UPAS L/C : An Innovative payment scheme for international trade

The business world is constantly looking for favorable payment terms in international trade. Everybody wants to position oneself in upper-side. UPAS L/C is such a mechanism to create win-win situation for all the parties involved in the international trade; buyer-seller-banker.

One of the biggest problem in trade finance is the different interest between the buyer and seller, which the buyer always want to have longer credit tenor, while the seller prefer to give shorter credit tenor to the buyer. This difference have given financial institution an idea to develop a letter of credit that could accommodate both interest through UPAS L/C.

UPAS L/C, Usance Payable at Sight, is a derivative from the standard L/C type (Sight L/C & Usance L/C). It is actually the combination between Sight L/C and Usance L/C. Simply saying, UPAS is a Usance L/C that is payable sight basis
to the seller (beneficiary), while the payment settlement from the applicant (buyer) to the issuing bank will made on at the end of usance term.

So how does it work? Go through below case to remove confusion:

Company-A is a garment manufacturer in Bangladesh, who on regular basis import fabric from Company B in China. Company A need to process the purchased fabric into garments wear, before they could sell and the product to the end buyer and collect the payment to pay Company B in China, say company A’s cash to cash cycle is 90 days.

Having said so, the most suitable trade scheme for company A is to use Usance L/C 90 days. However, company B is not comfortable of the risk of Bangladeshi Bank / country risk, thus they refuse company A’s request to use Usance L/C 90 days, instead they are forcing company A to keep using Sight L/C.

In order to accommodate both parties’ requirements, the issuing bank propose a 90 days UPAS L/C solution to both parties. 90 days UPAS L/C means that it is Usance L/C 90 days to the applicant (buyer) and it is Sight L/C to the seller (beneficiary).

Having said so, the issuing bank provides financing to the applicant (buyer) so the seller could still receive the payment at sight basis, while the applicant could still enjoy the 90 days credit term from the bank. Since the issuing bank already paid the seller at sight basis, while they will only get the principal payment from the applicant (buyer) at the end of usance term (90 days), thus the issuing bank will charge financing interest to the applicant(buyer). The payment made by the bank to the seller is final (non recourse basis), thus it the same as sight L/C for the seller.

We can save 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 GDP of the country.

It is thus evident that UPAS L/C is very beneficial for all the parties involved in trade transaction because of its all-encompassing and win-win facilities.
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