Friday, December 16, 2016

Rajnarain Bose's house in Deoghar[1]


Manindranath and
son Asoke
My father Asoke (son of Manindranath, the youngest son of Rajnarain Bose) left Deoghar, our ancestral home, when he was only about 12 years of age. This was prompted by the untimely and early death of both his parents - one after the other. After their death, almost everything at the Deoghar home was reportedly taken away by people (including some relatives) on various pretexts. My father - far too young to comprehend what was going on - could save absolutely nothing for himself when he had to leave Deoghar. He came to Calcutta to reside with his aunt Leelabati Mitra at 6 College Square. He never went back. (If anyone has any photograph, correspondence, diary or memorabilia relating to him or other relatives, I would be grateful if the present owner narrate details or offer me a copy of the available documents.)

Rajnarain's earliest residence at Boral

The house was at Boral, South 24 Parganas, West Bengal, where Rajnarain first came to stay for a considerable period of time. It was in ruins when my father - the young Asoke - returned to Calcutta from Deoghar, with the minimum of possessions.

Realising that he would not be able to protect or preserve Rajnarain Bose’s residence at Boral, my father Asoke donated the property to the Boral-based Rajnarain Bose Memorial Committee. I had paid a visit to the library some years ago and left my contact details, hoping that someone will be in touch, eventually. None ever did. The present constitution and activities of the committee, if it exists at all and is still functional, are not known.

Rajnarain's former residence at Boral has been turned into a school, and is functioning quite well.


I travelled to Deoghar on 23 May 2011. The day was my father’s 100th birthday. That was my first ever visit to Deoghar. The visit was possible, thanks to Prof. Buddhadev Chakrabarty, one of the grandsons of Sri Anukul Thakur, founder of the Satsang Ashram in Deoghar.

What I discovered there saddened me deeply. Let me begin with the section of the road from its meeting point with the Jasidih-Deoghar-Baidyanath Dham highway, located just before one enters the city proper. The road leads to Ranchi, Dumri and Giridih. The road crosses the railway line, continues past the grounds and the house (on its left) that once belonged to Rajnarain Bose. The section of the road named after Rajnarain Bose had originally begun from the road junction and went past his residence. The identifier street signs that used to be at the road junction seem to have disappeared long ago.

What I discovered there saddened me deeply. Let me begin with the section of the road from its meeting point with the Jasidih-Deoghar-Baidyanath Dham highway, just before one enters the city proper. It leads to Ranchi, Dumri and Giridih. The road crosses the railway line, continues past the grounds and the house (on its left) that once belonged to Rajnarain Bose. The section of the road named after Rajnarain Bose had originally begun from the junction and went past his residence. The street signs that used to be at the road junction seem to have disappeared long ago.

I came across a crumbling, concrete road sign opposite the circuit house and a little away from his house, that displayed the words “Rajnarain Bose Path” (in Hindi and Bengali) and “Rajnarain Bose Road” in English. The colour on the concrete slab had faded. This was the only evidence about the road’s history[1]. The road was still recorded in the books of the Deoghar Municipality as ‘R. N. Bose Road’. But not a single signage on either side of the road or on the many shop signboards displayed his name or the official name of the road. For all practical purposes, the entire stretch of the road had come to be colloquially known as ‘Satsang Road’.

The same fate had befallen his house. I understand that, after he had passed away, a claim against my grandfather for some small amount was said to have been lodged in a local court. My father was far too engaged in Calcutta battling for survival to further get involved in fighting a claim about which he had no idea or information whatsoever, in a distant court at a place he had left for good. In due course, the entire property consisting of several acres of land and the house appears to have been grabbed by others.

The vast open space that had stretched from the house right up to the front gate, and the area all around the house, appears to have been sold off in odd parcels over time. Disorganised, unplanned constructions have come up all over that land, including the side and at the back of the house. A large number of tiny roadside shops have come up along the boundary wall facing the main road.

I met Dr. Gourab Ganguli, Principal of A. S. College of Management, Deoghar, who provided to me some interesting pieces of information about Swarnalata Bose and the house where she had lived, Rishi Rajnarain Bose, the house where he had spent his last years, and about the library named after him. While recounting the details, he remarked that if the people or the local administration of Deoghar had any idea about the person that had once resided there, or about the famous personalities (like Swami Vivekananda, Rabindranath Tagore) that had visited that house, or like Sri Aurobindo (of Pondicherry) who lived there, that section of the road would have been paved in gold.

The original house had also undergone change, and renamed as ‘Adharayatan’. (The present owner, one Sri Sudhirata Chatterjee, is reportedly bogged down with litigations against his family members.) The facade is different, the big varandah in front is gone, the house itself has been partitioned inside and additional rooms created.

Rajnarain Bose is now a forgotten chapter in the history of Deoghar (and in Bengal). There is absolutely nothing to indicate that Rishi Rajnarain Bose once lived there. There is no signboard or plaque to inform passers-by about the historical significance of that house, the legacy that the house carries, or the stature of the visitors that had once set foot in that house more than hundred years ago. (Reminds me of a close friend of Rajnarain, Michael Madhusudan and the lines from his famous poems, “দাঁড়াও পথিকবর, and “রেখো মা দাসেরে মনে.)

I enquired about another piece of property named Swarnalata Kutir, located in Rohini. Swarnalata was one of the daughters of Rishi Rajnarain, and the mother of (among others) Sri Aurobindo and the revolutionary, Biplabi Barin Ghosh. The house had once belonged to Lajjabati Bose, another daughter of Rajnarain, and was later gifted to my father Asoke. I understand that the property was “purchased”, and is presently owned, by Satsang Ashram. It is strange how the transaction took place without any knowledge of the actual, original owner or any member of our family and the ownership passed on.

