What Is a Red Clause Letter of Credit?

The "red clause letter of credit" was named because its advance clause was noted in red in the letter of credit to attract attention.

Red Clause Letter of Credit

Red clause

New business model

Huanghe Aluminum Power Group is a large-scale enterprise integrating coal, electricity, carbon and aluminum production. It is located in Wuchi County, which is rich in coal and bauxite resources. It is a large enterprise group with annual profits and taxes of over 100 million yuan in Sanmenxia City. With an annual import and export business of over USD 40 million, it is a traditional business customer of ICBC and Bank of China. In early 2003, the group wanted to sign a contract with Hong Kong Xinxin Co., Ltd. to export aluminum ingots of 15 million U.S. dollars, and the settlement method was red letter of credit.

To win customers, you must provide them with more financial services. It is clearly proposed to do more from the perspective of corporate interests. On the one hand, it collects international information about the aluminum industry in the market through various means. On the other hand, it carefully analyzes the red clause letters of credit opened by the company in the past to see if it can provide more thoughtful than other banks. Financial services. The International Business Department put forward a detailed service plan tailored to the red letter of credit business. Submitted to the Chairman of the Group an "Agricultural Bank Recommendation" for the letter of credit business. First, it is proposed to reduce the opportunity cost of USD 15 million from the original ICBC customer service LIBOR + 2% to the current LIBOR + 1.5%, which can reduce the financial expenditure of the company by 2 million yuan; Second, after repeated calculations, the red clause letter of credit guarantee The amount can be reduced from the original plan of 16 million US dollars to 15.4 million US dollars, which can save 600,000 US dollars of liquidity for the enterprise. Third, based on the trend of alumina powder price increase, it is predicted that the aluminum price will rise, and it is recommended that the company change the original ICBC red clause letter of credit The fixed aluminum ingot export price is used as the reference futures market price in order to obtain the best interests of the enterprise.

In order to implement the service plan item by item, Xing Jinchang and the relevant departments of the city bank went to the provincial bank to make special reports on the foreign exchange business of the Yellow River Aluminum and Electricity Group. The city and the city are linked up and down to provide enterprises with a full range of high-quality services in local and foreign currencies. In 2003, he went to Shenzhen in person to communicate and negotiate with foreign and foreign correspondent banks, to provide consulting services for enterprises, and to negotiate the main terms of letters of credit with representatives of foreign standard banks. Regardless of SARS, Xing Jinchang reported to the Provincial Foreign Affairs Administration and the Provincial Agricultural Bank three times. Through coordination among various parties, he finally reached a consensus with overseas standard banks. The Provincial Agricultural Bank issued a guarantee letter to speed up business processing.

The British (Hong Kong) Standard Bank finally issued an irrevocable letter of credit to Sanmenxia Agricultural Bank, and issued a 15.4 million USD advance guarantee. A 15 million USD foreign exchange deposit was successfully "flyn" from London, England, into the Sanmenxia Agricultural Bank account. First, the net interest margin of US $ 15 million in foreign exchange deposits can be realized by 1.166 million yuan; second, the guarantee premium is collected at 0.75 and the income can be 1.736 million yuan; the third is the payment of negotiable documents and the income can be 350,000 yuan; Fifth, it can increase the average monthly RMB deposits by about 10 million; Sixth, it can support RMB loans under the 120 million letter of credit, which can bring interest income of 9.2 million yuan.

The three proposals also brought unexpected income to the company, especially the aluminum price has increased from US $ 1250 per ton at the time of signing the contract to US $ 1520 per ton. In the proposal, the terms of the letter of credit were changed to fix the price of aluminum ingots to the reference futures market price as The enterprise has won huge benefits, achieved a win-win situation between banks and enterprises, and further consolidated the relationship between banks and enterprises.