services.

It is primarily for the banks to decide the period for which a packing credit advance may be given, having regard to the various relevant factors so that the period is sufficient to enable the exporter to ship the goods / render the services

• If pre-shipment advances are not adjusted by submission of export documents within 360 days from the date of advance, the advances will cease to qualify for concessive rate of interest to the exporter ab initio.

• RBI would provide refinance only for a period not exceeding 180 days.

Disbursement of Packing Credit

Banks may also maintain different accounts at various stages of processing, manufacturing, etc. depending on the types of goods / services to be exported, e.g. hypothecation, pledge, etc., accounts and may ensure that the outstanding balance in accounts are adjusted by transfer from one account to the other and finally by proceeds of relative export documents on purchase, discount, etc.

Banks should continue to keep a close watch on the end-use of the funds and ensure that credit at lower rates of interest is used for genuine requirements of exports. Banks should also monitor the progress made by the exporters in timely fulfillment of export orders.

Liquidation of Packing CreditThe packing credit / pre-shipment credit granted

to an exporter may be liquidated out of proceeds of bills drawn for the exported commodities on its purchase, discount etc., thereby converting pre-shipment credit into post-shipment credit. Further, subject to mutual agreement between the exporter and the banker it can also be repaid / prepaid out of balances in Exchange Earners Foreign Currency A/c ( EEFC A/c ) as also from rupee resources of the exporter to the extent exports have actually taken place.

Running Account' FacilityIn many cases, the exporters have to procure raw

material, manufacture the export product and keep the same ready for shipment, in anticipation of receipt of letters of credit / firm export orders from the overseas buyers. Having regard to difficulties being faced by the exporters in availing of adequate pre-shipment credit in such cases, banks have been authorized to extend Pre-shipment Credit ‘Running Account’ facility in respect of any commodity, without insisting on prior lodgment of letters of credit / firm export orders, depending on the bank’s judgment regarding the need to extend such a facility and subject to the following conditions:

a) Banks may extend the ‘Running Account’ facility only to those exporters whose track record has been good as also to Export Oriented Units (EOUs) / Units in Free Trade Zones / Export Processing Zones (EPZs) and Special Economic Zones (SEZs)

(b) In all cases where Pre-shipment Credit ‘Running Account’ facility has been extended, letters of credit / firm orders should be produced within a reasonable period of time to be decided by the banks.

(c) Banks should mark off individual export bills, as and when they are received for negotiation / collection, against the earliest outstanding pre-shipment credit on 'First In First Out' (FIFO) basis. Needless to add that, while marking off the preshipment credit in the manner indicated above, banks should ensure that concessive credit available in respect of individual pre-shipment credit does not go beyond the period of sanction or 360 days from the date of advance, whichever is earlier.

(d) Packing credit can also be marked-off with proceeds of export documents against which no packing credit has been drawn by the exporter.

Export Credit against Proceeds of Cheques, Drafts, etc. Representing AdvancePayment for Exports

Where exporters receive direct remittances from abroad by means of cheques, drafts, etc. in payment for exports, banks may grant export credit at concessive interest rate to exporters of good track record till the realization of proceeds of the cheque, draft etc. received from abroad, after satisfying themselves that it is against an export order, is as per trade practices in respect of the goods in question and is an approved method of realization of export proceeds as per extant rules.

Rupee Export Packing Credit to Manufacturer Suppliers for Exports Routed through STC/MMTC/Other Export Houses,

Agencies, etc.

Banks may grant export packing credit to manufacturer suppliers who do not have export orders/letters of credit in their own name, and goods are exported through the State Trading Corporation/Minerals and Metal Trading Corporation or other export houses, agencies, etc.

Requirements (a) Banks should obtain from the export house a letter

setting out the details of the export order and the portion thereof to be executed by the supplier and also certifying that the export house has not obtained and will not ask for packing credit in respect of such portion of the order as is to be executed by the supplier.

