Did you know that over 95 per cent of international trade is transacted with the help of Letter of Credits (LCs)? But only about 25 per cent of the documents submitted under LC get negotiated promptly. The reason? Discrepancies. And you could be forced to pay more than Rs. 1000 per discrepancy!

A workshop held in Bangalore on October 21 threw light on how to save money while dealing in LCs. The workshop was organized by Synergy Management Services and was conducted by  M S Vadiraja, a faculty member at the staff training college of Vysya Bank.

According to Vadiraja, if a businessman wishes to open an LC for a deal, the first thing he should do is to read the business contract carefully. “The mistakes start from this point, many a time the LC application is filed without proper scrutiny of the contract. This leads to discrepancies at the application level itself,” he said.

If you are approaching the bank for the first time, it is very likely that the bank will charge you some margin money that could even be 100 per cent of the LC amount. Once the bills are cleared, you get this money back. But even in this mechanism you stand to lose – the interest on the margin money. Hence, whenever you pay the bank margin, demand that the money be kept in a fixed deposit account.

According to Vadiraja, most businessmen do not read a note that they sign with the bank when applying for an LC. This note seeks to absolve the bank of any discrepancies that might occur during the transaction. It is advisable for the businessman to first get the document in hand before signing this note. Otherwise the bank cannot be held responsible even for mistakes that it made during issual of LCs.

One way of getting over this problem is finding out whether the bank operates a SWIFT account. SWIFT – Society for World-wide Interbank Financial Telecommunications – is an electronic network of banks all over the world. LC messaging through SWIFT is much cheaper than the conventional methods. A SWIFT transmission is likely to cost the businessman Rs 1500 while the conventional mode of mailing or telexing would cost him nearly the double, said Vadiraja.

While filing an LC application, the businessman should specify the seller’s banker. The reason for this is that banks have relations with almost all the banks in the country that the businessman is importing from. In order to spread their business, banks might route the transaction through another bank that will also charge commission. According to Vadiraja, in some cases, the transaction fee could be as high as $25 per transaction.

If the deal has to go through multiple transactions due to discrepancies, the amount of money spent on this unwarranted negotiation could run into thousands of rupees. The reason for this is that, the importer would have to pay a commission both to the opening banker as well as the negotiating banker.

Speaking about putting down the terms for insurance, Vadiraja claimed that it should be put at 110 per cent of the value of the goods. This is due to the fact that even if the goods is lost in transit, the importer would still have to pay the freight charges which roughly amounted to 10 per cent of the transaction value.

The workshop also discussed other legal fine print regarding LC. If an importer opened an LC account for a specific transaction, the contractual obligation on fund transfer rests between the opening bank and the beneficiary. Usually if the Bill of Exchange is not cleared within 90 days, and this is especially in cases like Usance LCs, a stamp duty ranging from Rs. 1.5-2.5 per Rs. 1000 is charged on the applicant (importer). “You need not pay this amount, the Bill is drawn on the bank and not the importer,” said Vadiraja.