Caselet - LC

M/S Auto India is a public limited company; they manufacture SUVs (sports utility vehicle),
in technical collaboration with General Motors of USA. The company has established their
manufacturing base at Ranjangaon in Pune. They have acquired an area of 250 acres and the
total project cost is estimated at Rs 1500 crores. As per the projections, the company is slated
to achieve a 25% market share in the Indian market, within a period of two years.

Out of the total project cost, 49% is brought in by General Motors and the rest is tied up with
financial institutions, international banks and Indian banks. The working capital is financed
by a consortium of banks in which Global bank, Pune branch, is the leader. The company
imports many parts of the car engine in a CKD (completely knocked down) condition from
General Motors, Detroit, after establishing import letters of credit through its main bankers,
Global Bank, Pune Branch.

M/S Auto India approached Global Bank, Pune for opening of import letter of credit as
per UCP ICC 600 for USD 100,000, on sight basis, in favour of General Motors, Detroit.

Type of credit - Irrevocable negotiable

Application - UCP ICC 600
Applicant - M/S Auto India, Pune, India
Beneficiary - M/S General Motors, Detroit, USA
Issuing Bank - Global Bank, Pune, India
Advising Bank - The American Bank, New York
Negotiating Bank - The American Bank, New York
Reimbursing Bank - International Bank, New York
Availability - Negotiable at sight
Expiry - At the counters of The American Bank, New York
Amount - USD 100,000
Merchandise - Car engine parts
Quantity and price - 50 units @ USD 2000 per unit

The journey of the LC

Issuing Bank
Global Bank, Pune issued its irrevocable negotiable credit through its head office in Pune
since Global Bank co-ordinated all its accounting and communication functions at its
head office. The Bank’s head office transmitted the credit through Swift network as
instructed by its Pune branch to General Motors, Detroit, through The American Bank,
New York.
Advising Bank
The American Bank, New York advised the credit to General Motors, Detroit on receipt
of the swift transmission.
Credit
Along with other conditions, the credit clearly stated that the negotiating bank was to
forward the documents directly to Global Bank’s head office at Pune.

Beneficiary
After export of the consignment, General Motors, Detroit presented the documents under
the credit to The American bank, New York.

Negotiating Bank
The American Bank, New York, examined the documents presented by General Motors
and determined that they were in compliance with the terms and conditions of the credit.
The American bank negotiated the documents and forwarded the documents, as per the
credit terms, to the HO of Global Bank in Pune and claimed reimbursement from
International bank, New York.

Reimbursing Bank
International Bank, New York honoured the reimbursement claim by crediting the current
account of the American Bank, New York and debiting the account of Global Bank, Pune,
in its books.
Issuing Bank Head Office
Global Bank’s Head Office, at Pune, received the documents and after internal
registration of the documents, forwarded the documents to its Pune Branch by inter-office
mail.
Issuing Bank Branch
On receipt of the documents by the Pune branch of Global Bank, they examined the
documents and determined that they were in compliance with the terms and conditions of the
credit.
Applicant
Auto India requested for copies of the documents to be forwarded by fax and after reviewing
the same, they proceeded to take charge of the consignment at the pre-decided port.

Caselet- Green Clause LC

Mr. Mac from Canada is buying wheat worth USD 10,000.00 from Mr. Shiv from India. Mr. Shiv
requests Mr. Mac to issue a green clause letter of credit with an advance payment of USD 5000.00
(i.e. 50%). Mr. Mac agrees and applies for green clause letter of credit with his bank – Bank of
Canada

Importer/Buyer – Mr. Mac from Canada

Exporter/Seller – Mr. Shiv from India

Green clause letter of credit issuing bank – Bank of Canada

Advising bank – Bank of India

Following is the detailed process for the above example –

The sale transaction is agreed upon.

1.On request of Mr. Mac, Bank of Canada issues Green Clause Letter of Credit of USD 10,000.00 in
the name of Mr. Shiv (beneficiary).

2.Bank of India advises the Green Clause Letter of Credit received from Bank of Canada to Mr. Shiv

3.Mr. Shiv the wheat that is to be shipped in the warehouses of Mundra Port (Port of origin) of India.

4.Mr. Shiv submits the advance payment document, i.e. written undertaking, receipt and document of
title to the Bank of India

5.Bank of India checks these documents and sends it to Bank of Canada

6.Bank of Canada checks the advance payment documents and informs Mr. Mac that the documents
have arrived

7.Mr. Mac provides an undertaking to Bank of Canada that he will pay the 50% advance i.e. USD
5000.00 to the Bank of Canada in future.

