Back to Back Letter of Credit
Before discussion about Back to Back Letter of Credit, let us explain what we mean for letter of credit. In simple words, a letter of credit is a written undertaking given by a bank on behalf of an importer to pay the value of the goods or services to the seller on fulfillment of some terms and conditions. So letter of credit is a media of transaction or a means of payment of trade. The Back to Back Letter of credit is a credit issued by the bank based on another original credit (i.e. Master L/C) in favor of a new beneficiary. Master LC beneficiary is to procure raw materials or the goods specified in the credit from another supplier or manufacturer by opening a new LC. The second credit is called Back to Back credit and the original credit is called master LC/original LC/mother L/C. The Back to Back L/C is opened in conformity to the terms and conditions of the Master L/C except value, shipment period and validity. The Back to Back L/C is an independent L/C though it is opened on the strength of another LC. In our country, export oriented garments industries operating under bonded ware house system are availing Back to Back LC facilities for import/ procurement of raw materials. The ADs may open Back to Back LCs against Master LC received by export oriented industrial units operating under bonded ware house system, subject to observance of domestic value addition requirements prescribed by Ministry of Commerce from time to time. As per instruction of our Central Bank, the schedule Banks of our country are tendering Back to Back LCs at Nil margin to the manufacturers and exporters of readymade garments of our country again lien of Export LCs opened in their favor for procurement of raw materials i.e. fabrics and accessories.
Back to Back L/C Documents Requirement:
- Valid Bonded ware house Licence.
- Incorporation certificate of Joint stock company (in case of Ltd co).
- CIB Report.
- Quota allocation letter for quota item.
- Trade License.
- Letter of transferring bank issued to L/C issuing bank confirming
execution of transfer. - Valid IRC & ERC.
- No objection Certificate from previous Banker.
- BGMEA Membership certificate.
- Memorandum and Articles of Association.
- Tax Identification Number.
- Prayer for opening of back to back L/C.
- LC application form duly filled and signed.
- LCA form duly filled & signed.
- Indent/Proforma invoice.
- Insurance cover note with cash money receipt (In Case of foreign B.B)
- IMP form 1 Set.
- Original export LC.
- Freight declaration from shipping company (if terms of delivery are CFR).
- Indemnity.
- Any other documents (if required).
At this stage, the dealing officer must scrutiny the master LC and that there is no harmful clause in the LC. If any defective point clause is being observed in master LC, the bank must ask for amend the same.
Without obtaining necessary amendment, bank should not issue the BTB LC.
Back to Back to Letter of Credit Issue:
On being satisfied on the above mentioned terms and condition, bank may proceed for opening of Back to Back LC after incorporating LC number from the LC opening register. Then LC to be sent through SWIFT or by air mail After Opening of the Credit:
- Export LC must be marked under lien
- Quota allocation letter must be marked under lien and particulars of B.B LC to be endorsed on the Back of the allocation letter.
- LC copy to be sent to reimbursing Bank with authorization letter.
Vouchers to be Passed at the Time of Opening Back to Back LC:
Dr. Customers liability on LC. (B.C. selling rate)
Cr. Banker’s liability on LC
Dr. Party Account
Cr. Income account comm. on LC
Cr. Income account Cable/Telex charge/SWIFT charges.
Cr. Income account postage charges.
Cr. Income account (IMP forms/LCAF) Misc charges.
Back to Back LC on Sight Basis (EDF):
So far we discussed, it was usance BB LC, because we are to meet up our
import liabilities out of realized export proceeds. That is why the master LCs are to be choosen at sight basis and corresponding BB LC are to be opened at usance basis. But BB LCs may also be opened at sight basis. In that case the source of fund is to borrowed from central bank under Export Development Fund Scheme.
Tenor of the Draft Back to Back Letter of Credit:
Generally a Back To Back Letter of credit is of tened on DA basis ranging
the usance period from 30 days to 180 days depending on the sales contract between the supplier/exporter (beneficiary of the Back To Back L/C) and importer/exporter (beneficiary of the original credit).
Lodgment of Documents by Letter of Credit Issuing Bank:
Upon receipt of the documents either from negotiating bank or remittance
bank, the LC are drawn in compliance with the credit terms. If documents
issuing bank examines the documents to see if the documents are found in order, the LC issuing bank will lodge the documents to IFBC (Inward Foreign Bill for Collection) after duly accepted by the applicant.
Settlement of Back to Back Letter of Credit
As told earlier, the back-to-back liability will be adjusted out of the export
proceeds. The applicant/exporter manufactures garments upon receipt of fabric and ships goods to the importer and presents documents to his own bank or advising bank for negotiation under the original credit. The bank negotiates the documents as they find the documents in order and sends the documents to the issuing bank of the original credit or nominated bank as per L/C. The issuing bank of the original credit or nominated bank receives the documents from the negotiating bank. Upon receipt of the documents, the examine documents and if they find the same in order they makes payment of the bill (import bill) to the bank as instructed by the negotiating bank and notification of the payment is conveyed through SWIFT. The negotiating bank realizes the export proceeds as credited to NOSTRO account. On maturity date of the IFBC or when the fund is available in FBPAR A/C whichever is earlier, makes payment of the IFBC and records the date of payment of the IFBC in the IFBC register.
