Procedure of providing LC ‘s by banks

 Procedure of providing LC ‘s by banks

 For LC Issuing Banks will be taking Insolvency risk(Default) of Customer i.e If LC has been issued by a bank on request of Applicant Issuing bank bound to pay to Beneficiary even though applicant gets defaulted

So next question Comes how banks handle default risk of Applicant

And same way how confirming bank handle default risk of Issuing bank

Here comes concept of Facility id and limit id

So when Applicant approaches bank for LC issuance he has to go through KYC check and compliance due diligence checks to get LC issued

Post all checks Applicant should provide some collateral which may be in Fixed or cash to bank as per requirement of business basically banks will be requesting for more collateral which customer and his business risk is more

So when bank issues LCs They will block customer collateral for certain and in some cases when customer deals products where risk is more banks might block cash collateral additional to fixed collateral

When customer provides different types of collateral banks will estimate those values and provide different facilities to them for dealing with different products available in bank

How theses collaterals are tracked in banks

Each and every bank will be having different software’s to maintain there customer Limits

Basically these limits will get attached to some facility Id

Once Facility Id gets attached banks asset management team with attach description for each of the sub facilities or limits to which module or product they should be used and how much it can be described clearly on limit description option available in software

Limits Tree

Child limit

 

Parents Limit : In above example parent limit can be Trade Finance and child limit can be Lc ,collections, Guarantees etc

Or Parent limit can be Loans and having one child limit as Commercial loans

Some times directly we can link child limit to Main facility or Limit

Note: when there is some child limit linked to parent limit system should not allow us to link child limit to Main facility

When there is no child limit linked to parent limit system should allow to link same to main facility or limit

For example : When Main facility having amount as 1000

Parent limit 1 is having limit as 500 and then further child linked to parent 1 is 250 each it might changes it should not be 250

Parent limit 2 is having limit as 250 and having only one child total 250 will be shared with child

Child limit which is directly reported to main facility will be having 250 as limit

 

When any of the above parent limits or child limits are utilized automatically amount available in main limit will get reduced .

So banks will be blocking the assets by means limits and providing LC to customer once Liquidation happens which means payment has been done for full or partial these limits will get released accordingly and comes to neutral post liquidation of full LC these works same for GUA  when it comes to documentary collection we will be blocking limits when there is avalization.