Incidentally, Rajnarain Bose Memorial Library (near the clock tower in the busiest area of Deoghar, Baidyanath Dham) still stands, but is in extremely bad shape. No one uses the library any more; there is no fund to maintain the library nor for the purchase of new books. The ground is nowadays being used to hold local fairs. Property developers are waiting to grab the property some day. It may happen sooner rather than later.

I had an occasion to re-visit Deoghar on 21 December 2011. I found that the brick and cement road signage, which was till then the only indicator of the official name of the road, had been demolished by a bulldozer of the local municipality during its anti-encroachment drive. With that, all visible connections between Rajnarain Bose and Deoghar, now stands erased.

The only question that remains now is, can anything be done in Deoghar to preserve , in whatever manner possible, the memories of one of the greatest sons of Bengal and the ‘Grandfather of Indian Nationalism’? 
Further, would it be possible to preserve the houses of Rajnarain Bose and Swarnalata Kutir, places where many revolutionaries and renowned personalities had visited and also spent a part of their lives?
Can any sign board be suitably placed at the site of his former residence to serve as a reminder of its most famous resident? 
Can the former residences of Rajnarain and his sister Swarnalata be declared as heritage sites, properly identified, marked and protected?

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[1] This is about Rishi Rajnarain Bose, my great grandfather. More specifically, it is an update on the house at Deoghar, Jhargram, India, where he had spent the last years of his life after he moved from Midnapore. For a full profile of his life, refer to the book Rajnarain Bose - A Tribute by Rupnarayan Bose.

Tuesday, November 29, 2016

UCP standards for the examination of transport documents[1]

Transportation of goods is the lifeline that international trade depends on. It is a key segment of the logistics that connect the seller with the buyer across the globe. It includes several diverse elements.  A whole range of rules, regulations and practices apply to the process of transportation. One also need to know, among others, about marine insurance, and the rules governing documentary credit operations that relate especially to the transportation of goods.

Transport documents and the UCP
Several articles of UCP 600 (Uniform Customs and Practice for Documentary Credits) – a publication of the International Chamber of Commerce (ICC), Paris – deal with transport documents. Articles 19 to 24 explain the various forms of transport document. Article no. 25 describes receipts (however named) evidencing the acceptance of goods for despatch to a named destination. Articles 26, 27, 31 and 32 address other issues related to the transportation of goods. The examination of transport documents is ostensibly covered under a few sub-sections of Article 14 of the UCP.

I say ‘ostensibly’ because the norms and standards for the examination of transport documents are by no means limited to the UCP. A casual perusal of ISBP 745 (International Standard Banking Practice for the Examination of Documents under UCP 600 - another ICC Publication) is sure to throw up surprises aplenty – not only for the applicant, issuing or examining banks, exporters or importers - but for many of the documentary credit practitioners. As if the provisions in the UCP were not enough of a problem for those dealing with original transport documents, anyone seeking to include copies of transport documents in documentary credit operations better read the ISBP very carefully before proceeding further. (The UCP itself does not address issues relating to copies of transport documents.)
The following is a collation of the more important provisions of the UCP and the ISBP with regard to transport documents (original and copy), and the rules for their examination under documentary credits.

Original transport documents
Article 14(c) of the UCP reads thus:
A presentation including one or more original transport documents subject to articles 19, 20, 21, 22, 23, 24 or 25 must be made by or on behalf of the beneficiary not later than 21 calendar days after the date of shipment as described in these rules, but in any event not later than the expiry date of the credit.

What remains unstated (clarified only in ISBP 745), is that the 21-days stipulation is the default option. Under the UCP, the issuing bank is free to modify this period to lesser or more number of days. (Caution: If last date is set to beyond 21 days, it may invite unintended consequences!)

Sub-article 14(f) excludes transport documents from matters relating to issuer’s name and data content. These are addressed elsewhere, under sub-article 14(l), quoted below:
A transport document may be issued by any party other than a carrier, owner, master or charterer provided that the transport document meets the requirements of articles 19, 20, 21, 22, 23, or 24 of these rules.

As stated earlier, several UCP articles – from article number 19 onwards – are devoted to transport documents. Important components like who can issue a transport document, what constitutes shipment date and so on are defined in detail.
But what about copies of transport documents? How are these to be handled or processed? What are the responsibilities and obligations, if any, of the applicant, the scrutinising banks or other related parties as far as copies of transport documents are concerned? Nothing can be found in the UCP on these issues. In fact, references to transport documents is qualified only at one place (sub-article 14.c) to state that the UCP provision applies to ‘original’ transport document. More often than not, this subtle, low key reference is likely to be overlooked by a reader. Other references to transport documents in that article do not state that the provisions apply only to originals, not to copies.

Copies of transport documents
The clarification that one seeks is to be found only when one refers to the provisions of the ISBP. Here are the relevant provisions from Article A6 of ISBP 745:
a.      When a credit requires the presentation of a copy of a transport document covered by UCP 600 articles 19-25, the relevant article is not applicable, as these articles only apply to original transport documents. A copy of a transport document is to be examined only to the extent expressly stated in the credit, otherwise according to UCP 600 sub-article 14(f).
b.      Any data shown on a copy of a transport document, when read in context with the credit, the document itself and international standard banking practice, need not be identical to, but must not conflict with, data in that document, any other stipulated document or the credit.
c.      Copies of transport documents covered by UCP 600 articles 19-25 are not subject to the default presentation period of 21 calendar days stated in UCP 600 sub- article 14(c) or any presentation period stated in the credit, unless the credit explicitly states the basis for determining such presentation period. Otherwise, a presentation may be made at any time, but in any event no later than the expiry date of the credit.

Sub-article A18.b.ii of the ISBP practically repeats what is already stated in Article A6.a above, thus:
The default presentation period of 21 calendar days stated in UCP 600 sub-article 14(c) only applies to a presentation including one or more original transport documents covered by UCP 600 articles 19-25.

