International Commercial Terms (INCOTERMS)

INCOTERMS (International Commercial Terms) are a series of international sales terms that are widely used throughout the world. They are devised and published by International Chamber of Commerce (ICC). Given below are few important INCOTERMS used for export price quotation in Letter of credit.
FOB

FOB mean Free on Board. In F.O.B quotation, the price quoted includes cost of goods and all other expenses incurred till the goods are actually loaded on board the ship. This included packing, local transport charges and dock dues including expected profit.

F.O.B. price = Cost of production + Other Incidental Expenses + Profit Margin
C&F

C&F means Cost plus Freight. In C&F the price quoted includes cost of production, incidental charges and freight charges. Here the price includes transport charges till the port of delivery

C&F Price = F.O.B. Price + Freight to the port of destination

C.I.F.

C.I.F. means Cost Insurance Freight. Here the price includes cost of production and all other expenses till the goods reach the port of the buyer for delivery including the Insurance charges.

C.I.F. price = F.O.B. price + Freight + Insurance

Common Terminology in Letter of Credits

Irrevocable Letter of Credit

An irrevocable LC cannot be cancelled or amended without the consent of the parties to the credit.


Confirmed Letter of Credit


The bank in U.K may not agree to discount an LC issued by a certain bank in India, and may insist that the LC is also confirmed by an acceptable bank in U.K. Such an LC would be called a confirmed Letter of Credit.


Revolving Letter of Credit and Revolution of Letter of Credit


There are instances wherein the agreement between the buyer and supplier may stipulate the regular supply of certain quantity of goods, say, every two months. In such cases instead of opening an LC every two months, it would be better to open a LC wherein the terms provide for automatic renewal of the LC for the specified amount. Such an LC would be called a revolving Letter of Credit and the renewal operation is called revolution of Letter of Credit.


Back- to- back Letter of Credit


Opening of a LC on the strength of an existing LC to enable the supplier of later LC to perform. Normally opened in favour of domestic supplier for supply of goods covered by a foreign LC. It is issued by the notifying or negotiating bank of a foreign LC and is in favor of a supplier of finished goods to the beneficiary of a foreign LC.


Red Clause Letter of Credit


An LC that provides for the payment of a portion prior to shipment of goods. Additional facility provided by the buyer to the supplier.


Advising Bank, Correspondent Bank, Confirming Bank, Reimbursing Bank


Consider the following illustration:

A purchaser in Bombay is buying certain goods from a company in say, Calcutta. The supplier in Calcutta would ask the Purchaser to furnish a Letter of Credit. The Letter of Credit would specify all the terms applicable as per the agreement between the Purchaser and Supplier. The Supplier will be named as the beneficiary in the Letter of Credit.

The Supplier needs to be informed that a Letter of Credit has been issued in his favour, so that he may dispatch the goods as per the contract. The issue of the Letter of Credit is communicated to the Supplier through a bank branch in Calcutta. Since the bank issuing the Letter of Credit may not have a branch in Calcutta, the communication may be routed through some other bank. Such a bank is referred to as the
Advising Bank.

In some cases, the supplier in Calcutta may not be satisfied by the Letter of Credit issued by the bank in Bombay, and may ask for confirmation by a recognized bank based in Calcutta as well.

When a confirmation is required, a bank branch in Calcutta may add its confirmation to the Letter of Credit. In the event of the Purchaser not being able to pay for the goods, under the terms of the Letter
FUNDAMENTALS OF TRADE FINANCE 7

of Credit, the bank in Bombay will be liable to pay the supplier. In case a bank in Calcutta has confirmed the Letter of Credit, then even that bank is liable to pay the supplier in case the bank in Bombay is not able to pay. The bank in Calcutta will be called the
Confirming Bank.

Bank may not have offices in all the cities / states. When a bank branch issues a Letter of Credit, and the beneficiary happens to have his office in a city where the bank has no branch, then to carry out the operations like advising the Supplier etc., the bank may enter into a relationship with some other bank which will function as a
Correspondent bank. The two banks may have some agreement on sharing of charges etc.

Negotiating Bank, Reimbursing/Paying Bank

The negotiating bank is the bank that negotiates the documents under the LC. If the LC does not restrict the credit to any particular bank, the beneficiary can negotiate the documents under the LC through any bank. The Negotiating bank is authorized to negotiate the documents and claim reimbursement from issuing bank only if all terms and conditions of LC are satisfied.

The paying bank is the bank on which the bill of exchange, if provided for, in the

Import LC - An Overview

Establishments

Amendments

MT754/Payment Sight

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