(b) Banks should, after mutual consultations and taking into account the export requirements of the two parties, apportion between the two i.e. the Export House and the Supplier, the period of packing credit for which the concessionary rate of interest is to be charged. The concessionary rates of interest on the pre-shipment credit will be available up to the stipulated periods in respect of the export house/agency and the supplier put together.

The export house should open inland L/Cs in favour of the supplier giving relevant particulars of the export L/Cs or orders and the outstandings in the packing credit account should be extinguished by negotiation of bills under such inland L/Cs. If it is inconvenient for the export house to open such inland L/Cs in favour of the supplier, the latter should draw bills on the export house in respect of the goods supplied for export and adjust packing credit advances from the proceeds of such bills. In case the bills drawn under such arrangement are not accompanied by bills of lading or other export documents, the bank should obtain through the supplier a certificate from the export house at the end of every quarter that the goods supplied under this arrangement have in fact been exported. The certificate should give particulars of the relative bills such as date, amount and the name of the bank through which the bills have been negotiated.

Export of Services

In view of the large number of categories of service exports with varied nature of business as well as in the environment of progressive deregulation where the matters with regard to micromanagement are left to be decided by the individual financing banks, the banks may formulate their own parameters to finance the service exporters.

Exporters of services qualify for working capital export credit (pre and post shipment) for consumables, wages, supplies etc.• The proposal is a genuine case of export of services.• The item of service export is covered under

Appendix – 36 of the Hand Book (Vol.1)• The exporter is registered with the Export

Promotion Council for services • There is an Export Contract for the export of the

Service• There is a time lag between the outlay of working

capital expense and actual receipt of payment from the service consumer or his principal abroad.

• There is a valid Working Capital gap i.e. service is provided first while the payment is received some time after an invoice is raised.

• Banks should ensure that there is no double financing/excess financing.

• The export credit granted does not exceed the foreign exchange earned less the

• margins if any required, advance payment/credit received.

• Invoices are raised• Inward remittance is received in Foreign

Exchange.• Company will raise the invoice as per the

contract where payment is received from overseas party, the service exporter would utilize the funds to repay the export credit availed of from the bank.

India: POST-SHIPMENT EXPORT CREDIT

Post-shipment Credit' means any loan or advance granted or any other credit provided by a bank to an exporter of goods / services from India from the date of extending credit after shipment of goods / rendering of services to the date of realization of export proceeds and includes any loan or advance granted to an exporter, in consideration of, or on the security of any duty drawback allowed by the Government from time to time.

Types of Post-shipment Credits:(i)Export bills purchased/

discounted/ negotiated.

(ii) Advances against bills for collection.

(iii) Advances against duty drawback receivable from Government

Liquidation of Post-shipment Credit:Post-shipment credit is to be liquidated by the

proceeds of export bills received from abroad in respect of goods exported / services rendered. Further, subject to mutual agreement between the exporter and the banker it can also be repaid / prepaid out of balances in Exchange Earners Foreign Currency Account (EEFC A/C) as also from proceeds of any other unfinanced (collection) bills. Such adjusted export bills should however continue to be followed up for realization of the export proceeds and will continue to be reported in the XOS statement.

Rupee Post-shipment Export Credit

• the case of demand bills, the period of advance shall be the Normal Transit Period (NTP) as specified by FEDAI.

• In case of usance bills, credit can be granted for a maximum duration of 365 days from date of shipment inclusive of Normal Transit Period (NTP) and grace period, if any. However, banks should closely monitor the need for extending post shipment credit up to the permissible period of 365 days and they should influence the exporters to realize the export proceeds within a shorter period.

• Normal transit period' means the average period normally involved from the date of negotiation / purchase / discount till the receipt of bill proceeds in the Nostro account of the bank concerned, as prescribed by FEDAI from time to time. It is not to be confused with the time taken for the arrival of goods at overseas destination.

Post-shipment Advances against Duty Drawback Entitlements• Banks may grant post-shipment advances to exporters

against their duty drawback entitlements as provisionally certified by Customs Authorities pending final sanction and payment.