I wonder why the provision quoted immediately above was not added to article 14(c) in the UCP where it really belongs. Apart from acting as a trigger, it could have been of immense help to those for whom the ISBP is yet another mountain to climb.

Reverting to the ISBP provisions quoted above:
  1. ISBP clarifies that the 21 calendar days limit stated in UCP 600 sub-article 14(c) is the default period which is applicable only to original transport documents.
  2. In a credit the presentation period is usually stipulated using the date of shipment as the point of reference, thus: ‘Documents should be presented within X days from the date of shipment, but no later than etc….’. This stipulation of the presentation period in the credit does not apply if the transport document does not include an original but is only a copy.
  3. The concept of ‘data-conflict’ (sub-article 14.d of UCP 600) applies to all transport documents, not only to originals but also to copies.
  4. Documents which are not defined by the UCP as ‘transport documents’ are to be examined only under sub-article 14(f) of the UCP.
These are NOT transport documents
Certain documents commonly used in relation to the transportation of goods should not be confused with what the UCP defines as ‘transport document’. Those are not ‘transport documents’ as defined in UCP 600 articles 19-25. Such documents include (but are not limited to) delivery note, delivery order, cargo receipt, mate’s receipt, forwarder’s certificate of receipt, forwarder’s certificate of shipment, forwarder’s certificate of transport, forwarder’s cargo receipt (ref.: sub-section A18 of the ISBP). Therefore:
a.      The default provision of 21-calendar days (as laid down in sub-article 14.c of UCP 600), or limiting the presentation period using the date of shipment as the basis for its calculation, does not apply to the documents such as mate’s receipt etc. referred above.
b.      Hence, these documents are to be examined only to the extent expressly stated in the credit, otherwise according to UCP 600 sub-article 14(f).

With regard to presentations based on these documents (not defined as a transport document by the ISBP) sub-article A18.b.i states:
… a condition of a credit that presentation is to occur within a certain number of days after the date of shipment will be disregarded, and presentation may be made at any time, but in any event no later than the expiry date of the credit.

Of course, if the issuer still wishes to limit the period of presentation, sub-article A18.c of the ISBP offers a solution, thus:
For a presentation period to apply to a document referred to in paragraph A18(a), the credit should specify that presentation is to be made within a certain number of days after the issuance date of the respective document, or a date that is to be mentioned in the document (for example, when a credit requires the presentation of a document titled cargo receipt, ‘documents to be presented no later than 10 days after the date of the cargo receipt’, or, ‘documents to be presented not later than ddmmyy’).

The purpose of a courier receipt
Regarding courier receipts, postal receipts or certificate of posting certain clarifications may be in order. Article 25 of UCP 600 defines these documents as transport documents. However, credits often require the presentation of courier receipts etc. for other purposes as per the LC terms – say, for example, as proof of having despatched copies of documents A, B, C direct to the applicant within ‘x’ days of shipment. In such situations, it is obvious that these documents then are not fulfilling the function of a transport document. Article A10 of the ISBP therefore stipulates that:
When a credit requires the presentation of a document as evidence of sending documents, notices and the like to a named or described entity, in the form of a courier receipt, post receipt or certificate of posting, such document is to be examined only to the extent expressly stated in the credit, otherwise according to UCP 600 sub-article 14(f) and not under UCP 600 article 25.
Scrutinising banks and beneficiaries are advised to take note of this distinction.

Presentation of original transport documents
With regard to presentation of original transport documents, the rules (under A29 of the ISBP) are as follows:
  1. The number of originals to be presented is to be at least the number required by the credit or UCP 600.
  2. When a transport document or insurance document indicates how many originals have been issued, the number of originals stated on the document is to be presented, except as stated in paragraphs H12) and J7)(c) of the ISBP.
  3. When a credit requires presentation of less than a full set of original transport documents, (for example, “2/3 original bills of lading”), but does not provide any disposal instructions for the remaining original bill of lading, a presentation may include 3/3 original bills of lading.
Article A.30.b
When a credit requires the presentation of a copy of a transport document and indicates a disposal instruction for all originals of that document, a presentation is not to include any original of such document.
Article A37
The fact that a document has a box, field or space for a signature does not in itself mean that such box, field or space is to be completed with a signature. For example, a signature is not required in the space titled “Signature of shipper or their agent” commonly found on an air waybill or “Signature of shipper” on a road transport document. Also see paragraph A17) in respect of the requirements for data to appear in a box, field or space.

‘Transhipment prohibited’ - really?
Finally, about transhipment. Credits often prohibit transhipment (SWIFT MT700 Field 43T). While doing so, the issuing banks may, hopefully, keep in mind this gentle warning in sub-paragraph (vi) of the opening section of ISBP 745 titled ‘Preliminary considerations’:
… a credit requiring presentation of a bill of lading and containing a prohibition against transhipment will, in most cases, have to exclude UCP 600 sub-article 20(c) to make the prohibition against transhipment effective.

The UCP sub-article 20.c is quoted here for ready reference:
                     i.       A bill of lading may indicate that the goods will or may be transhipped provided that the entire carriage is covered by one and the same bill of lading.
                    ii.       A bill of lading indicating that transhipment will or may take place is acceptable, even if the credit prohibits transhipment, if the goods have been shipped in a container, trailer or LASH barge as evidenced by the bill of lading.

