A Letter of Credit is an undertaking by the bank issuing it to pay the beneficiary of the credit provided stipulated documents are presented and other terms and conditions of the LC are complied with. It is the preferred mode of settlement between a buyer and a seller under the following circumstances:
In such cases, the seller would like a bank to provide assurance of payment. As an instrument of international trade, It is one of the most secure methods for a seller to be paid. Besides credit risk considerations, LCs is the customary business practice for long distance trade and a particularly important commission earning service for any bank.
The Letters of Credit (LC) module constitutes a part Oracle FLEXCUBE’s comprehensive trade financing system. Together with the Bills and Collections module, it automates the entire gamut of trade financing. While the LC module handles the opening, advising and amending of all types of LCs, the BC module handles collection of bills which may or may not be presented under LC. The documents required under an LC are maintained in the BC module. Once an LC is opened, the documents presented by the beneficiary and LC negotiation are also processed in the BC module.
The LC module primarily supports the processing of all types of documentary and clean LCs. It can handle all activities during the lifecycle of an LC. This includes the generation of messages and advices for all the applicable events, and the update of account balances. The system also handles the collection of various commissions and charges defined for an LC.
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In an effort to sharpen the competitiveness of your trade-financing department and to empower your bank to handle a high volume of credit transactions Oracle FLEXCUBE is designed with the following features:
The following are the operations supported on an LC:
Thus, your bank can perform one of the following roles:
In addition to amendment of the terms of an LC such as the expiry date, the amount, the latest shipment date, etc., you can amend the operation on an LC as follows:
Appropriate messages, advices, and covering letters are generated for these operations. These are listed in an annexure in this manual. The SWIFT messages generated for the different types of LC are listed in this chapter.
In the LC module, the method of collecting commissions and levying charges is flexible. Commissions can be collected for the initiation and amendment events of an LC. The definition of commission rules facilitate the uniform and efficient application of commission across all LCs processed under a product.
Commissions can be collected in advance or in arrears, periodically or non-periodically. You can choose to accrue commissions at a regular frequency (daily, monthly, quarterly, half-yearly or annually). Similarly, the frequency of liquidation of periodic commission can be varied. In Oracle FLEXCUBE various charges such as handling charges, SWIFT charges, etc. can be processed.
The commissions and charges can be collected from any party, and if necessary, debited from a receivable account and liquidated subsequently.
An LC being a very flexible payment mechanism can be made available to the customers of your bank in a number of popular variations.
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You can process a Red Clause LC wherein you can provide for anticipatory drawings. In such a case, the confirming bank or any other bank is authorised to make advance payments to the beneficiary, before the presentation of the documents.
While capturing the details of an LC, you can indicate whether it is transferable. This information is part of the instrument generated for an LC.
You can open an LC and choose to make it available again in its original amount after the goods have been shipped, documents presented and credit is settled. Such an LC is a revolving LC. Under a revolving LC the amount is reinstated or renewed without any specific amendments to the LC. A revolving LC may be revocable or non-revocable, and can revolve in relation to the following:
This facility can be utilized when a supplier wishes to make repetitive shipments over a period such as a year. The LC can have an automatic reinstatement clause, which provides for continuing the renewal of availability. You also have the option to manually reinstate an LC. The credit may require approval of the opening party before it becomes available again.
Oracle FLEXCUBE allows the processing of a sight or usance payment against an LC.
An LC can be processed against cash collateral. Oracle FLEXCUBE provides you with the facility to calculate the cash collateral either as a percentage of the LC amount or as a fixed amount. Cash collateral advice will be generated for its collection. When the LC amount is amended, you also have the option of adjusting the collateral amount accordingly.
You can process the availments against an LC either through the LC module or through the bills module of Oracle FLEXCUBE. Availment charges can be levied and cash collateral adjusted, during an availment.
Information on the LCs processed and the static maintenance done for the module is available in the form of reports. These reports can be printed, spooled on to a disk file or displayed on the screen.
The following are some of the reports available:
Refer the chapter titled ‘Reports’ in this User Manual for details about reports.