LTR in banking stands for a Loan against Trust Receipt, a specific type of financing used in import transactions.
Understanding Loan Against Trust Receipt (LTR)
A Loan against Trust Receipt allows importers to take possession of imported goods before making full payment to the bank that financed the shipment. This facilitates quicker clearance of goods and allows businesses to process and sell them without delay.
How LTR Works:
The process involves a few key steps:
- Import Shipment: An importer arranges for goods to be shipped.
- Bank Financing: The importer's bank provides financing for the import shipment.
- Documents and Trust Receipt: The bank releases the shipping documents to the importer without requiring immediate payment. Instead, the importer signs a Trust Receipt. The reference states: "LTR is a loan against a Trust Receipt provided to the client when the documents covering an import shipment are given without payment."
- Holding Goods in Trust: The importer now holds the goods (or the sale proceeds from those goods) in trust for the bank. The client acknowledges that the bank retains ownership until the LTR is repaid.
- Repayment: The importer sells the goods and uses the proceeds to repay the loan to the bank, including any interest and fees. The reference states: "Under this system, the client will hold the goods of their sale proceeds in trust for the bank, until the loan allowed against the Trust Receipt is fully paid."
Key Features of LTR:
- Trust-Based System: Relies on the importer's integrity to sell the goods and remit the proceeds to the bank.
- Short-Term Financing: Typically used for a short period, allowing the importer time to sell the goods.
- Security for the Bank: The goods themselves (or their sale proceeds) act as security for the loan.
Benefits of LTR:
- Improved Cash Flow: Importers don't need to tie up their capital in goods sitting in customs.
- Faster Turnover: Allows for quick processing and sale of imported goods.
- Facilitates Trade: Makes international trade more accessible to businesses.
Example:
Imagine a clothing retailer imports shirts from overseas. Instead of paying the bank immediately, the retailer receives the shipping documents by signing an LTR. The retailer can now clear customs, get the shirts to their store, sell them, and then use the revenue to repay the bank.