8.Bank of Canada pays USD 5000.00 to the Mr. Shiv through Bank of India. Which means Bank of
India receives the payment from the Bank of Canada and notifies Mr. Shiv.

9.Upon receiving the advance payment, Mr. Shiv starts shipment procedure and ships the goods to
Mr. Mac.

10.Mr. Shiv submits the shipping documents such as invoice, packing list, bill of lading, etc. to Bank of
India

11.Bank of India checks the shipping documents and forwards it to Bank of Canada

12.Bank of Canada checks the documents and informs Mr. Mac that they have received the shipping
documents.

13.Mr. Mac makes the payment of USD 10,000.00 to the Bank of Canada (100%) + plus pays interest
for the 50% advance payment that has been paid by Bank of Canada earlier.

14.Bank of Canada remits the remaining unpaid portion of USD 5000.00 (50%) to the Mr. Shiv
through Bank of India.

15.Bank of India receives the payment of USD 5000.00 and further remits this payment to Mr. Shiv’s
account

16.Using the shipping documents, Mr. Mac clears the goods from the shipping line.
 Caselet- Revolving LC

Mr. Cho from China is a manufacturer of ball pens and is a regular supplier to Mr. Will who is based in
the UK. They decide to have a transaction with a revolving letter of credit. On January 1, 2018, Mr.
Will obtains a revolving letter of credit of USD 60,000.00 to be drawn each month by USD 10,000.00
for the next 6 months in the name of Mr. Cho.

Following is the line of transactions –

Month Transactions on the part of Mr. Cho Payment through revolving letter of credit

Goods worth USD 10,000.00 manufactured

January 2018 Payment received USD 10,000.00
and shipped

Goods worth USD 3,000.00 manufactured and

February 2018 Payment received USD 3,000.00
shipped

Goods worth USD 4,000.00 manufactured and

March 2018 Payment received USD 4,000.00
shipped

Goods worth USD 12,000.00 manufactured but

shipping of only USD 10,000.00 allowed. So
April 2018 Payment received USD 10,000.00
goods of USD 10,000.00 shipped and
remaining goods kept in stock

Goods worth USD 8,000.00 manufactured and

May 2018 goods worth USD 10,000.00 shipped (USD Payment received USD 10,000.00
8000.00 of May + USD 2000.00 of April)

Goods worth USD 10,000.00 manufactured

June 2018 Payment received USD 10,000.00
and shipped

End of June 2018 Revolving letter of credit expired

Further, a revolving letter of credit based on time can be of two types as follows –
Cumulative

In a revolving LC based on time, if it is the cumulative type, the previous unused L/C limits can be
used in future months. In the previous example, if Mr. Cho doesn’t ship any good in the month of May
2018, then he can ship goods worth USD 20,000.00 in the month of June 2018.

Non-Cumulative

In a revolving letter of credit based on time, if it is the non-cumulative type, then the previous unused
L/C limits cannot be used in future months. In the previous example, if Mr. Cho doesn’t ship any good
in the month of May 2018, still he is allowed to ship only goods worth USD 10,000.00 in the month of
June 2018. The USD 10,000.00 unused limit of May 2018 becomes void.

Caselet- Back-to-Back LC

Assume that Company A is in the U.S. and sells heavy machinery. Broker B, a trading firm based in
London, has learned that Company C, which is located in China, wants to purchase heavy machinery
and has managed to broker a deal between the two companies. Company A is eager to sell but does
not want to take on the risk of default of payment by Company C. Broker B wants to ensure that the
trade is made and that it receives its commission.

Back to back LCs can be used to make sure the transaction goes through. Company C will go to a
well-known financial institution in China and get it to issue an LC with Broker B as beneficiary. In turn,
Broker B will use that LC to go to its own well-known financial institution in Germany and have it issue
an LC to Company A.

Company A can now ship its heavy machinery knowing that once the transaction is complete, it will be
paid by the German bank. The broker is also assured of being paid. The credit risk has been removed
from the transaction.

Caselet- Transferable LC

Kira Ltd, a German company places an order to Sim Ltd., an American company. Sim Ltd. requests
Kira Ltd to issue a Transferable Letter of Credit so that it can avail credit facility from its supplier on
the basis of such letter of credit. Kira Ltd. requests its bank to issue Transferable Letter of Credit. The
bank agrees to the request of Kira Ltd., Sim Ltd. can issue the Transferable Letter of Credit to its
supplier i.e., the secondary beneficiary.