How to distinguish between BL and MTD
On occasions, a letter of credit or a transport document may stipulate the following:
i)       a place of receipt
ii)      a place of loading (possibly different from the place of receipt)
iii)    an indication of a means of pre-carriage
iv)    port of discharge
v)     final destination or a place of delivery of the consignment

Article D2 of ISBP 745 tells us that the transport document need not be titled ‘multimodal transport document’ (MTD/MMTD) or ‘combined transport document’ (CTD) or a bill of lading (BL) even when the credit names the required document. Our approach should, therefore, follow the principle stated in sub-article 14(f), viz., the content of the document presented should fulfil the function of required document. The critical issue, however, is how to interpret the contents of a transport document in order to arrive at the correct conclusion.
UCP articles 19 and 20 lay down the ground rules applicable to MTD and BL respectively. Extensive coverage (with examples) can be found under Section D (for MTD) and Section E (for BL) of the ISBP. The method to distinguish a MTD from a BL is embedded in several sub-articles of the UCP and ISBP where the litmus test ought to include the following issues[2] with regard to any such document:
a)     notations in respect of places of receipt and delivery
b)     notations in respect of port of loading and discharge
c)     notations in relation to vessel’s name
d)     notations in respect of shipment date
e)     notations with regard to freight (what charges are included or excluded).

Answers to the above may help us to distinguish a MTD from a bill of lading, and thereby help us in proper application of the relevant provisions of the UCP & the ISBP. For a better understanding of the applicable rules, a close study of both these ICC documents is, therefore, strongly recommended.

[1] Published in Indian Engineering Exports, Vol. 9 Issue no. 6, September 2016, and Trade Services Update, Denmark, Volume 18, Issue 3, July-September 2016.
[2] For more information refer to

Sunday, November 06, 2016

Decoding UCP Article 30 on LC amount, quantity and unit price

Decoding UCP Article 30 on LC amount, quantity and unit price [1]
Rupnarayan Bose[2]

Article 30, UCP 600[3]
We are aware that if a beneficiary is to get his documents negotiated under a letter of credit, he must conform strictly to the terms of the credit. Compliance with the terms includes, among others, compliance with amount and quantity of goods being shipped. Under certain conditions, the UCP permits variations in both the amount and the quantity. These conditions are spelt out in Article 30 of UCP 600.
This article addresses the issues regarding variations in the quantity of the goods shipped, the amount of presentation under documentary credits vis-à-vis the amount and quantity for which a particular credit may have been issued. These are critical issues for the beneficiary, as also for a bank that issues a credit and later has to examine the documents presented for compliance. This is primarily because the exchange control regulations of some countries do not permit import of goods for values that exceed (even by a small margin) the amount stated in the credit. On his part, the buyer too may not wish to accept excess drawing or excess shipment. It is, therefore, necessary to understand the provisions of Article 30 that permit variations, and the circumstances under which it does so. Do note carefully the instances where 10% and 5% variations apply.
Variation in Amount, Quantity or Unit Price
Article 30(a) stipulates that if the term ‘about’ or ‘approximately’ is used in respect of an amount, quantity or unit price stated in the credit, then it is to be understood that the credit permits a tolerance not to exceed 10% more or 10% less in the amount, the quantity or the unit price respectively to which the term has been prefixed or suffixed.
Thus, if the credit is issued for ‘about USD.100,000 or USD.100,000 approx.’, then shipment can be made for a total amount of (USD.100,000 +/- (10% of 100,000), that is) USD.110,000 (maximum) or USD.90,000 (minimum). Similarly, if the term ‘about’ or ‘approximately’ relates to the quantity stated in the credit, the total quantity shipped may be 90% or 110% of the quantity stated in the credit. The same rule applies to the unit price.
It would be seen from this example that the term ‘about’ or ‘approximately’ used in conjunction with amount, rate or quantity creates room for excess or short shipment under a letter of credit. In certain instances, such eventualities may invite complications, especially if the law of the land is breached as a result. It is, therefore, necessary to be careful if the terms such as ‘about’, ‘approximately’ are used in a credit when referring to amount, quantity, rate or measure. However, if the country’s laws do not stand in the way, and there is a possibility that the shipment may not be for the exact amount specified in the credit, it may be advisable to prefix the amount with the expression ‘up to’, or ‘not to exceed’ or words to that effect (viz. LC issued for amount up to USD.1000,000.00 only, or credit amount not to exceed USD.100,000) to restrict the drawing strictly within the amount stated in the credit.
Variation only in Quantity
Sub-article 30(a) deals with the use of the term ‘about’ or ‘approximately’ in conjunction with the amount, rate or quantity stated in a credit. But what happens if these terms are not used to qualify the quantity stated in a credit, but variations are observed? To what extent such variations could be permitted or is acceptable? These issues have been dealt with in the next section of Article 30, i.e. sub-article 30(b).
Even if nothing is stated in the credit, no qualifying term or expression is used, sub-article 30(b) still permits a variation of 5% either way (i.e. more or less) in the quantity stated in the credit. But this variation is allowed under the following conditions:
(1)   if a credit does not stipulate the quantity in terms of a stipulated number of packing units or individual items, and
(2)   also provided that the total amount utilised does not exceed the amount of the credit.
Hence, (keeping the two foregoing provisions in view) if variation in quantity shipped is not to be allowed at all, the issuing bank should word the credit to specifically stipulate that the quantity of the goods specified must not be exceeded or reduced.
Invoicing for a Lower Amount
In real life, while a credit is issued as far as possible for or near to a round sum, the actual amount drawn may not always be exactly so. The amount finally invoiced may happen to be a broken amount, more often slightly less than the amount stated in the credit. The last section of Article 30 provides for this possibility. It states that (even when partial shipments are not allowed) a tolerance not to exceed 5% less than the amount of the credit would be allowed (practically by way of default). This would, of course, be under certain specific conditions.
A beneficiary may thus submit his invoice for an amount lower than the LC amount (maximum 5%), provided,
(1)   that the quantity of the goods (if stated in the credit) is shipped in full, and
(2)    the unit price (if stated in the credit) is not reduced.
This deviation does not apply when the credit stipulates a specific tolerance, or uses the expressions ‘about’, ‘approximately’ or terms to similar effect (as stated in sub-article 30(a)).
This means that if the credit stipulates a specific tolerance limit, that will apply. If terms such as ‘about’, ‘approximately’ etc. are used, then the 10% variation (as per sub-article 30(a)) will prevail. As already clarified, the invoice amount being lower than the LC amount by (a maximum margin of 5%) is a default option permitted in the UCP.
If the above still appears to be confusing and unclear, the illustration furnished in the next section may be helpful in better understanding of the relevant articles of the UCP.
Article 30: A worked out example
Sub-article 30(a): If the quantity of goods in the credit is simply mentioned as ‘1000 MT’, the beneficiary must ship a minimum of 950 MT, or up to a maximum of 1050 MT (+/- 5% allowed as per sub-article 30(b), provided the other stipulations are complied with). However, if the credit states the quantity of goods to be shipped as about or approximately 1000 MT, then the shipment can vary between a minimum of 900 and a maximum of 1100 MT and still comply with the credit terms. It is to be remembered that even if more than the stipulated quantity is shipped under this provision, the total amount available under the credit cannot be exceeded.
Sub-article 30(b) & (c): Assuming that a credit is issued for USD100,000 (not ‘approximately’ US$100,000 or ‘about’ US$100,000); quantity of goods is stipulated as 1000 MT; partial shipment is not allowed, to what extent can the beneficiary vary the quantity of goods that he wishes to ship and the amount of his invoice?
Under the provisions of sub-article 30(c), the minimum amount that can be drawn is restricted to (5% less than the LC amount, that is) USD 95,000. Since the credit has mentioned the quantity of the goods to be shipped, it must be shipped in full. Further, since the amount is not being exceeded, or the credit does not stipulate any packing unit or individual item, this issue does not attract the provisions of sub-article 30(b). The quantity, therefore, can also be varied by 5% either side of that stated in the credit (1000 MT). Shipment can thus be made for either 950 MT or 1050 MT as long as the unit price (if stated in the credit) is not changed.
The Issuing Bank and Article 30
In view of the provisions of Article 30, and the leeway provided by the same to the beneficiary in terms of variation in amount drawn under a credit, the unit price and the quantity finally shipped, the issuing bank should apply its mind with due care while drawing up a letter of credit.
Here too, understanding the exact requirement of the applicant would be helpful in giving final shape to the terms and conditions of a documentary credit.

