Documentary Letters of Credit

-safest means for international trade settlement both for importers and exporters of goods. -obligation of the bank that opens the letter of credit (the issuing bank) to pay the agreed amount to the seller on behalf of the buyer, upon receipt of the documents specified in the letter of credit. The letter of credit is opened by the bank on the basis of the buyers (importers) instructions, which are compiled in accordance with the terms of the contract.

Both the importer and exporter should take into account that the letters of credit constitute a transaction separate from the purchase and sale agreement or other agreements on which they are based. The banks obligations under the letter of credit are set forth in the letter of credit itself, and the bank deals exclusively with documents, not with goods or services

Documentary Letters of Credit

Methods of International Trade settlement 1. Advance payment- Cash in advance payment terms, exporter avoid credit risk. Wire transfer and credit cards are mostly used. Relies on exporter to ship goods ordered. 2. Open account system Where goods are shipped and delivered before payment is due, usually 3090 days. Most dangerous option for importer in terms of cash flow. Relies on buyer to pay as agreed upon. 3. Counter trade - International trade in which goods are exchanged for other goods, rather than for hard currency. 3 types Barter involves the direct exchange of goods and services having an equivalent value, but with no cash settlement. Counter purchase, the overseas seller agrees to buy goods or services sourced from the buyer's country up to a defined amount. offset arrangement, the seller assists in marketing products manufactured by the buying country or allows part of the assembly of the exported product to be carried out by manufacturers in the buying country 4. Bills for collection - a document guaranteeing the payment of a specific amount of money, either on demand, or at a set time, without conditions in addition to payment imposed on the payer. 5. Documentary letters of credit

Documentary Letters of Credit

one of the safe methods of international trade settlements Constructive delivery by handing over documents or transferring title to or control over the goods is possible It guides the buyer as responsible for stipulating the required documents and conditions stipulates the liabilities of the issuing bank, advising bank, confirming bank, negotiating bank, etc

Documentary Letters of Credit

Why letter of credits? Current financial crisis has driven many exporters to look to bank undertaking as a means of securing their exports.

Those who have traded on open account terms for many years are looking out for more protection in certain markets.
This has given rise to a demand in the need for issuance of documentary credits and confirmation thereof.

Documentary Letters of Credit

Parties to A Letter Of Credit Transaction Applicant / Importer Beneficiary / Exporter Issuing Bank Advising Bank (Correspondent bank of Issuing Bank in Foreign country) Confirming Bank Bank in an exporter s country gurantees that LOC established by importer will be honored once conditions are fully compiled with. The confirming bank undertakes this responsibility on arrangements with issuing bank. Negotiating Bank - the exporters bank which agrees to pay the exporter by purchasing a negotiable instrument. Reimbursing Bank - that serves as a source of funds for payment to the L/Cs exporter.

Flow Chart of Letter Of Credit

Buyer (Importer)

L/C Application

C o n t e n t

Contract
Shipment Seller (Exporter)

Documents

Documents

A/C Debit

Advising Bank

Documents

Buyers Bank

Payment

Nominated Bank

Payment

Documentary Letters of Credit

Types of Credits Sight credit - A letter of credit that is payable once it is presented along with the necessary documents. An organization offering a sight letter of credit commits itself to paying the agreed amount of funds provided the provisions of the letter of credit are met Deferred payment credit A letter of credit that allows the buyer to take possession of goods by agreeing to pay the issuing bank or the confirming bank at a fixed future date. Acceptance credit - the buyer authorizes the transfer of funds to the seller on or after a certain date assuming the conditions of the letter are met. Negotiation credit - issuer expressly indicates the credit is available by negotiation, or where its issuers obligation extends to its drawers, endorsers, and bona fide holder for value for drafts drawn under it. Confirmed credit - used when the issuing bank of the letter of credit may have questionable creditworthiness and the seller seeks to get a second guarantee to assure payment.

