Export LC Discounting
Exports Letter of Credit Discounting is actually a short-term credit facility offered by the banks to the clients. In this process, the banks or NBFCs purchases all the documents or bills produced by the client and which are backed by LCs and pay the money to the client against discounting interest for the usance period as per the terms of LC.
How it Works
- Before getting LC , Exporter shares basic details of trade with www.lcbiding.com to get quote for Export LC Bill Discounting.
- Selection and acceptance of LC discounting rate and bank by the Client
- Basic credit information, KYC, details of counterparties, LC issuing banks and exporter business background and any additional information that might be specifically required from Exporter.
- One-time approvals are generally needed form LC discounting Bank. For each transaction, the financing bank's details (and clauses if any) will need to be incorporated into the LC. It is strongly advised to pre-discuss each transaction to avoid issues later.
- Once LC is received by discounting bank , Exporter will ship the goods and submit the trade & other related documents required under LC.
- Discounting Bank will forward the document to confirming bank or LC issuing bank as per the terms of LC
- Buyer will give acceptance to LC issuing bank once trade documents are received by them and considered proper.
- Discounting bank / Confirming bank will discount the LC and credit the account of Exporter after deducting interest and other charges for usance period of the LC.
What is Export LC bill discounting?
It is discounting of export bills / invoices under a usance Letter of credit. This discounting is done on a post acceptance basis (in other words, after acceptance to pay on due date has been received from the LC issuing bank). Given the risk assumption is on the LC issuing bank, financier needs to have some credit appetite on the issuing bank. Funds are made available to exporters bank via banking channels.
How is Export LC bill discounting (LCBD) different from Factoring?
Export LC Bill Discounting refers to discounting of export documents (bills or invoices) under a Letter of Credit wherein the discounting bank assumes the risk of the LC issuing bank. Factoring, on the other hand, refers to discounting of export documents that are not under a Letter of Credit. In other words, Factoring is done for documents against acceptance or where documents have been sent directly to the buyer and the financier takes risk on the buyer.
Do we need to open an account with the Export LC Bill Discounting bank?
No, however KYC and basic credit check and internal approvals are required to be done with the discounting bank. The discounted proceeds will be remitted to the existing working capital banks.
Can we obtain financing for pre-shipment if the transaction is backed by a Letter of Credit?
Yes, pre-shipment finance can be availed as LC is treated as a proof of an order. However, pre-shipment finance is dependent on the borrower's credit and therefore the financier's risk is on the borrower (and not on LC issuing bank thus the borrower will need to be a client of the bank). Pre-shipment finance may be extended by the exporter's bank only.
What is the procedure for availing Export LC Bill Discounting?
One-time approvals are generally needed to on-board a client with the financier which requires basic credit information, KYC, details of counterparties, LC issuing banks and business background and any additional information that might be specifically required for a customer. For each transaction, the financing bank's details (and clauses if any) will need to be incorporated into the LC. It is strongly advised to pre-discuss each transaction to avoid issues later.
What are the things to keep in mind prior to availing the financing?
There are a few factors that determine the acceptability and pricing of the transaction. These are
- LC issuing bank - If it is a well rated bank, interest rate will be better. If it is an unknown small bank, the financing bank may decline the transaction.
- Country of the LC issuing bank - The rating of the country plays a role in the overall pricing (especially if confirmation is to be added). Transactions involving sanctioned countries will be declined
- Tenor of the post shipment credit - LIBOR will change depending upon the tenor, as might the spread.
Do we require credit limits to be in place with Export LC discounting bank?
Some basic credit check including KYC will be done by the bank. However, as the risk assumption is on the LC issuing bank, generally speaking, credit limits are not required to be in place. Some banks may put in place some credit limits to protect themselves against commercial disputes etc. Therefore, it would depend from financing institutions to financing institution.