• The advance against duty drawback receivables can also be made available to exporters against export promotion copy of the shipping bill containing the EGM Number issued by the Customs Department. Where necessary, the financing bank may have its lien noted with the designated bank and arrangements may be made with the designated bank to transfer funds to the financing bank as and when duty drawback is credited by the Customs

ECGC Whole Turnover Post-shipment Guarantee Scheme

The Whole Turnover Post-shipment Guarantee Scheme of the Export Credit Guarantee Corporation of India Ltd. (ECGC) provides protection to banks against non-payment of post-shipment credit by exporters. Banks may, in the interest of export promotion, consider opting for the Whole Turnover Post-shipment Policy. The salient features of the scheme may be obtained from ECGC.

DEEMED EXPORTS - CONCESSIVE RUPEE EXPORT CREDIT

Banks are permitted to extend rupee pre-shipment and post-supply rupee export credit at concessional rate of interest to parties against orders for supplies in respect of projects aided/financed by bilateral or multilateral agencies/funds (including World Bank, IBRD, IDA), as notified from time to time by Department of Economic Affairs, Ministry of Finance under the Chapter "Deemed Exports" in Foreign Trade Policy, which are eligible for grant of normal export benefits by Government of India.

INTEREST ON EXPORT CREDIT• A ceiling rate has been prescribed for rupee export credit

linked to Benchmark Prime Lending Rates (BPLRs) of individual banks available to their domestic borrowers. Banks have, therefore, freedom to decide the actual rates to be charged within the specified ceilings. Further, the ceiling interest rates for different time buckets under any category of export credit should be on the basis of the BPLR relevant for the entire tenor of export credit.

• ECNOS: ECNOS means Export Credit Not Otherwise Specified in the Interest Rate structure for which banks are free to decide the rate of interest keeping in view the BPLR and spread guidelines. Banks should not charge penal interest in respect of ECNOS.

Interest Rate Structure• Pre-shipment Credit (from the date of advance) : (a) Up to 180

days / (b)Against incentives receivable from Government covered by ECGC Guarantee up to 90 days.

• Post-shipment Credit (from the date of advance) : a) On demand bills for transit period (as specified by FEDAI) (b) Usance bills (for total period comprising usance period of export bills, transit period as specified by FEDAI, and grace period, wherever applicable)

Up to 90 days

Up to 365 days for exporters under the Gold Card Scheme.

(c) Against incentives receivable from Govt. (covered by ECGC Guarantee) up to 90 days

(d) Against undrawn balances (up to 90 days)

(e) Against retention money (for supplies portion only) payable within one year from the date of shipment (up to 90 days)

EXPORT CREDIT IN FOREIGN CURRENCY• Pre-shipment Credit in Foreign Currency (PCFC): The

scheme is an additional window for providing pre-shipment credit to Indian exporters at internationally competitive rates of interest. It will be applicable to only cash exports. The instructions with regard to Rupee Export Credit apply to export credit in foreign currency also mutatis mutandis, unless otherwise specified.

Source of Funds for Banks• The foreign currency balances available with the bank in

Exchange Earners Foreign Currency (EEFC) Accounts, Resident Foreign Currency Accounts RFC(D) and Foreign Currency (Non-Resident) Accounts (Banks) Scheme could be utilized for financing the pre-shipment credit in foreign currency.

• Banks are also permitted to utilise the foreign currency balances available under Escrow Accounts and Exporters Foreign Currency Accounts for the purpose, subject to ensuring that the requirements of funds by the account holders for permissible transactions are met and the limit prescribed for maintaining maximum balance in the account under broad based facility is not exceeded.

Post-shipment Export Credit in Foreign Currency• Banks may utilise the foreign exchange

resources available with them in Exchange Earners Foreign Currency Accounts (EEFC), Resident Foreign Currency Accounts (RFC), Foreign Currency (Non-Resident) Accounts (Banks) Scheme, to discount usance bills and retain them in their portfolio without resorting to rediscounting. Banks are also allowed to rediscount export bills abroad at rates linked to international interest rates at post-shipment stage.