Documentary Letters of Credit

Types of Credits Freely negotiable credit - a negotiation credit that authorises the beneficiary (exporter) to choose any bank to negotiate bills drawn under the letter of credit. Restricted credit - the beneficiary sent the documents to bank c rather than the nominated bank b, the issuing bank is not bound to pay. Issuing bank and bank C - Bank c is not the nominated bank so the issuing bank has no liability to bank c even bank c has negotiate the documents. The issuing bank should notify bank c without delay and return the documents to bank c. However if the issuing bank chose to handle the documents in normal ways, bank c will be deemed to be its nominated bank and it cannot deny any liability towards bank c and the beneficiary. Revolving credit - customer pays a commitment fee and is then allowed to use the funds when they are needed. The bank that is in agreement with the customer guarantees a maximum amount that can be loaned to the customer. Along with the commitment fee there are also interest expenses for corporate borrowers and carry forward charges for consumer accounts

Transferable credit - permits the beneficiary of the letter to make some or all of the credit available to another party, thereby creating a secondary beneficiary. The party that initially accepts the transferable letter of credit from the bank is referred to as the first beneficiary. The bank issuing the letter of credit must approve the transfer Back-to- back credit - Two letters of credit (LCs) used together to help a seller finance the purchase of equipment or services from a subcontractor. With the original LC from the buyer's bank in place, the seller goes to his own bank and has a second LC issued, with the subcontractor as beneficiary. The subcontractor is thus ensured of payment upon fulfilling the terms of the contract. Anticipatory credit allows its beneficiary to borrow against it before fulfilling its all requirements. Red clause credit - buyer extends an unsecured loan to a seller. The funds provided in a Red Clause Letter of Credit are known as advances. These advances are then deducted from the face amount of the credit when it is presented for payment. Green clause credit - the beneficiary can request the advance payment of an agreed amount (defined in the terms and conditions of the letter of credit) from the correspondent bank. This is basically intended to finance the production or purchase of the goods to be delivered under the letter of credit. Standby letter of credit - A guarantee of payment issued by a bank on behalf of a client that is used as "payment of last resort" should the client fail to fulfill a contractual commitment with a third party

 Revocable L/C- can be changed or cancelled by the bank that issued it at any time and for any reason. Irrevocable L/C - Cannot be changed or cancelled unless everyone involved agrees.

Documentary Letters of Credit

Documents in international trade Financial documents

Commercial documents
Transport documents Risk covering documents

Documentary Letters of Credit

Financial Documents Bill of Exchange Sight Bill of Exchange- must be paid as soon as it is received. Usance Bill of Exchange - The allowable period of time, permitted by custom, between the date of bill and its payment. Commercial documents Commercial Invoice Consular Invoice diplomat appointed to protect comm.interest Customs Invoice Legalised Invoice

Documentary Letters of Credit

Commercial documents Certificate of origin Generalised system of preferences (GSP) - designed to promote economic growth in the developing world by providing preferential duty-free entry for up to 4,800 products from 129 designated beneficiary countries and territories. Packing list Weight certificate Certificate of analysis and quality Certificate of inspection Health certificate

Documentary Letters of Credit

Transport Document Bill of Lading (B/L) Received for shipment B/L On Board B/L Clean B/L Claused B/L Straight B/L Charter party B/L

Documentary Letters of Credit

Regulatory Documents Export Declaration Forms G R / SDF Form Guranteed receipt/ Statutory declaration form P P Form Personal Particulars Softex Form software export form

Export Certificate

Documentary Letters of Credit

Common Discrepancies Late shipment / Presentation Description of goods between invoice and LC Incorrect / incomplete Bill of exchange Inconsistent documents Unsigned B/L, AWB Faulty Insurance Overdrawing LC International standard banking practice (ISBP) 2007 will be applicable for UCP 600 credits

Advantages of using letters of credit

For Importers - Documentary letters of credit help the importer significantly reduce the risk connected with the seller not meeting its delivery obligations. - Letters of credit ensure certainty that the payment will be made only upon presentation of the documents confirming shipment of the goods. - Use of a letter of credit allows avoiding or reducing pre-payment. - A letter of credit allows importer to structure the payment plan under the contract according to the importers interests. - Having opened a letter of credit, the importer proves his ability to pay and can count on more favourable payment terms in the future.

For Exporters - Guaranteed payment upon presentation of the documents specified in the terms of the letter of credit. - Reducing the production risk, first of all, for the situations when the buyer cancels or changes his order. - The ability to structure the delivery schedule according to the exporters interests. - The buyer cannot refuse to pay due to a complaint about the goods. - The importer must raise any complaints/claims about the delivered goods separately from the letter of credit, which provides the exporter with a significant advantage in resolving such issues