Page 23 - Banking Finance June 2022

ARTICLE

Particulars LC Requirement Treatment to stock covered by Usance
Raw Material purchased under LC Rs.300 Lakh LC:
Lead time (in months) 1.50 Lien should be earmarked against advance value of stock
Usance period (Credit period)-75 days 2.50 for the outstanding usance LC bills.
Total time period to complete 4.00 This ensure provisions of margin on the stock covered
LC transaction by usance LCs right from the time the stocks bought on
credit backed by the Bank's commitment.
How many times the LC can be 12/4=3 times
utilized in a year Thus it ensures that the margin is available well before
the cash credit account is debited for the matured LC
LC limit eligible Rs.300 lakhs/3
bills
= Rs.100 Lakh
In some cases it is quite possible that the units may not
As shown above example the customer is eligible for LC limit be in a position to provide margin right from the time
of Rs.100 lakhs. For instance no credit period is allowed by of purchase against LCs. In such cases, based on merits,
supplier i.e. usance period is zero as the case we saw in DP earmarking of lien for the value of usance LC bills
LC. The limit shall be arrived at Rs.37.50 Lakh considering outstanding against the aggregate market value of all
time period of 1.50 month for one LC transaction and with the securities (including the LC stocks) may be permitted
eight LC transactions in a year. instead of against the advance value of securities.

Whenever limit assessed under MPFB (Maximum Development of LC (precautions):
Permissible Bank Finance), it takes care entire working
The limits for demand LCs and usance LCs should be
capital requirement of the borrower. In instance LC also
assessed separately with ample justifications.
meant for meeting working capital need (purchase of raw
The usance period should not generally exceed the
material), Bank to carve out the LC facility from the total
product cycle.
limit arrived under MPBF and balance portion of the limit is
extended in form of fund based exposure i.e. cash credit In case of bulk imports establishments of LCs for longer
facility. Few cases the borrower may be request for with-in- usance period may be considered selectively.
which facility of fund based limit. Under such circumstance, When liability under LC is met by creating an irregularily
limit are permitted after working out the eligibility under in the cash credit account. The relative LC limit should
each head of facility and over all exposure shall be within not be released for opening further LCs till the account
MPFB. is adjusted.
In other words the liability should not be marked off in
While assessing the limits in larger borrower accounts where
LC liability registered within 15 days or if the LC devolved
the requirement of LC is very huge running into crores,
earlier is not adjusted, no further LCs should be opened
where Bank to ensure how the LC are honoured on due date
without adequate margin
and availability of cash flows are checked even by obtaining
cash budget or increase the margin component upfront or
Scrutiny:
step-up method so the bills are retired on due date with out
resorting to development of the LC. In all cases of opening Level of sundry creditors in the accepted projections in
of letters of credit, the LC opening bank has to ensure that case of Usance LCs
the customer is able to retire the bills drawn under LC as Compare with operating cycle
per the financial arrangement already finalised.
Margin & security depending on track availability of
funds
While extending LC for procuring the capital goods, Bank to
Irregularity to be rectified before fresh LCs are opened
ensure a proper term loan tie-up is made to retire the bills
are due date. Continuous development is a warning signal

BANKING FINANCE | JUNE | 2022 | 23