UPAS LC
The business world is constantly looking for favorable
payment terms in international trade. Everybody wants to position oneself in
upper-side. UPAS L/C is such a mechanism to create win-win situation for all
the parties involved in the international trade; buyer-seller-banker.
One of the biggest problem in trade finance is the different interest between the buyer and seller, which the buyer always want to have longer credit tenor, while the seller prefer to give shorter credit tenor to the buyer. This difference have given financial institution an idea to develop a letter of credit that could accommodate both interest through UPAS L/C.
UPAS
L/C, Usance Payable at Sight, is a derivative from the standard L/C type (Sight
L/C & Usance L/C). It is actually the combination between Sight L/C and
Usance L/C. Simply saying, UPAS is a Usance L/C that is payable sight basis
to
the seller (beneficiary), while the payment settlement from the applicant
(buyer) to the issuing bank will made on at the end of usance term.
So
how does it work? Go through below case to remove confusion:
Company-A is a garment manufacturer in Bangladesh, who on
regular basis import fabric from Company B in China. Company A need to process
the purchased fabric into garments wear, before they could sell and the product
to the end buyer and collect the payment to pay Company B in China, say company
A’s cash to cash cycle is 90 days.
Having said so, the most suitable trade scheme for company A
is to use Usance L/C 90 days. However, company B is not comfortable of the risk
of Bangladeshi Bank / country risk, thus they refuse company A’s request to use
Usance L/C 90 days, instead they are forcing company A to keep using Sight L/C.
In order to accommodate both parties’ requirements, the
issuing bank propose a 90 days UPAS L/C solution to both parties. 90 days UPAS
L/C means that it is Usance L/C 90 days to the applicant (buyer) and it is
Sight L/C to the seller (beneficiary).
Having said so, the issuing bank provides financing to the
applicant (buyer) so the seller could still receive the payment at sight basis,
while the applicant could still enjoy the 90 days credit term from the bank.
Since the issuing bank already paid the seller at sight basis, while they will
only get the principal payment from the applicant (buyer) at the end of usance
term (90 days), thus the issuing bank will charge financing interest to the
applicant(buyer). The payment made by the bank to the seller is final (non
recourse basis), thus it the same as sight L/C for the seller.
We
can save a huge amount of foreign currency by facilitating the importer to
avail UPAS facility from the offshore units of the local banks who are
basically playing dual roles of a foreign reimbursing bank and a discounting
bank without charging any unwarranted fees and charges on the importer. Income
of offshore unit of the local bank is the asset of Bangladesh and contributing
to the GDP of the country.
It
is thus evident that UPAS L/C is very beneficial for all the parties involved
in trade transaction because of its all-encompassing and win-win facilities.
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