Modes of Payment for Imports

MODES OF PAYMENT FOR IMPORTS Bangko Sentral ng Pilipinas increasingly liberalized the acceptable modes of payment for imports and exports under a succession of new regulations provided that the commodities to be imported or exported are not classified as prohibited or regulated which requires special clearance from the government agencies concerned. For monitoring purposes , the BSP requires the pre-registration of imports under Documents against Acceptance(D/A) and Open Account(O/A) arrangements before an importer can obtain the required foreign exchange from the banking system for payment. Export payment terms vary from Cash in Advance to Open Account.Commercial banks may sell foreign exchange to service payments for imports under the following arrangement without prior Central Bank approval direct remittance, letters of credit, documents against acceptance, open account and documents against payment. Other arrangements not involving payments using foreign exchange are allowed without the need prior Central Bank approval. These include self-funded(no dollars) imports which are funded from importers own foreign currency deposit accounts or those sent by suppliers abroad for which no payment in foreign exchange will be made as well as importations on consignment basis. These refer to importations by export producers of raw materials and accessories/supplies from foreign suppliers abroad for the manufacture or processing of products destined for export to said foreign suppliers/buyers. Commercial banks may sell foreign exchange to service payments for imports under any of the following arrangements without prior CB approval subject to the provisions of Section 9 to 12 of CBP Circular 1389(April 13,1993)

1. Letter of Credit (L/C) (Sec 9, Central Circular No.1389,April 13,1993) A document issued by a bank per instructions by a buyer of goods, authorizing the seller to draw a specified sum of money under specified terms usually the receipt by the bank of certain documents within a given time. Letter of Credit is abbreviated as an LC or L/C and often is referred to as a documentary credit(abbreviated as DC or D/C) or simply as credit(as in the UCP 500 and UCP 600) The English name of “ letter of credit” derives from the French word “accreditif”, a power to do something which in turn is derivative of the Latin word “acrreditivus”, meaning trust.This in effect reflects the modern understanding of the instrument.

Letter of credit are classified into two: 1.Commercial Letter of Credit- issued to finance a transaction, they may be negotiable or nonnegotiable, confirmed or unconfirmed, documentary or clean, cumulative or non-cumulative. 2.Travellers’ letter of credit which are issued to provide the traveler with needed en route. Related to letters of credit are trust receipts no governed by the Trust receipt Law under Presidential Decree No.115 Commercial Letter of Credit A Letter of Credit is a written undertaking by the bank given to the seller at the request of the buyer to effect payment of a stated sum of money within a prescribed period of time and against stipulated documents.  L/C provides a convenient and secure means to execute international commercial transactions. It ensures payment when the terms and conditions have been met.  L/C gives protection to both parties involved since the seller must present documents evidencing shipment of goods before he can collect payment from the issuing bank while the buyer will have to pay the bank first before he can get the shipping documents needed to release the goods. Essential conditions of letters of credit  To be issued in favor of a determined person and not to order.  To be limited to a fixed and specified amount or to one or more indeterminate amounts but all within a maximum sum the limit of which must be exactly stated Requirements for Opening L/C All L/Cs must be opened on or before the date of shipment with maximum validity of one(1) year. Likewise, only one L/C should be opened for each import transaction.For purposes of opening an L/C, importers shall submit to the commercial bank the following documents: a. The duly accomplished L/C application b. Firm offer/proforma invoice which shall contain information on specific quantity of the importation, unit cost and total cost, complete description/specification of the commodity and Philippine Standard Commodity Classification statistical code. c. Permits/clearances from appropriate government agencies whenever applicable d. Duly accomplished Import Entry Declaration(IED) Form which shall serve as basis for payment of advance duties as required under Presidential Decree 1853 Amendments of L/Cs L/C amendments need not to be referred to the Central Bank for prior approval. However, amendments extendin the total validity period of an L/C for more than one (1) year, if payment of the L/C is to be sourced from the banking system, shall be referred to the Central Bank for prior approval.

Negotiations of L/Cs\

L/C shall be negotiated in accordance with the terms and conditions set forth in the L/C and shall be governed by the Uniform Customs and Practices on Documentary Credit.

Other Types of L/C 

Standby L/C A Standby L/C is a guarantee from the Bank in favor of the beneficiary for the fulfillment of a contract. It is similar to a performance bond or bid. In issuing a standby LC, the bank gurantees the performance of its client’s specific act to the beneficiary of the LC.This special type of LC does not involve the movement of goods. A Guarantee of Payment It is an L/C in which the issuing/opening bank guarantees payment of the obligation in case of failure of client to comply with certain specified requirements or in case of default in payment by the client. Release under Trust Receipt Agreement It is a contract between the bank and the importer whereby the goods imported and consigned to the bank are released to the importer under trust receipt in order that the same goods maybe sold and the obligation arising out of the issuance of the letter of credit be fully liquidated.(the seller can get hold of the goods under loan and use the proceeds to pay his obligation to the bank)

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Back to Back L/C: A new letter of credit issued to another beneficiary on the strength of a primary credit. The second L/C uses the first L/C as collateral for the bank.Used in a three party transaction.

