Interest as a % clause in the LC - it should be part of total credit limit or not?

vanchasantosh · 2012-02-14

For one of the LC transaction in India, the applicant was also to pay the Interest as a % on the value of goods, for the usance period, (say 90 days) the day LC matures.

Now question is whether, LC credit limit should also be including this pre-determined interest rate, as a part of the total credit limit (or) not.

eg: USD 10,000/- total value of the goods, interest rate 12% per annum. usance 90 days.
now credit limit should be mentioned as USD 10,300/- (USD 10,000 + USD 300 interest for 90 days)
(or)
credit limit USD 10,000/- and just a seperate clause mentioning as 'interest at 12% per annum for 90 days)

Vadim Gusev · 2012-02-14

good afternoon
from my point of view amount of the LC and the total obligation of the issuing bank under the LC must be separated. the LC amount is a total price for the goods delivered and should be in consistent with all other conditions of the LC, say, quantity and price per unit as minimum. so interest is to be indicated separately in some other part of the LC, MT 700 exactly gives such opportunity by field 39C. I think that it would be quite enough if that field stipulates the formula for calculating interest, however indication of the maximum limit for interest obligation also would be appropriate
regards,
vadim

vanchasantosh · 2012-02-15

K. Attn: Mr. Vadim Guesv,

Dear Sir,

Many thanks for your above view point.

I agree with your view point, as we were receiving LCs as above all along for many years and we were discounting, as per this view point.

Suddenly, the bank informed us to get the LC amended by increasing the credit limit by including interest amount alongwith goods amount, upto 90 days.

We were contesting this and unfortuantely, got to abide by the banker decision to avoid argument, as getting LC expired and also there was urgent requirement of the goods to be delivered to the customer.

We would like to pursue with our banker. How could I convience the banker with UCP 600 clauses regarding this.

Regards, Santosh Reddy Vancha

Vadim Gusev · 2012-02-15

Dear Santosh,
i cannot understand what in particular the bank claimed. what do you mean by "bank informed us to get the LC amended by increasing the credit limit"? what bank did you mean (issuing bank of confirming one)? did that mean that the bank requested the amount of the LC to be increased? or did the bank advised you that the its liability under the LC needed to be considered as amount + interest? please advise
regards,
Vadim

vanchasantosh · 2012-02-15

Dear Sir,

i cannot understand what in particular the bank claimed. - they want amount + interest to be considered as liability

what do you mean by "bank informed us to get the LC amended by increasing the credit limit"? what bank did you mean (issuing bank of confirming one)? - confirming one - our bank where we negotiate the documents.

did that mean that the bank requested the amount of the LC to be increased? or did the bank advised you that the its liability under the LC needed to be considered as amount + interest? Yes, the bank where we will negotiate the documents asked to get the LC amended with increase in credit limit, i.e., amount + interest.

Regards,
Santosh.

Vadim Gusev · 2012-02-15

Dear Santosh,
I am not sure that UCP 600 will provide any answer to that issue. the LC is undertaking to pay some certain amount which from my point of view doesn't exclude a possibility that the total liability to be described by one or another manner, I mean that the undertaking may be described by very particular figure or by reference to some certain principle how such figure might be determined or by some mix of the both, however in most cases the amount of the LC is stated as very particular figure.
then the requirement how the LC to be (or may be) drafted is a question of common wisdom and a peculiarity of a situation and/or a bank.
I am sorry but without further details I cannot give more detailed opinion because in-depth comment I would need to understand the transaction in more details.
Regards,
Vadim

Patrik Havander · 2012-02-15

Its good to have you back Vadim, we have missed your insightful contributions!

vanchasantosh · 2012-02-16

Dear Sir,

Thanks for the reply.

The problem was now got sorted out.

We got the LC amended by mentioning this interest value for 90 days in the field 39c, additional value, as you said in your first post.

Earlier, the applicant bank used open LC by mentioning the clause "interest at 11% per annum for 90 days on credit amount is applicable" in the description column.

The banker asked us to increase 32b, credit amount with actual goods value + interest, which we contested.

Now banker and we agreed to get this additional value in 39c and closed the issue.

We thank you for your view point onto use clause 39b, additional value for the values other than goods incoterms value.

Regards,
santosh.