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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DLC, UPAS L/C, Usance LC Payable at Sight (UPAS L/C)

UPAS L/C, Usance Payable at Sight, is a derivative from the standard LC type (Sight L/C & Usance L/C). It is actually the combination between  Sight L/C and Usance L/C. Simply saying, UPAS is an 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.

Do you still remember one the biggest problem in trade finance?  Yes, it 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.

If you still confuse, let’s discuss it using real case example,

Company A is a flour manufacturer in Indonesia, who on regular basis import wheat from Company B in Brazil. As you know, company A need to process the purchased wheat into floure, before they could sell and the flour to the end buyer and collect the payment to pay the exporter (Company B) in Brazil, say compay 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 Indonesian 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.

Wording in L/C :

42.C. Draft at.. 90 days after B/L (or other benchmark)

47. Additional Condition

Eventough the usance period of 90 days, this L/C is payable to the seller at sight basis. Financing interest is borne by applicant.

Note : The wording can be different among different issuing bank, but the wording should have the same meaning as the above.

UPAS L/C Diagram

Example :  90 days UPAS L/C

1. Sales contract between buyer and seller
2. Buyer (applicant) request their bank (issuing bank) to issue a 90 days UPAS L/C for the seller
3. Issuing bank , upon receiving the request, issue a 90 days UPAS L/C to seller’s bank (advising bank)
4. Seller’s bank (advising bank) then advise the UPAS LC to the seller (beneficiary)
5. Seller then ship the goods to the buyer
6. Upon shipping the goods, the seller prepare all documents as requested by the UPAS L/C, and then present the documents to their bank / bank that is specifically nominated by the UPAS L/C to receive the documents (negotiating / nominated bank).
Note : Usually advising bank & negotiating bank is the same bank, but could be different.
7. Negotiating bank checks the presented documents, then deliver the documents to the issuing bank
8. Issuing bank upon receiving the documents sent by the negotiating bank, will start check the documents within max 5 banking days, and once they find that the presented documents are comply with the UPAS L/C terms and conditions, they will pay the seller through the negotiating bank right away
9. Negotiating bank will credit the payment proceed from issuing bank to seller’s account with them
10. Buyer provides their payment undertaking for principal and interest on maturity date (day 90) to to the Issuing bank, can be in the form of signed draft (Bill of Exchange) or Promissory Notes.
11. Issuing bank then release all documents to the buyer, including Bill of Lading.
12. Payment by applicant (buyer) to the issuing bank on day 90 (maturity date) for both principal (P) & Financing Interest (I)

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At MING FONG FINANCE COMPANY LIMITED (MFFCL) we’re not just bank insiders, we are builders. We provide smart financing and the know-how of  MING FONG FINANCE COMPANY LIMITED to help our customers’ capital go further and do more. Your company is building something and we get that. What you are building takes money, but it may also need knowledge and expertise. This is where we come in.

MING FONG FINANCE COMPANY LIMITED (MFFCL) is an extension of MING FONG FINANCE rich heritage of building and supporting growth. Investing in the sectors we know best, we can provide more than just financing, We bring insight, knowledge and expertise to every loan or funding transaction. And as a result, businesses that finance with MING FONG FINANCE COMPANY LIMITED benefit from our global know-how and expertise. Around the world, we are helping our customers to invest more, to make more, to sell more and to do it all with greater efficiency. We’re helping companies in ways that no other financial institution or bank can. Any bank or financial institution can help you finance. Only a builder can help you grow. Because we are MING FONG FINANCE COMPANY LIMITED, we make the difference, we set the pace...

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3. Letter of Credit  (Documentary Letter Of Credit (L/C, DLC) is the bank's obligation to pay the seller of goods or services a certain amount of money in the timely submission of documents confirming shipment of goods or performance of contractual services. Documentary Letter Of Credit is one of the most important means of financing in the international trade, as the letter of credit is a tool that removes most of risks as from the buyer (importer) and from the seller (exporter).

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