UPAS LC stands for Usance Payable At Sight LC. Interestingly, you can use it as a financing instrument to finance either an FI or a corporate.
For FI domiciled in a country where US dollar may be expensive to tap into, the UPAS LC would come in handy to access cheaper USD financing via the negotiating bank's country. The FI borrowing USD from the negotiating bank (exporter's bank) would issue a UPAS LC in favour of the beneficiary (exporter) through the negotiating bank. Say the LC is a 90 days usance LC but with a special clause in the LC authorising the negotiating bank to pay the beneficiary at sight despite the 90 days usable term. Normally the negotiating bank will pay the beneficiary at sight and claim reimbursement from the Issuing Bank. However the negotiating bank can strike an arrangement with the Issuing Bank whereby former will lend a UPAS LC loan to latter with a pre-agreed competitive financing rate. At maturity, the Issuing Bank will repay the negotiating bank with principal amount plus accrued interest. This is commonly used in China/Hong Kong trade flows where PRC banks are tapping into much more competitive USD funding pool from HK based FIs.
For FIs (Issuing Bank) wanting to finance their own corporates, they can suggest to their importer to change the payment terms with their exporter/beneficiary from sight LC to say 90 or 180 days UPAS LC. This way the importer can lengthen their DPO and unlock their working capital to embark on some other income generating activities. Interest charges will be payable by the importer so there is no financial impact to their beneficiary. It is a win-win-win for importer, beneficiary and the Issuing Bank.
UPAS LC can be used for more complicated financing structure involving a supplier credit and a buyer credit portion in the UPAS LC say the first 30 days supplier credit and the last 90 days buyer credit.
For more details on how this would work, please contact us for an insightful dialogue.
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