Crystallisation of import bills under LC

The process of converting foreign currency liability of the importer into Indian Rupee liability is called the crystallization of import LC bills. The idea behind the crystallization of import bills is to transfer the probable exchange risk of a non-retired bill amount in foreign currency to the importer.

An LC can be issued either against sight payment which means the payment should be made on receipt of the document by LC issuing Bank. The other type of LC is LC under Usance terms.  LC Bills under Usance terms are the bills payable by the buyer/importer at a specified period ‘after date’ or ‘after sight ’of the bill. If the applicant (importer) does not deposit the money and retire the bill as per LC terms, the LC issuing bank shall make payment to the beneficiary on submission of documents as per terms of L.C. Further,  non-retirement of import bill by the due date, there is a risk that the value of the bill may be significantly changed due to adverse movement in value of Indian  Rupee against denominated foreign currency when the payment amount deposited by the importer at a later date. Therefore, the bank needs to pass on the exchange risk of the non-retired bill to the importer (LC applicant) through crystallization of the bill.

The overdue import bill is crystallised by converting foreign currency liability of the bill into Indian Rupees’ liability at a prevailing TT buying rate. If the forward contract is booked, crystallization has to be done at the contracted rate. In the event, the crystallization of bills leading to early delivery under the forward contract, swap charges if any will be recovered from the importer.

Unpaid foreign currency import bills under Letters of credit shall be crystallised as per the stated policy of the bank. FEDAI has given the authorized dealers the freedom to decide on the period for crystallization based on risk factors like credit perception of different types of exporter clients, operational aspects, etc. in this respect (FEDAI rules 7.1 edition dated 1.7.2012, no changes made in the latest 10th edition). Earlier FEDAI rule had made it mandatory to crystallize unpaid LC bills on the 10th day after the date of receipt of sight payment document or on the due date in the case of usance bills. The policy in this regard should be transparently available to the customers.  In case the due date falls on a holiday or Saturday the importer’s liability should be crystallized into Rupee liability on the next working day.

For the purpose of realization of LC bills, the concerned bank opens a separate overdue import bill account (individual banks have different nomenclature for such account) and realize the bill to the debit of that account. The Rupee outstanding in the overdue import bill account created for the purpose will be recovered from the importer with interest at a rate applicable for overdue advances or as per the rate prescribed by RBI from time to time.

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