The life of an LC

Every LC starts with the buyer, not the bank. Once the buyer in Hamburg and Evelyn agree the deal, he fills in an LC application at his bank. It lists everything the LC must say:

• the amount, the currency and the beneficiary (Evelyn);
• the goods, the Incoterm and the ports;
• the latest shipment date, the expiry date and where documents are to be presented;
• the documents Evelyn must produce.

The bank then asks itself three questions. Can he pay? The LC is counted against the buyer's credit limit, and the bank may ask for margin. Is the import allowed? The bank checks that the goods may legally be imported and that the deal makes sense. Do we know him? Normal KYC and sanctions checks apply.

If all is well, the bank issues the LC. Today it is almost always a SWIFT message to a bank in Evelyn's country, not a paper letter in an envelope. From the moment it is issued, the issuing bank is bound by its promise.

In Bangladesh it works the same way: an importer applies at an AD branch, which checks things such as his IRC and whether the goods may be imported under the Import Policy Order before it opens the LC.

The SWIFT message lands at Evelyn's bank in Dhaka, which acts as the advising bank. It checks that the LC appears genuine (SWIFT messages carry built-in security) and passes it to Evelyn, usually with a short covering letter.

If the issuing bank asks for it, Evelyn's bank may also confirm the LC and add its own promise to pay. A bank is free to say no; it simply tells the issuing bank.

Now comes Evelyn's most important job, and the one most often skipped: read the LC the day it arrives. Can she really ship by that date? Is her company's name spelt right? Can she get every document it asks for? A clause such as "certificate signed by the buyer's agent" puts her payment in someone else's hands.

If something can't be met, she asks the buyer to arrange an amendment. Only the issuing bank can amend the LC, and the change comes through the same advising bank.

An amendment doesn't bind Evelyn until she accepts it, and she must accept it all or reject it all; half an amendment is not allowed. If she says nothing, the documents she later presents will show which version she followed.

With the LC checked, Evelyn makes the T-shirts and ships them by the latest shipment date. The shipping line issues the bill of lading, and its on-board date is the shipment date everyone will look at.

Then she gathers the documents the LC lists: invoice, packing list, bill of lading, certificate of origin, perhaps an inspection certificate. Each must fit the LC, and none may conflict with another.

Next she presents them to the nominated bank, often her own bank in Dhaka. Two clocks are ticking:

• The presentation period. The LC may say, for example, "within 15 days after shipment". If it says nothing and the documents include an original bill of lading, they must be presented within 21 calendar days after shipment.
• The expiry date. Whatever the presentation period says, documents can never be presented after the LC expires.

The clock that runs out first wins. If she ships on 1 May, has 21 days, and the LC expires on 10 May, her real deadline is 10 May.

Smart exporters don't wait for the last day. A late presentation is a discrepancy, and then Evelyn depends on the buyer's goodwill.

The nominated bank now examines the documents on their face: do they fit the LC, the rules and each other? It has a maximum of five banking days after the day of presentation to decide. Days when the bank is closed don't count.

If the documents comply, the bank that has promised (the issuing bank, a confirming bank, or a nominated bank that agrees to act) honours them, in the way the LC says:

• Sight payment: pay now.
• Acceptance: accept a bill of exchange (a draft) and pay it on its due date, say 90 days later.
• Deferred payment: promise to pay on a future date, without a draft.

If the LC is available by negotiation, the nominated bank may pay Evelyn early against complying documents, before the issuing bank pays.

If the documents don't comply, the bank may refuse. It must then send one notice that lists every discrepancy, within those five days. It can't drip-feed problems one at a time. If time allows, Evelyn can correct and present again. Or the issuing bank may ask the buyer whether he will waive the discrepancies. If the buyer waives the discrepancies and the bank pays, the exporter may still be charged a discrepancy fee.

After honouring or negotiating, the nominated bank sends the documents to the issuing bank in Hamburg, usually by courier, and claims its money. The issuing bank checks the documents too, again within five banking days. If they comply, it must reimburse the nominated bank, either directly or through a reimbursing bank it has named. If no bank in Dhaka paid Evelyn earlier, this is when her money is sent.

Now the issuing bank turns to its own customer. The buyer pays, or the bank finances him for a while, and the bank hands him the documents. With the bill of lading in hand, he collects the container. Under a usance LC, he usually gets the documents now and pays on the due date.

Turn the picture around and you see the import side. Evelyn's friend Faruk imports sewing-machine parts into Dhaka, and his AD branch is the issuing bank. When the documents arrive, he retires the bill (or the bank finances him) and takes the documents. His C&F agent uses them to file the Bill of Entry and clear the parts at Chattogram. Some importers use UPAS: the seller is paid at sight, while the importer pays later.