A win-win payment method in international trade

UPAS LC is now a much sought-after payment method for all parties involved in international trade. UPAS refers to USANCE credit (a letter of credit payable at a determined future date after presentation of conforming documents) credit paid at sight. There are two ways to settle the international trade payment - cash and credit (deferred or delayed payment).
Payment at sight or in cash is to be made to the exporter as soon as the required documents presented to the issuing bank and on the other hand, the payment is to be made to the exporter after a certain period of time, say 90 days or 180 days or 360 days or beyond as pre-agreed between buyer and seller.
Cash LC (at sight LC) is allowed to be used by all users, irrespective of commercial, industrial and personal. But Usance LC (deferred LC) is only allowed to be used by the industrial users who require a certain period of time to complete a production cycle into the cash that will be used for settlement of his obligation to the exporter who offer time-credit to the importer. So it is evident that only the industrial consumers or importers are allowed to open UPAS LC.
WHO OPEN UPAS LC: Industrial consumers who are allowed by the Bangladesh Bank to enjoy deferred payment import credit facilities as per 33(a),Chapter-07 of Guidelines for foreign Exchange Transaction Volume-I and Chapter-02, Para-8(6) of Import Policy Order and FE Circular No-18,September-2010.
In brief, import of capital machinery, industrial raw materials for own use of the industrial importers, costal vessels including oil tanker and ocean-going vessels (including the scrap vessels), agriculture implements and chemical fertiliser and life-saving drugs are allowed to use UPAS LC.
THE PARTIES INVOLVED IN UPAS LC:  
The parties involved in the UPAS LC mechanism are the same as the traditional LC mechanism. But the differentiation is lying in the mechanism and payment not in the number of parties. In deferred credit, beneficiary will be paid at a later date either by the issuing bank or by the reimbursing bank at the request of the issuing bank.
On other hand, in the context of the UPAS LC, the beneficiary will be paid at sight by the issuing bank or its correspondent bank having credit line through discounting the import usance bill.
THE BENEFIT OF UPAS LC: Importer-A in Bangladesh requires a machinery for his factory and communicate with the supplier-B in China asking for the rate for the machinery to be imported. Exporter-B quotes the rate in the following ways to the Importer-B:
l Quotation-01: USD 100000.00 for one unit of the machinery if paid at sight (cash)
l Quptation-02: USD.110000.00 for one unit of the machinery if paid 360 days later (Deferred or Usance)
Importer-A has a credit line with his Bank-B (@5.50% p.a) facilitating him to import industrial raw materials by using foreign currency loan from the offshore banking unit of bank-B. If FC loan from the offshore banking unit is availed by the industrial importer to settle the payment at sight basis or cash (as quoted in above option-01), the situation will be as follows:
l The supplier will be paid at sight (only paid USD.1,00,000.00)
l Offshore banking unit of Bank-B disbursed FC loan in the name of the importer (usually in the name of the importers bank) for USD.1,00,000.00 @5.50 per cent for 360 days and earned a sum of USD.5500.00
l The importer is benefited in many ways -paying cash to the supplier keeping his working capital intact, non-utilisation of fund which will be utilised otherwise in the benefit of the company let alone saving USD.USD 4500.00 in interest payment.
In the economic perspective, there is mixed reactions regarding the real benefit of UPAS LCs. Industrial importers are importing raw materials by paying the interest at reduced rate which results in the lower cost of production of the finished goods. But the end-users are not being benefited from that mechanism and the impact of reduction of interest is not reflected in the market. A huge amount of idle fund is still lying in the banks because of the importers who are reluctant to avail taka loan at such a comparatively higher rate of interest.
On the other hand, the country is saving 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 gross domestic products of the country.
It is thus evident that UPAS LC is very beneficial for all the parties involved in trade transaction because of its all-encompassing and win-win facilities. After all, it has a long-run impact on industrialisation as well as the economy of Bangladesh.
Mohammad Rafiqul Islam, CDCS
The  writer is In-Charge (offshore
Banking Unit), Bank Asia
Limited, CEPZ, Chittagong.
[email protected]