[1] First published in LCM-Trade Services Update, Volume 15, Issue 1, January - February 2013.
[3] This interpretation is my based on my understanding of UCP, Article 30. Error, if any, may please be pointed out for rectification.]

When a non-bank issues a letter of credit

 When a non-bank issues a letter of credit
Department of Policy and Business Practices
 ICC Commission on Banking Technique and Practice,
30 October 2002.

Because of widespread interest in this subject, the ICC Banking Commission has decided to post its official Opinion on non-banks and letters of credit on the ICC web site. The Opinion follows.
Articles 1 and 2 of UCP 500
When a non-bank issues a letter of credit
We have been receiving a significant number of enquiries about letters of credit which are advised by some banks in the usual way, but are actually issued by a corporate, or the finance arm of the corporate and not a Bank.
These predominantly corporate L/Cs from Country U are ‘advised’ by banks on their letterhead in a SWIFT MT 700 format, and to all intents and purposes appear to be bank issued L/Cs, with the requirement to present documents to the advising or transferring bank, where documents will be processed and payment made after receipt of funds from the ‘issuer’.
Invariably they incorporate clauses to the effect that the L/C is subject to the UCP, and that where the UCP refers to ‘issuing bank’ then the issuer is to be construed as acting in all respects as the ‘issuing bank’.
Notwithstanding the fact that legally any entity can issue a letter of credit, our understanding is that the UCP only contemplates as issuers banks, on the basis that the issuing bank is undertaking a third party, independent guarantee of payment to the seller (beneficiary). It is this independence of a banker's letter of credit that is key to the payment undertaking.
The requirement by the seller for a letter of credit is two-fold: first that he has a guarantee of payment, and second that he can use the credit to raise pre-shipment finance from his banker.
In the case of the corporate L/C as we understand it, the guarantee of payment is not normally by an independent third party, and, as such, the credit risk is that of the corporate entity issuing the credit. Similarly when documents are presented under the L/C for negotiation, that negotiation if any, is based on the risk of the issuing entity, i.e. is corporate, not bank risk.
We would be grateful if the ICC Commission on Banking Technique and Practice would advise on the following:
1.      Is it acceptable practice for a bank to advise a corporate letter of credit in the same way as a bank-issued letter of credit without drawing attention to the ‘non-bank’ nature of the issuing entity? Does the Commission consider appropriate guidelines should be published? If so what will these say?
2.      What is the position if the corporate issuer were to apply for liquidation, bankruptcy, or protection from creditors (e.g. file for Chapter 11), and how different is the position to that of when a bank is unable to meet its obligations.
The UCP reflects that state of practice, namely a situation where the issuer or other actor on a letter of credit is a bank. As a result, although there is no affirmative rule in the UCP prohibiting entities that are not banks from issuing, confirming, paying, negotiating, or advising letters of credit, its vocabulary (‘issuing bank’, ‘confirming bank’, etc.) assumes that these entities are banks.
This assumption is based on the recognition that there are three principal advantages to bank issuance and handling of letters: namely that banks have the operational expertise to handle issuance and presentation under letters of credit in a professional manner, that they have the tradition of independence from the underlying transaction which is the basis of the commercial reputation of the letter of credit, and that in virtually all countries banks are specially regulated with a view toward protecting those who rely on their undertakings.
These matters are of considerable importance to the integrity of the letter of credit as an instrument of commerce and to its dependability as an instrument of payment.
However, neither the Commission on Banking Technique and Practice nor the UCP can determine who is empowered to issue letters of credit under local law nor who may issue its undertakings subject to the UCP. That restriction on the issuance of letters of credit is a regulatory matter under local law should be obvious. In some countries, non-banks can issue letters of credit, although there may be limitations where they are used in consumer situations. In other countries, issuance is limited to financial institutions, but it is less clear that only banks constitute financial institutions. As a result, non-banks that are financial institutions, such as insurance companies, can issue letters of credit in some countries.
It may be less apparent that the UCP cannot itself limit the scope of its application. The UCP is a set of voluntary rules of practice. The rules can be modified or excluded by the undertaking that is issued subject to them as is recognized in UCP 500 article 1 (Application of UCP) (The provisions ‘are binding on all parties thereto, unless otherwise expressly stipulated in the credit.’). Issuance by a non-bank constitutes such a modification. Even if the UCP expressly prohibited issuance by a non-bank, this prohibition could be modified because the UCP is not a legislative act that can restrict the manner in which it can be applied.
Where a letter of credit is issued by a non-bank, the non-bank issuer should be held to the same obligation and standard of care as would a bank. In either case, the obligation is to pay against the presentation of documents that comply with the terms and conditions of the credit and that determination is to be made based solely on the documentary presentation and not on the status of reimbursement obligations or the underlying transaction, and local law should apply the same principles to an independent undertaking regardless of who makes it.