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Clean L/C: A letter of credit that requires the beneficiary to present only a draft or a receipt for specified funds before receiving payment

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Deferred Payment L/C: A letter of credit issued for the purchase and financing of merchandise, similar to acceptance type letter of credit, except that it requires presentation of sight drafts payable on an installment basis over a period of time which is usually more than one(1) year.

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Irrevocable L/C: An instrument that once established cannot be modified or cancelled without the agreement of parties concerned.  Confirmed L/C: An L/C guaranteed by both the issuing and advising banks of payment so long as seller’s documents are in order and the L/C terms are met. Only applied to irrevocable L/Cs.The confirming bank assumes the credit risk of the issuing bank.

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Non-cumulative L/C: A revolving letter of credit that prohibits the amount not used during the specific period from being available afterwards.

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Restricted L/C: A condition within the letter of credit which restrictys its negotiation to a named bank.

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Revocable L/C: An instrument that can be modified or cancelled at any moment without notice to and agreement of the beneficiary but customarily includes a clause in the credit to the effect that any draft negotiated by a bank prior to the receipt of a noticce of revocation or amendment will be honored by the issuing bank.Rarely used since there is no protection for the seller.

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Revolving L/C: A credit wherein the issuing bank notifies the seller of the merchandise that the amount involved when utilized will become available again usually under the same terms and conditions and without the issuance of another L/C.

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Straight L/C: A letter of credit that contains a limited engagement clause which states that the issuing bank promises to pay the beneficiary upon presentation of the required documents at its counters or the counters of the named bank.

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Transferable L/C: A letter of credit that allows the beneficiary to transfer in whole or in part to another beneficiary any amount which, in aggregate of such transfers does not exceed the amount of the credit. Used by middlemen. It is used when the first beneficiary cannot supply the goods and wishes to tansfer in part or all of the Lc to another beneficiary.Partial of full transfer of LC from first to second beneficiary in case first beneficiay cannot supply the goods.

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Unconfirmed L/C: A letter of credit forwarded to the beneficiary by the advising bank without engagement in the part of the advising bank.

2. Documents Against Payment (D/P) An agreement whereby the shipping documents are forwarded by the seller to his bank for transmittal to a local bank. The documents are released by the local bank to the importer upon payment. The bank shall act as the collection agent for the seller. There is a risk to the seller however since the bank cannot guarantee payment. 

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Under D/P arrangment, commercialk banks shall advise the importer of the receipt of the complete original shipping documents(inclusive of the CRF whenever applicable) and shall effect the release of said documents to the importer upon receipt of payment. Commercial banks sall remit paynebt to the supplier through the correspondent bank abroad.

3. Documents Against Acceptance (D/A) An agreement whereby the draft and shipping documents are forwarded by the seller to his bank for transmittal to a local bank. The documents are released by the local bank to the importer upon acceptance of the draft.

Release through Agent The bank shall act as the seller’s agent for the release of the shipping documents. There is a risk to the seller however since the bank cannot guarantee payment. Under D/A arrangement, the shipping documents are released to the importer by the local bank concerned thru the seller’s bank upon the importers acceptance of the seller’s bill of exchange obligating the importer to pay for the shipment of some future date.

4. Open Account (O/A) Arrangements An arrangement whereby the documents are forwarded directly by the seller to the buyer. The bank’s participation will be to remit payment to the seller upon instruction by the buyer upon maturity date. The bank shall act as the buyer’s agent for the remittance of the payment to the seller upon maturity date. Under an O/A arrangement the shipping documents are sent and released by the seller directly to the importer without coursing the documents thru the banks, upon the importer’s promise to pay at some future date after shipment. Eligible Firms Producers/manufacturers whether for the domestic or export market, oil firms, franchised public utility concerns and importers-traders importing raw materials required by domestic manufacturers are allowed to import under D/A and O/A arrangements.

5. Direct Remittance An agreement whereby the documents are forwarded directly by the seller to the buyer. The bank’s participation will be to remit payment to the seller upon instruction by the buyer. The bank shall act as the buyer’s agent for the remittance of the payment to the seller “at sight” or upon the buyer’s presentation of documents to the bank. Commercial banks may service applications for direct remittance of import payments effected through modes other than those under L/C, D/P, D/A, or O/A only upon presentation of the complete original shipping documents as well as copy of the CRP and or imports clearance for regulated items issued by concerned government agencies, if applicable.