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Covid-19 lockdowns must spur trade-fin digitization

Unprecedented disruption to trade finance must change how LCs are processed, writes Tat Yeen Yap.

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Tat Yeen Yap was mostly recently head of trade-finance product management for Asia at Société Générale and a contributor to International Chamber of Commerce rules on letters of credit. He is currently on gardening leave in Singapore.

Starting at midnight on March 25, India went into a 21-day lockdown in response to the Covid-19 outbreak. Although banks are exempted, transport services will be suspended except those carrying essential goods.

This will impact delivery of documents for trade purposes, which will impact the operation of letters of credit.

Although postal and courier services are exempted from business closure, news reports suggest courier service providers had already begun to stop picking up documents. With the curfew, it is doubtful that customers could hand deliver documents to their banks.

For exporters, the chief concern is the timely presentation of documents after shipments have been made. (Notwithstanding concerns about shipments also being disrupted.)

An LC beneficiary has the following important deadlines to comply with:

  • Latest date for shipment
  • Last day for presentation

According to UCP 600 (rules issued by the International Chamber of Commerce concerning letters of credit), documents must be presented no later than 21 days after the date of shipment, and not later than the expiry date of the LC, although parties can agree otherwise.

An LC may stipulate a presentation period of different durations to either the issuing bank or a nominated bank eligible to process the documents. If a complying presentation has been made to a nominated bank, the issuing bank must honor LC terms even if there is a delay in the forwarding of documents by the nominated bank.

When obligations can’t be met

But what if an unforeseeable event makes it impossible for a bank to honor the terms of the LC? Sometimes the LC beneficiary cannot make a presentation in time due to force majeure.

There is no provision in UCP 600 for an automatic extension of the deadline for providing documents. Does the government-mandated lockdown of India meet the definition of force majeure, as far as LCs are concerned?

China’s lockdown earlier this year suggests the answer is usually no. Apart from one mandatory closure on account of the coronavirus on a business day, January 31, China’s banks remained open in all locations. 

But meeting its obligations is not easy for the LC beneficiary. It must obtain all the documents required in the LC, including those issued by third parties such as shipping lines, insurance companies or chambers of commerce. And it must then get these documents to the nominated bank or issuing bank.

Given the disruption caused by lockdowns such as India’s, LC beneficiaries may not hit their deadlines. They can try to ask counterparties for extensions or to modify the LC’s force-majeure provisions. But it may not be enough to get a counterparty’s agreement if the issuing bank or a confirming bank refuses to agree or are not in touch with the applicant.

This raises the question of making presentations electronic.

Going digital

If the nominated bank is open, and its data processing system is able to receive an electronic presentation, the physical constraints of forwarding paper documents will be overcome.

For this to be possible, the applicable rules need to be eUCP, rules drafted by the International Chamber of Commerce to accommodate the presentation of documents in electronic form, made to an electronic address.

The rules under eUCP provide an important advantage. If a bank is open but its system is unable to receive a transmitted electronic record in time, then the expiry date and/or last day for presentation will be extended to the next available banking day.

This means beneficiaries have more flexibility in making a timely presentation electronically than if they were using paper documents. Now, this does not apply to cases of force majeure under UCP 600 rules – banks that resume business would not be liable to honor or negotiate an expired LC.

For an eUCP credit, however, force majeure could come into play if the surprise events knocked out a bank’s ability to access its systems or its communications software or equipment.

The Covid-19 pandemic is forcing changes to our way of living, including forcing many people to work from home. Might this be a catalyst for greater adoption of eUCP credits?

Right now many operators involved in trade finance are feeling the challenges of moving paper documents. The time has come for all actors in the trade ecosystem to take seriously the need to digitize documentation. For years, the arguments for digitization have focused on efficiency, cost savings, and lower risks of error.

But with the lockdowns we are now experiencing, digitization is not only enhancing better commerce but a necessity to keep commerce going.

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Covid-19 lockdowns must spur trade-fin digitization