Having concluded that a credit can be issued subject to the UCP by a non-bank, however, does not mean that it is prudent for a beneficiary to accept such a credit. Issuance through an advising bank does mitigate the issue of whether the credit is authentic and presentation of documents to a bank does reduce some operational risks. There is, nonetheless, the risk of the creditworthiness of the issuer and country risk. These risks apply equally whether the issuer is or is not a bank and a beneficiary should always assess whether it is prepared to accept the credit and country risk associated with the issuer. If not, it should require confirmation by an entity with which it is comfortable.
There remains, however, an additional risk that may not be apparent to beneficiaries, namely the risk of neutrality of the issuer. This risk is somewhat more intangible but is very important. It is the risk that, when presented with documents, the issuer may be influenced by factors other than whether they comply on their face with the terms and conditions of the credit and may exercise certain discretionary judgments in examining documents against the beneficiary where it would not otherwise do so if external factors were different. While this risk is not confined to non-banks, the reputation of individual banks for integrity is well known in the letter of credit community and one which most banks that regularly engage in letter of credit practice work hard to maintain. It is less apparent that when faced with a poor credit decision, an insurance company will approach the problem in the same way as would a letter of credit banker rather than as an insurer, which may be inclined to reject all arguable claims and engage in litigation to settle any colourable dispute.
Similar concerns would apply to corporate issuers on behalf of themselves or affiliated companies, even though two-party letters of credit are recognized by UCP 500 article 2 (Meaning of credit) (‘and on the instructions of a customer (the 'Applicant') or on its own behalf’).
For these reasons, it is in the interest of banks generally to inform corporate letter of credit users of the advantages of having a bank's obligation, either as the issuer of a credit or as the confirmer of a credit issued by a non-bank. There would be no objection under standard international letter of credit practice to informing specifically the beneficiary of such a credit as to the nature of the issuer in addition to emphasizing that the advising bank assumes no liability, although in the absence of agreed standards such a decision should rest with the individual bank involved.
Of course, where the manner of issuance misleads the beneficiary into believing that the issuer is a bank, the advising bank may expose itself to liability. Ultimately, however, the decision as to whether or not to accept the risks associated with a non-bank issuance rests with the beneficiary.
  1. It does not ‘violate’ the UCP for a non-bank to issue a credit subject to the UCP even though such issuance is not contemplated in the rules. The UCP does not specifically provide for bank advice of non-bank issued letters of credit. Such an advice should accurately identify the issuer and indicate the advising bank's limited role. If the form of advice refers to the ‘issuer’ as ‘issuing bank’ or otherwise gives the impression that it is a bank, it is recommended that the advice affirmatively disclose the non-bank status of the issuer in order to correct any mistaken impression caused by such reference.
  2. The consequences of insolvency are a matter for local law, whether the insolvency is that of a bank or non-bank issuer. In either case, however, the beneficiary assumes the risk of the creditworthiness of the issuer unless it is offset by obtaining confirmation or credit insurance.

Rome, 30 0ctober 2002

Sunday, August 07, 2016

'Anywhere Banking' –The beginning (The origin of 'Core Banking' in India)


By now, most of us – bankers and non-bankers – have become familiar with the term ‘Anywhere Banking’, also known as ‘core banking’ or ‘centralised banking solution’ (CBS). The terms have come to signify banking conveniences never before experienced in India during the days of manual banking operations. The all-encompassing change in banking practice has come as a boon to the banking community at large – the bankers as well as to those who make use of banks’ services. It’s now a routine, everyday part of our life, taken almost for granted. Yet few, if anyone, know precisely how this transition took place; where it all began. This is the story.

One can probably go so far as to say that ‘Anywhere Banking’ would not have been possible without the concurrent development in technology, especially the advent of V-Sat during the early 1990s. Prior to the advent of V-Sat, the most efficient means of communication included larger and costlier satellite dish having larger but non-focussed footprints. It did not offer the technology or the convenience required for the purpose of small or medium volume commercial applications, nor was it suitable for focussed, high quality, point to point communication at a reasonable cost.

The other (and far worse) option was setting up WAN (wide area network) using leased or dial-up land lines. It was actually a non-solution.

Reserve Bank of India: The game-changer

In January 1993 the Reserve Bank of India (RBI) came out with its guidelines for issuing licences to new commercial banks in the private sector. The move shook up the moribund banking industry. Since independence, for the first time in more than forty years, a positive announcement of such significance was made.

