LTR in LC stands for Loan against Trust Receipt. It's a financial facility used in international trade, specifically within the context of a Letter of Credit (L/C).
Explanation:
A Loan against Trust Receipt allows an importer to take possession of imported goods before making full payment to the exporter (or the exporter's bank). This is made possible through a "trust receipt" issued by the importer to their bank. The trust receipt acknowledges that the importer holds the goods in trust for the bank, with the obligation to either sell the goods and repay the loan or return the goods to the bank.
How it Works:
- Letter of Credit (L/C): An importer arranges for their bank to issue an L/C in favor of the exporter. This guarantees payment to the exporter upon presentation of compliant documents.
- Shipping Documents: The exporter ships the goods and presents the required shipping documents (bill of lading, invoice, etc.) to their bank.
- Importer's Bank Involvement: The exporter's bank forwards the documents to the importer's bank.
- Loan Against Trust Receipt (LTR): Instead of immediately paying the importer's bank, the importer requests an LTR. The bank agrees, extending a short-term loan.
- Trust Receipt Issuance: The importer signs a Trust Receipt in favor of the bank. This confirms that the importer is holding the goods as the bank's trustee until the loan is repaid.
- Release of Documents: The bank releases the shipping documents to the importer.
- Goods Release: With the documents in hand, the importer can clear the goods through customs and take possession.
- Repayment: The importer sells the goods and uses the proceeds to repay the loan to the bank within the agreed timeframe.
Benefits:
- For Importers: Allows access to goods for processing or resale without immediate full payment. It improves cash flow.
- For Banks: Provides a secured lending opportunity, as the bank retains a security interest in the imported goods.
Risks:
- For Banks: Risk of the importer not selling the goods or not repaying the loan.
- For Importers: The Trust Receipt arrangement creates a fiduciary duty to the bank.
Example:
Imagine a textile manufacturer in the United States importing cotton from India under a Letter of Credit. Instead of paying the full amount immediately to obtain the shipping documents and clear the cotton, they might arrange an LTR with their bank. They sign a Trust Receipt, promising to sell the cotton and use the proceeds to repay the bank. This allows them to begin manufacturing garments without tying up all their working capital upfront.
In summary, Loan against Trust Receipt is a trade finance tool that bridges the gap between the arrival of imported goods and the importer's ability to make full payment, facilitating smoother trade transactions.
