The report also pointed out that in the current macro environment, most of the power generating companies are facing severe cash flow mismatches because of huge pending receivables from discoms.
“To alleviate such cash flow stress, it would be prudent if a usance letter of credit is considered by coal companies for payment purposes. Such letters of credit provide a credit period say of 180 days.”
As the first step towards this, the buyer which is the generating company will request the issuing bank a usance letter of credit for 180 days. On scrutiny of documents, bank will issue a usance letter of credit in favour of the advising bank.
After the issuance of the letter of credit, the advising bank will advise the seller which is the coal company which in turn will dispatch the goods to buyer (generating company) in accordance with set terms.
After the dispatch of goods, seller or the coal company will submit the dispatch documents to the advising bank, which will forward the dispatch documents to the letter of credit issuing bank. This bank will present dispatch document to the buyer or the generating company. The bank will do the scrutiny of documents and convey the acceptance to the advising bank.
After the confirmation from the letter of credit issuing bank to the advising bank, proceeds will be credited to the coal company account by the advising bank. The advising bank will request the LC issuing bank for payment at maturity.