Prior to that, the banking industry was plagued with frequent and continuous resistance by the various workers’ unions to the introduction of automation in the banking industry. The greatest fear of these unions was job losses and redundancy. So they resisted or severely restricted the introduction of computers in banks. The computers were consequently named as ALPMs (automated ledger posting machines) and ELPMs (electronic ledger posting machines). The capacity of each computer was forcibly restricted to a ridiculously low level at a certain number of accounts (say 5,000 per machine). Interconnectivity and networking were not allowed; and, additional allowances were demanded for the computer operators. Automation remained a bargaining tool and a bone of contention between the RBI, the bank management and the staff unions. Mechanisation and automation were completely stalled. Services suffered in consequence.

In opening up the banking sector to new players, the RBI came out with a strategically brilliant move. While announcing the new licensing policy, it insisted that technology must be the main plank, the core engine and the primary driving force for operations planned by all new applicants. The RBI, very wisely and with great foresight, banked on the possibility that competition from new, technology-driven banks would force the nationalised banking sector and their uncompromising, rigid unions to see logic, realise the futility of their policies, and motivate them to change their collective, obstructionist mind-set. The RBI was eventually proved right in their approach, and how! We are all witness to the subsequent developments that swept the Indian banking industry since the opening up of the banking sector.

A journey of discovery

A handful of licences (actually ‘in-principle approvals’) were initially issued by the RBI in 1993-94. The thrust on technology was made a primary condition in those approvals. It must be remembered that not a single individual in India at that point in time had any experience in setting up commercial banks from scratch. Neither did anyone within the establishment of the RBI. For the officials within the RBI, as well as those who had received in-principle approvals for setting up commercial banks in India, it was going to be a challenge as well as a great learning process.

There were a multitude of issues that had to be addressed by all concerned. New issues surfaced almost every other day. It was a journey of discovery for the new banks as well as the RBI. Very frequently, the representatives of the applicant banks and those from the RBI (DBOD) had to sit together (mostly, informally) to find a way or via media in their attempt to resolve knotty issues, take a view on certain problems and move forward. The officials of the RBI were wonderful beyond compare in their cooperation, communication, reasonableness, understanding and support. In my years of interaction with them during the period (and after), I can vouch for these facts without any reservation whatsoever.

The primary concern of the new banks was, of course, technology. One of the reasons for such concern was that once chosen, the technology platform could not be changed very easily. Apart from the cost factor, the complicated and lengthy implementation process, the quality of operations and future success would depend very heavily on the initial choice.

Thus, though the RBI stipulation had opened up immense possibilities as well as opportunities for the banking sector – as also the information technology sector - it had simultaneously presented a few problems too. One of them was that not a single software vendor in India had any banking application software available that was geared for the next generation of banking. The then existing market situation was a product of union action, restriction and activism, resistance to all forms of automation, limited mechanisation and technology upgradation.

In consequence, the vendors in India offering application software during that period to the banking industry had restricted themselves to dedicated, low capacity software suitable only for stand-alone computers. Not a single vendor had anticipated the move by the RBI. None had any suitable application software ready or on the drawing board, because there was neither a market for it at the time nor was the possibility anticipated by any one. No research, development or investment was, therefore, directed at being prepared for such eventuality, either. The industry was caught totally unprepared by this development.

Resolving the technology conundrum

When the RBI came out with its guidelines for licensing new banks, I was with 20th Century Finance Corporation Ltd., based at its Raheja Centre head office at Nariman Point in Mumbai (Bombay). The file containing just the RBI guidelines landed on my table in January 1993. The bank project was added to my existing assignments.

The events that followed – from a slim, cardboard file right up to the new bank starting operations on 25 January 1995 – form a very interesting tale. That is a story to be told another day. At that juncture, a critical issue was identification of suitable application software that would meet our grand IT plans. ‘Grand’, because these plans were far ahead of their times, viz., the era of ALPMs and ELPMs. For me in particular, the project was very exciting indeed. It is not every day that one can give back to the industry everything that one acquired during one’s career as a banker, or put into practice one’s ideas and dreams for a better, more efficient banking system. Rarely, if ever, would an ordinary banker be asked to set up a commercial bank from the very inception, or be given a totally free hand to shape it in his own way, to his best judgment. Such trust was rare. Here was an opportunity to set up a bank from scratch, to create something totally different from what existed then; an opportunity to create something entirely new, to give shape to what one would have considered, at best, as wishful thinking. A rare opportunity of such magnitude brooked no compromise in selecting the best considered necessary for a whole new bank.

The software was going to be the core and the heart of the bank. On that point, there was no doubt. In selecting the software, one had to make sure that it would meet the requirement of the future at least for several years to come, as well as provide a platform for growth. As a banker I had experienced difficulties and bottlenecks in transaction management, in operations, in communication, in managing and collating information, in accounting, in reconciling thousands of outstanding entries, and in a host of other areas. The assignment, therefore, was a dream-come-true, a great opportunity for me to make sure that the new bank did not suffer from these constraints. Going one step further, I tried to ensure that the bank could offer much more than was ever before offered by the industry to its internal and external customers. As stated earlier, the selection of the right software platform, its capabilities and potentialities became the key.

It was mentioned towards the beginning of this article that connectivity was a critical issue. Core banking required an efficient communication system. Efficient, commercially viable alternatives to land lines were not available till then. V-Sat had just then begun to be discussed. We were not sure when exactly the technology was going to be made commercially available. However, the important thing was that V-Sat was on the horizon, and appeared to fit our requirements exactly. Hence, we decided to make our plans on the assumption that V-Sat technology would be available sooner rather than later, hopefully by the time the bank was ready to start operation.

