UPAS (Usance Paid At Sight) LC
The best way to understand the process is to follow it from beginning to end.
The applicant and the supplier or exporter agree on terms of sale where the beneficiary will be paid at sight.
A letter of credit is issued on the request of applicant and asking to finance the transaction for 180 days sight.
The issuing bank issues the UPAS letter of credit requiring the draft at 180 days locate drawn on the repaying bank and expressing that the recipient is to be paid at locate with all premium charges for the record of the candidate. The letter of credit will likewise express the repaying bank which is ordinarily the neighborhood office of the issuing bank. The issuing bank will likewise send a repayment approval with a similar installment terms as the letter of credit to the repaying bank. The approval will likewise ask for the repaying bank to acknowledge and markdown the draft according to an understanding between the issuing bank and the repaying bank.
Given that the recipient will be paid on a sight premise, they dispatch the products/consignment and present the expected documents to their local bank.
The local bank examines the documents and if the documents are in order proceeds with the reimbursement claim as follows:
- The original documents except for the draft are forwarded to the issuing bank
- The draft plus a cover letter is sent to the reimbursing bank.
The reimbursing bank will get the draft and act in agreement to the repayment approval by accepting and discounting the draft. The face measure of the draft is then sent to the beneficiary’s bank. Funds for the payment will come from a long term suspense account of the reimbursing bank. The reimbursing bank will then contact the issuing bank and let them know that the draft was presented, accepted and discounted. They will also let them know the maturity date of the draft and all fees associated with the acceptance and discount of the draft.
The issuing bank receives the message from the reimbursing bank and the documents from the beneficiary’s bank. The issuing bank examines the documents, and provided the documents comply, advises the applicant of the maturity date and all fees. The issuing bank also provides the applicant with the documents so that the applicant can obtain the goods.
The beneficiary’s bank, having received the funds from the reimbursing bank deducts any fees and remits payment to the beneficiary.
180 days after sight, the issuing bank provides the reimbursing bank funds to cover the payment of the letter of credit plus the fees for the UPAS draft (the UPAS draft fees may be paid up front, depending on the agreement between the issuing bank and the reimbursing bank).
180 days after sight, the issuing bank collects the draft amount plus all fees from the applicant (the fees may be collected up front depending on the agreement between the issuing bank and the applicant. – It is important to note that the payment from the issuing bank to the reimbursing bank is separate from the payment from the applicant to the issuing bank, as the reimbursing bank is taking on the risk of the issuing bank, and it is the obligation of the issuing bank to pay the reimbursing bank from its own funds even if payment is never received from the applicant.
OK, so that’s the basic timeline of how it works. Now the big question is why do they do it this way and who gets what benefits.
1. Obviously this is the best scenario for the beneficiary, as they do not have to provide financing terms within the letter of credit and wait for payment. They get their invoice amount up front. This is also the easiest way for the beneficiary to price the goods, because if they had to wait 180 days for the funds, the price would go up.
2. The applicant also benefits from this scenario in a couple of way.
a. They get financing of 180 days
b. The unit price of each good sold is lower, so the amount of import duties may be lessened.
c. They have a happy supplier who will work with them
d. They can get a good rate on the discount as the regulations in the discounting country could be less restrictive.
3. The reimbursing bank benefits by having added business. They collect the acceptance and discount fee.
4. The issuing bank benefits because they are able to provide this service to the customer, and the discounted amount is subject to different local regulations (i.e. Reserve requirements) since they have not released any funds for a loan.
Note That: Despite the tenor of payment is 180 days from the date of acceptance the payment will be made at Sight Basis.