The following procedures and precautions are suggested while opening a confirmed irrevocable letter of credit:
1. The applicant should be a customer of the bank who maintains an account with it and is known to be participating in the trade.
2. It should be verified that the outstanding under the letter of credit and bills paid there under but still not released by the customer, together with the amount of the credit now required to be opened do not exceed the limit sanctioned to the customer.
3. The following should be obtained from the customer: (a) Application-cum-agreement for opening the letter of credit; (b) Exchange control copy of the Import Licence if the item to be imported is covered by the negative list; and (c) The sale contract between the exporter. and the importer.
4. The following particulars in the application should be verified for incorporation in the letter of credit: (a) Name and address of the beneficiary, (b) Nature of credit—revocable or irrevocable, confirmed or unconfirmed, transferable or non-transferable, etc. (c) Amount of the credit and currency, (d) Details of goods to be imported, their nature, quality, specification, quantity and unit price, (e) Trade terms—whether the price is on FOB, CFR, or CIF basis, W Details of bills of exchange to be drawn—tenor and drawee, (g) Mode of transport and document evidencing shipment—bill of lading, airways bill, etc, (h) Other documents to be tendered—nature of documents and the number of copies of each document.
(i) Latest date for shipment and for negotiation
(j) Whether partial shipments are allowed.
5. If the item to be imported is covered by the negative list, the exchange control copy of the licence should be obtained. While scrutinizing, the following particulars deserve special attention:
(a) Name of the applicant, (b) Commodity to be imported, (c) Amount. Licences are issued for CIF value. If the import is made on FOB basis, the licence cannot be utilized to its full value. Provision has to be made on the FOB value for insurance at 1%, and for freight at 10% for carriage by sea and at 20% for carriage by air. (d) Currency of letter of credit—whether permissible, (e) Quantity restriction, if any, stipulated in the licence, (f) Last date of shipment. It should not be beyond the validity of licence, and (g) Date of expiry of letter of credit. The payment of imports should be made within six months from the date of shipment. Therefore, the letter of credit should provide for payment within six months from the latest date of shipment allowed in the licence.
6. The sale contract between the exporter and the importer should be verified and a note of verification should be made on the credit application. If the customer is not in a position to submit the sale contract, any one of the following documents may be accepted for scrutiny by the bank: (a) Order together with the order confirmation of overseas supplier. (b) Proforma invoice of overseas supplier duly countersigned by importer. (c) Indent/order from overseas supplier or his authorized agent.
7. If all the provisions detailed above are satisfied, the bank decides on the margin money to be received from the applicant for the letter of credit to be opened. The margin will depend upon various factors such as the credit-worthiness of the i applicant, nature of commodity to be imported, etc.
8. The letter of credit is then prepared and forwarded to the correspondent bank with a request to confirm it. It should be ensured that—(a) the letter of credit is complete and precise in all respects; (b) it stipulates a condition that the bill of lading should indicate name and address of the importer as well as the bank opening the credit; and (c) an endorsement is made on the back of the import licence of the amount of the credit opened, where there is a licence.
9. If the customer so desires, a forward contract may be booked for a suitable delivery covering payment under imports.