I had mentioned earlier that, like everyone else, the large IT houses too had been caught unprepared for the sudden opening up of the banking sector. The best they could offer was stand-alone application packages customised for ALPMs and ELPMs. In response to our new demands they offered to link-up and network the stand-alone machines to help achieve our goals. Unfortunately, the offer was far removed from our idea of a centralised solution. We were looking for a hub-and-spoke arrangement whereby the branches and smaller offices would be networked and connected to the core, reducing cost but improving operation.

There were other reasons for insisting on this approach. One of them was technology management and upgradation. In our opinion, it was far easier to manage and maintain a core application rather than go around to all the offices for each and every modification or change in the system. For a large network of branches spread all over a country like India, issues of time, cost and operational constraints would have made the approach inefficient, impractical and unviable.

Core banking: The concept

Another critical issue revolved around information management. As bankers, most of us knew to our cost the amount of time that had to be set aside on a daily basis for creation of statements, reports and statistical returns. At head office, it was the job of major departments to call for and collate data. At branches, it was a full-time job of a section devoted simply to generating reports and returns for the controlling offices. Most of the time, the same sets of figures had to be re-arranged and presented in different formats for different departments through a large number of reports. Add to that the sudden but frequent call for unstructured, ad-hoc reports and statements from the controlling offices, and one can imagine the chaos that was routine in the life of a banker.

Timely, accurate and complete information was essential for running a bank efficiently. Almost every department and function, including treasury and money market operations, credit, risk management, customer profiling, marketing, planning and development, foreign exchange, needed management information to function. Taking the right decision depended on having the right information immediately, as and when required, properly collated and arranged in a structured format, without waiting for a collating process involving weeks if not months.

Centralised solution gave us a wonderful opportunity to solve the problem at one go. This meant that every bit of information would be available live, on-line, real time, always up-to-date and accurate, literally at the tip of your fingers. Linking up of stand-alone machines, as proposed by the vendors, did not meet that requirement. Hence, such a proposal had to be rejected outright.

Other benefits expected to be derived out of switching from the manual or partially mechanised to a fully automated, centralised environment included the following:
  • Doing way with inter-branch reconciliation, a huge problem till then.
  • Reduction in processing time; significant reduction in transaction cost.
  • Reduction in back-office work load, resulting in better allocation of manpower and resources, extension of business hours for customers.
  • Improvement in the system of remittances and fund transfers.
  • Improvement in cash management, in better management of collection accounts and fund management on behalf of large corporate houses – including such mega accounts like Indian Oil.
  • Implementation of CRM, exposure and risk management; not possible till then in a manual environment.
  • Enabling the customers to execute their transactions at any of the bank’s offices, irrespective of their geographical location. (The birth of ‘Anywhere Banking’.)
  • Setting up ATMs.
A core banking system would also go to resolve certain operational problems. Setting up and managing branches were expected to be faster, easier and at a lower cost, we argued. Because, all that would be required to set up a new branch were suitable premises, furniture, and a few computers. Link the computers through a server to a V-SAT terminal placed on top of the building, and you were in business. The arrangement also helped to offer all products at all outlets, irrespective of their distance from the controlling office or the bank’s head office.

The software solution

So we dreamt on. The reality at the ground level was, unfortunately, quite different. As I had said earlier, the technology vendors did not have any product ready to meet our requirement. Large, reputed houses like Wipro and Infosys offered to take up development of solutions, promising to tailor them to our needs. The problem was that we did not have at our disposal the lead time required to allow for full development of the required application (including the unavoidable time for removal of glitches, bugs, for field tests, parallel run followed by live run etc.). Neither did we have the resources for the purpose. There was no one to spare who could be assigned, full-time, at a stretch over quite a long time span, committed to product development on such a large scale. At the back of our mind, there was also the possibility (and the risk) that any delay in the availability, or the lack of, a fully developed solution could hold up the very launch of the bank itself.

Top brasses from leading software houses visited my 6’X6’ office on the 12th. floor of Raheja Centre. Intensive brain storming with the leading lights of the IT industry took place almost daily. For, they realised that this was a turning point in banking software technology development. An opportunity that could hardly be missed. Unfortunately, our yet-to-be born bank neither had the time, nor the resources to commit to any of these proposals or plans. What we required was a ready solution in quick time. Because, creating a whole new bank from nothing involved working on a huge number of other things too, while the search for the core, the engine, was on.

In due course of time we found what we were looking for. It was tweaked to meet our requirements and implemented across branches. In due course, other frontline software houses completely abandoned their earlier configurations that mainly attempted the link-up of individual, stand-alone computers to offer so-called centralised banking solutions. They adopted the concept and the framework of ‘Anywhere Banking’ that Centurion Bank[1] had devised and created, and successfully developed their own branded products. Some of them are now industry standards, used widely in India and overseas.


From the layman’s point of view, the term ‘Anywhere Banking’ conveys only a small part of what we wanted to achieve through our innovations while setting up a new bank. But the name stuck. ‘Anywhere Banking’ now represents the basic concept created for the very first time through ‘core banking’ or ‘centralised banking solutions’.

Centurion Bank Limited opened its doors on schedule on 25th. January 1995, with a glittering launch party at Goa the previous evening (where its registered office was located). An aircraft was chartered to ferry the guests from Bombay to attend the party. Another launch party was held at the Taj Hotel, Bombay on the eve of the launch day, especially for those who could not attend the launch party at Goa.

The term ‘core banking system (CBS) has gradually developed to now become a generic term for centralised banking solutions. I feel privileged to have been associated with a unique project, a game-changing concept that forever altered the face of the Indian banking industry. 
[1] Centurion Bank is no more. Initially, it transformed itself as the Centurion Bank of Punjab Limited. Later, HDFC Bank took it over completely, merged the bank with itself, and the bank’s name was obliterated for ever.