STANDBY LETTER OF CREDIT potx

-is usually the seller or exporter -the customer of the bank who applies to the bank for the standby letter of credit.. -must provide collateral for the bank or have sufficient credit to

STANDBY L/C

Group 7:

• Nguy n Th H ng Nhi ễn Thị Hồng Nhi ị Hồng Nhi ồng Nhi

• Huỳnh Ph H Th m ủ Hồ Thơm ồng Nhi ơm

• Nguy n Hà N Vi ễn Thị Hồng Nhi ữ Vi

• Nguy n Th Mỹ Y n ễn Thị Hồng Nhi ị Hồng Nhi ến

• Đ Ng c Châu ỗ Ngọc Châu ọc Châu

• Đ ng Th Mỹ H ặng Thị Mỹ Hương ị Hồng Nhi ươm ng

• Ph m Ng c Đoan Trang ạm Ngọc Đoan Trang ọc Châu

• Tr n Th y Vân Thanh ần Thủy Vân Thanh ủ Hồ Thơm

• Lê Ng c Huy n Trang ọc Châu ền Trang

Overview of Standby L/C:

• Standby L/C is a guarantee of payment issued by a bank on behalf of a client that is used as "payment of last resort" should the client fail to fulfill a contractual commitment with a third party

• Standby letters of credit are created as a sign of good faith in business transactions, and are proof of a buyer's credit quality and repayment abilities

• The bank issuing the Standby L/C will perform brief underwriting

duties to ensure the credit quality of the party seeking the letter of

credit, then send notification to the bank of the party requesting the letter of credit (typically a seller or creditor).  

• The cost to obtain a standby letter of credit is typically 1-8% of the face amount annually, but the letter can be canceled as soon as the terms of the contract have been met by the purchaser or borrower

Participants

-is usually the seller or exporter

-the customer of the bank who applies

to the bank for the standby letter of credit

-must provide collateral for the bank or have sufficient credit to induce the bank

to issue the instrument

-pay the bank a fee for issuing the instrument

-is usually the seller or exporter

-the customer of the bank who applies

to the bank for the standby letter of credit

-must provide collateral for the bank or have sufficient credit to induce the bank

to issue the instrument

-pay the bank a fee for issuing the instrument

- This is the party in whose favor the instrument is issued He is usually the buyer or importer.

- This is the party in whose favor the instrument is issued He is usually the buyer or importer.

Confirming bank

- This is the bank (usually located near the beneficiary) that agrees (confirms) to pay the beneficiary rather than the issuing bank  

- The beneficiary pays the confirming bank a fee for this convenience  

- The confirming bank then collects from the Issuing Bank the amount paid to the beneficiary.

- This is the bank (usually located near the beneficiary) that agrees (confirms) to pay the beneficiary rather than the issuing bank  

- The beneficiary pays the confirming bank a fee for this convenience  

- The confirming bank then collects from the Issuing Bank the amount paid to the beneficiary.

- This is the bank that represents the beneficiary  

- It may accept the letter of credit and collect it on behalf of the beneficiary Sometimes, it is also confirming bank, but not always.

Characteristics of Standby Letter of Credit

Characteristics

Irrevocable

Independent Documentary

Binding

Standby L/C is an irrevocable commitment, therefore, the applicant cannot amend or cancel his obligations, except the regulations in Standby L/C or the acceptance of those who concern to the above amendment or cancellation

Standby L/C is an irrevocable commitment, therefore, the applicant cannot amend or cancel his obligations, except the regulations in Standby L/C or the acceptance of those who concern to the above amendment or cancellation

Standby L/C is an independent commitment, applicant’s performance of the obligations stipulated in Standby L/C does not depend on: rights or abilities of issuer refunded by applicant, rights of beneficiary honoured by applicant

Standby L/C is an independent commitment, applicant’s performance of the obligations stipulated in Standby L/C does not depend on: rights or abilities of issuer refunded by applicant, rights of beneficiary honoured by applicant

Documentary Standby L/C is documentary, therefore,

issuer’s obligations depend on the presentation of documents and checking the surface of documents

Standby L/C is documentary, therefore, issuer’s obligations depend on the presentation of documents and checking the surface of documents

when it was released, Standby L/C is a binding commitment about the responsibilities of concerning parties, so it is binding on the issuer whether the applicant cancels the rights to issue; or the issuer receives fee; or the beneficiary receives or believes in Standby L/C or amendment or not

when it was released, Standby L/C is a binding commitment about the responsibilities of concerning parties, so it is binding on the issuer whether the applicant cancels the rights to issue; or the issuer receives fee; or the beneficiary receives or believes in Standby L/C or amendment or not

Payment process

1 Applicant and Beneficiary signs commercial contract

2 Exporter asks Issuing bank to open standby LC

3 Issuing bank transfers LC to Advising bank

4 Advising bank transfer standby LC to importer

5 Importer pays 30% value of contract in advance to exporter

6 - If exporter agrees to perform the contract, he will deliver goods to importer

- If exporter cannot product for importer, importer will use standby LC

7 If exporter defaults the contract, importer will asks advising bank to pay.

8 Advising bank pays 35% value of contract to importer (with 5% value of compensation)

9 Advising bank transfers document and LC to Issuing bank to ask the compensation.

10 Issuing bank confirms request, document, LC and transfer money to Advising bank.

11 Issuing bank sends document, standby LC to applicant and asks applicant to the amount which Issuing Bank paid Applicant agrees to pay.

12 Issuing bank debits applicant’s account.

Uses of standby letters of credit

What are benefits of using Standby Letters of credit?

consolidating bank relationships

of similar amounts at regular intervals from the same

supplier

-Providing substantial savings in transaction fees if businesses make purchases

of similar amounts at regular intervals from the same

supplier

Advance payment guarantees

Payment guarantees

Performance guarantees