I am new member in this forum and found it very useful.
I am working as LC executive. Every time we have to apply for LC in a bank we need to call the bank to ask how much LC is available i.e the maximum amount available currently for opening LC.
Example with ABC bank we have USD 2,000,000 LC facility line. We can open LCs maximum amounting to USD 2,000,000. Now as our company is continuously opening and paying LCs, each time we need to open LC we need to call bank to know what LC limit we currently have. Suppose the bank responded that we have utlized USD 600,000 and have USD 1,400,000 available currently out of maximum USD 2,000,000.
THE QUESTION IS , HOW DOES THE BANK CALCULATES THE CURRENT LC LIMIT AVAILABLE?
How can I estimate myself to keep record of that.
Suppose I have to open LC of amount USD 100,000 the bank deducts 20% as cash margin. How the bank will calculate LC availability after opening of this LC. Will it deduct the whole LC amount or it will deduct 80% of LC amount. When will the bank add back this amount to our LC facility available.
Send address - I can send a word document containing a detailed
solution to LC and the facility. My address can be found in my business
In response to your query of "simple calculation" the amount available for issuance of LC's under your facility of $2million line as at October 05th would be $1,510,000. Please take note that banks will re-instate amounts to calculate amount available (a) only upon complete discharge of LC drawings (b) approx 21 days after expiry date of unutilized LC's in lieu of time for presentation
When you have approved say USD 2,000,000 LC facility line obviously you can apply and accordingly your bank can issue numerous L/C’s which total amount can’t exceed USD 2,000,000(including +/- tolerances when needed under field 39A). Usually banks have their own trade finance integrated systems from which they can follow all documentary credit transactions which they issued – amount, currency, applicant, beneficiary, collateral, validity, commissions etc. One of the field may be “status” with two options – “closed” and “open”(for example). If the credit is still not expired or it is expired but presentation wasn’t made(and therefore the specific period determinated by the bank for this kind of cases isn’t come) or a there is a defered paymentthe status will be “open”. If the credit has expired or the full amount was drawn the status will be “closed”. So if you have 5 credits for USD 100 000 with status “open”, the bank obligation is still present so you have USD 1 500 000 USD available for applying. As soon as the status is changed to “closed” due the reasons above the bank will extend or “return” the respective amount to your LC facility line. This trade finance system is usually related somehow with the bank core system and the LC facility line actually is visible in this core system as account “unused credit lines for off-balance commitments” or something like that. Anytime you apply for L/C and the bank approved it the back office/accounting clerk will mark the change in this account. Before the bank L\C expert transmit the credit he will for sure contact the back office/accounting clerk for verifying the remaining balance. In general this is how the bank calculates the limit no matter of the collateral. So following this example you can make your own records but in any case you should turn to your banker every time you want to be sure.
To make it simple suppose LC's are sight payable and when the bank receives the documents it runs new contract to refinance the amount with interest factor 0.029 . Lets suppose on 29 sept. 2010 Our present LC available is USD 1,500,000 out of USD 2,000,000 Max facility. Payment of previous settled LC (USD 25,000 'this value is after including interest on USD 24,295.4 which was the original LC amount') is due on 1st october. We opened USD 15,000 LC on 30, Sept. Now On 5th october what would be my LC available. Please share your expertise
The refinance portion/limit is an on-balance sheet item and not part of the LC issuance limit, which is off-balance. Utilisations under either should not be combined, but treated separately.
As far as you are concerned, you should consider your liabilities to be reduced (and limit value to be reinstated), when the issuing bank itself has liquidated its own liability. That is to say, when it has honoured the LC drawing(s) and has received reimbursement from you (or has debited your account). For a sight LC, the issue is relatively simple, and would depend on the set value date of the payment(s), but for a tenor LC, respective liabilities wil not be reduced till the respective maturity dates.
Its simple, let me give you an example with clear outputs.
1) You have a facility in the Bank USD 2,000,000, this amount you can use it for :
A) Opening LCs (remember LC is off-balance sheet, means its unfunded).
B) LC refinance ( Remember Refinance is on-Balance sheet, means its funded).
2) You have one LC Sight amounting USD 100,000.
When LC is issued, you have used your facility by USD 100,000(i.e. Utilised LC limit by Usd 100,000 from the LC facility USD 2,000,000), now remains only USD 1,900,000 unutilised from your facility.
Now imagine shipping documents reached your Bank, and when docs accepted by you, they will pay to beneficiary USD 100,000, on the other hand, refinance is made for the same amount + Profit (100,000 + 2000).
Here is the Important point, the Bank will not consider the profit as part of your facility, they will only :
A) Return Back the LC amount back to your facility (USD 100,000), this will make your facility again as USD 2,000,000.
B) AS refinance took place, again the Bank will use from your facility USD 100,000, and not with profit,.
This is how it works, the complication will be faced only when you open LC in USD , and you refinance in your Local Currency, this will make your facility machanism in your Local Currency, the utilised facility portion at the time of LC issuance differs from the Utilised portion when Refinance is made.
Example : if LC is USD 100,000, and the exchange rate at the time of issuance is 0.377 will make the utilised facility portion as Bahrain DInars 37700. At Refinance time, the exchange rate was for example .3778, this will make your facility utilised portion as BHD 37780.
In the above example the utilisation of facility at the time of refinance is more than the utilisation of facility at the time of LC issuance, here you must keep track of the Facility from your company, always ask about the exchange rate at the time of both A)Lc Issuance B) Refinance time.
Note : If the Bank utilise profits with principal LC amount from your facility, then Its incorrect practice from my point of view, ask your Bank whether both Profits and Principal amounts are added to the facility.
This is my expertise regarding the facilities, others are most welcome to tell us their thoughts to enrich us.