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T.O.Lee (Check
Bio) says that:
 As far as our
consultancy is concerned, we do not see any decrease in use of credit in
our global market. In the Middle East use of credits are increased. So
are some USA banks from the news reported.
However, it is sad to see that the bank managers are
getting tougher and tougher jobs in the banks, whether big or small, because
there is a broken strata between old hands and new comers. Young people are
not interested in learning credit operations and they look for fast
promotion. As a result, the managers have to do some follow up and checking
after five to ensure no unpleasant surprises. Some managers apply to HR
department to seek metal therapy. This is a bigger problem than whether
credits are used more or less these days.
Visit T.O.Lee's website:
http://www.tolee.com/
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N.D. George
(Check Bio) says that:
Experience has shown that wherever LC product is
available at a reasonable cost – Middle East, Indian sub-continent and South
East Asia - LC business (between these markets) is thriving and income based
on volume make it worthwhile for banks to be active in this business.
I believe that it has been on the decline in West
Europe and probably USA. In my opinion it is not so much the problem of
discrepancy that has led to this state of affairs. It is the greed of
European bankers that has put off LC applicants from the above markets
to seek alternate modes of financing when dealing with Europe. When it comes
to collecting charges I can say imagination runs wild in the European market.
I do not understand why must banks charge advising commission as a per cent
age of LC value (unconfirmed) and that is exactly what happens in countries
like Germany (I have had one of my customers paying USD7500 as advising
commission!!).
Then there are commissions like
- “taking up commission”,
- “handling commission” (what is the difference
between this two? I don’t want to be the one having to explain and
convince my customer!),
- “supervision commission”,
- “payment commission”.
Add to this
- “advising commission”,
- “confirmation commission”,
- “acceptance commission”
- “discrepancy fee”
- etc.
at rates unheard of in Asian and Middle East
markets; one really ends up taking a big hit. Often the LC issuing
bank’s total charges to applicant turns out to be less than half of that of
the advising bank in Europe while the customer risk is completely borne by
the issuing bank and risk if any taken by the European bank is on the
issuing bank only
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CHEN Jee
Meng
(Check Bio) says that:
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L/C versus Open Account
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The notion,”demise of Letters of Credit (”L/C”)”,
has been floating around for more than ten years. Is the L/C, as a payment
instrument, seeing sunset? Debatable, it seems. Indeed, certain statistics
are showing the increased preference for Open Account trading. Let's examine
the trends:
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Firstly, bulk purchase of
retail and/or "low-value" merchandise.
Take for instance, a huge supermart based in the
United States that is periodically procuring high volume of basic items
for mass-market sales. Is the L/C applicable for the purchase of such
items? For simple illustration, imagine if the supermart were to
stock-up 16 types of coffee powder, say, from 16 different producers. In
which case, would this require 16 L/Cs to be issued? If so, this would
in turn translate into an "impractically" high number of L/Cs issuance
across the respective product segments. Cost-wise, it is definitely not
a cost-efficient choice.
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Secondly, the type of trade.
Oil trading, particularly, the purchase of oil
by the Oil Majors, etc., is transacted on Open Account basis. It is not
a norm for the big boys to issue L/C in favour of the seller.
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Thirdly, inter-company sales
and purchases.
A company established, as a procurement arm, for
its Head Office and/or related companies, would prefer to sell on Open
Account basis rather than issuing L/C. The reason is simple - cost. For
structured trade transactions (i.e. control of both the import and
export leg of the same transaction), there is a tendency for some banks
to issue L/C on the import leg; supported by Open Account sales on the
export leg, where the sale is effected to the Head Office or related
company.
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Fourthly,
the-cost-of-compliance.
Consider this: As a lender, in-principle
approval is given to support a customer's request for a particular trade
deal (of course, acting on good faith in accordance to the information,
as availed by the customer). However, when it comes to the actual
execution, details of the transaction e.g. names of buyers and sellers
are altered (for whatever reasons). The problem arises when the buyer /
seller receives a "positive hit" against, say, Factiva search, on
receipt of the export L/C / on issuance of the import L/C. For
compliance reasons, the deal could be put to a temporary stop. Does the
lender continue or abort the deal? Without doubt, the lender has to make
a business decision. At times, it can be a situation of "between the
devil and the deep blue sea". Compliance reasons may deter some banks
from engaging L/Cs.
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Having identified the above, this does not
invalidate the application of the L/C.
The L/C is still alive-and-kicking, at least,
in the Southeast Asia.
Similarly, where structured trade and commodity
financing ("STCF") is concerned, L/Cs are still very much in demand. The
principle tenets of STCF are (i) self-liquidating and (ii) secured source of
repayment. The export L/C from the ultimate buyer constitutes an acceptable
source of repayment [note: but it is not to be confused as a confirmed and/or
even a security, per se. Payment under L/C is contingent on documentary
credit compliance and there are simply too many factors to create
discrepancies.].
And on the import leg, unless the degree of trust
between the ultimate supplier and the middleman is very strong, it is
unlikely that the supplier would want to commence loading unless the import
L/C is duly received and advised.
Generally, the L/C is a 'beautiful' instrument.
In the hands of creative financiers, it can turn into a wonderful financing
tool protecting the interests of the genuine trading counterparties as well
as the financiers.
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By clicking this link you will open the Bolero
Discussion document: Letter of Credit discussion. Here Bolero argues for a
decline in the use of LC - and basically argues that the party to blame for
that is the banks. Interesting and thought provoking