Usance Payable at Sight (UPAS L/C)

Posted by tradefinanceguy on Feb - 9 - 2014

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 has
given financial institution an idea to develop a letter of credit that could accommodate both
interests through UPAS L/C.

If you still confuse, lets 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 As 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 As 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 sellers bank (advising bank)
4. Sellers 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 sellers 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)

UPAS L/C Timetable

Categories: Letter of credit, Uncategorized

INVESTOPEDIA EXPLAINS 'USANCE'

1. Usance applies to many items purchased on credit or a company's accounts payable. For example, a company that
purchases materials from a supplier will receive the goods today. The bill will be delivered today, but the company
might have up to 30 days to pay it. The 30 days represents the usance for the sale.

2. When a person lends money, he or she will charge a usance in exchange for the service. In this case, usance
relates to the profits made from the lending of principal.

3. Usance is the process of using goods to fulfill economic needs. This involves refining materials into finished goods,
or the consumption of goods to satisfy needs.