LTR in banking stands for Loan Against Trust Receipt. It is a type of short-term financing facility extended by banks to importers.
Understanding Loan Against Trust Receipt (LTR)
Loan Against Trust Receipt (LTR) allows an importer to take possession of imported goods before making full payment to the bank that provided the financing. The bank essentially provides a loan, secured by the imported goods, and the importer holds the goods in trust for the bank.
Key Aspects of LTR:
- Purpose: To enable importers to take delivery of goods from the shipping company or port authorities without immediately paying the full amount. This allows them to process, sell, or store the goods.
- Mechanism:
- An importer receives a shipping document (e.g., bill of lading) from the exporter.
- The importer applies to their bank for an LTR.
- The bank, after assessing the importer's creditworthiness, provides an LTR facility.
- The bank endorses the shipping document, enabling the importer to take possession of the goods.
- The importer signs a "Trust Receipt," acknowledging that they hold the goods as trustee for the bank until the loan is repaid.
- Security: The imported goods serve as collateral for the loan.
- Repayment: The importer is expected to repay the loan from the proceeds of selling the imported goods within a specified period.
- Risk: The bank takes the risk that the importer may not be able to sell the goods and repay the loan. To mitigate this risk, banks thoroughly assess the importer's creditworthiness and may require additional security.
Benefits of LTR:
- For Importers:
- Improved cash flow by delaying full payment.
- Ability to process and sell goods quickly, improving turnover.
- Facilitates smoother import operations.
- For Banks:
- Opportunity to earn interest income.
- Develop relationships with importers.
Example:
Imagine a retailer imports clothing from overseas. The shipment arrives, but they don't have the immediate cash to pay the bank (who issued a Letter of Credit to the exporter). The bank provides an LTR. The retailer signs a trust receipt, takes possession of the clothing, sells it in their store, and then uses the sales proceeds to repay the bank loan plus interest.
Differences from other Trade Finance Options
LTR differs from other trade finance options like Letters of Credit (LCs) and Bank Guarantees. While an LC provides a guarantee of payment to the exporter, an LTR is specifically a financing tool that allows the importer to access goods before full payment. A Bank Guarantee, conversely, is a guarantee of performance, not a direct financing mechanism for accessing goods.
