Documentary Credit

Documentary Credit
Letter of credit L/C or LC Credits Commercial Letters of Credit Documentary Letters of Credit

Documentary Credits simply defined

Definition
L/C is a bank undertaking of payment separate from the sales or other contracts on which it is based.
A way of reducing the payment risks associated with the movement of goods

UCP
The Uniform Customs and Practice for Documentary Credits is an internationally agreed upon set of rules for all parties involved in all types of letter of credit transactions.

The latest version, called the UCP600, formally commenced on 1 July 2007.

GENERAL PRINCIPLES OF UCP

Letters of credit are separate transactions from the sales or other contracts on which they may be based, and banks are in no way involved with or bound by such contracts, even if reference to them is included in the letter of credit. In letters of credit transactions, all parties deal with documents and not with the underlying contracts to which the documents may relate.

GENERAL PRINCIPLES OF UCP

Banks bear no responsibility for:
- the form or genuineness of documents; - the goods described in the documents;

- or the performance of the seller of the goods

Types of Documentary Credits

Basic types
Revocable L/C Irrevocable L/C Confirmed L/C Sight payment L/C Deferred payment L/C

REVOCABLE L/C
Can be revoked any time before it has been performed.

REVOCABLE L/C
RISK

L/C
Buyer (Importer)

Seller (Exporter)

Issuing bank

IRREVOCABLE L/C
The issuing bank as well as importer dont have the right to revoke the credit before a specific time.
Only be cancelled if all of parties made an agreement

CONFIRMED L/C
A confirming bank will undertake the responsibility of payment in case the issuing bank can not make a payment.
Wheres my money??? Dont worry. Ill help u I have no enough money

Seller (Beneficiary)

Confirming bank

Issuing bank

SIGHT PAYMENT L/C

If beneficiary or seller presents a perfect set of documents, he will get immediately payment.
NO RETURN
Perfect set of documents

NO DELAY

Seller

Money

Issuing Bank

DEFERRED PAYMENT L/C

The seller (exporter) allows the buyer (importer) the option of deferred payment in a definite period of time.
2000$ 35000$ 2800$

Seller

Partial payment is accepted

Buyer

Some special types of L/C

Standby Revolving Back-to-back Transferable

Standby L/C
Applicant: Importer Beneficiary: Exporter To be issued in favor of the exporter for the purpose of "backing-up" or insuring certain specified obligations of the Importer Irrevocable

Revolving L/C
Applicant: Importer Beneficiary: Exporter To be used for regular trade between an exporter and an overseas buyer. The credit amount is to be renewed or reinstated automatically without changes to the credit

Irrevocable or confirmed

Back-to-back L/C
Applicant: Importer; Intermediary (Exporter) Beneficiary: Intermediary(Exporter); Supplier To be issued on the security of the other when an exporter (not a manufacturer), obtains goods from a supplier by acting as an export agent for the supplier

Irrevocable

Transferable L/C
Applicant: Importer Beneficiary: Intermediary; Supplier To be used when the exporter is the importer's agent or a middleperson between real supplier and importer The exporter can transfer all or part of his/her rights to another party. Irrevocable

How to operate a Documentary Credit

Operating process
Major components of an L/C Sample Participating parties Procedure

Major Components of L/C

L/C number 20 LC84E0081/99 Place & date of issue Type of L/C irrevocable, transferable, Name and address of parties Applicant, Beneficiary, Date and place of expiry Date of delivery Goods description Documents to be presented Engagement of the bank Signature

SAMPLE

Documents accompany L/C

Commercial Invoice Bill of Lading Certificate quantity and quality Certificate of Origin Detailed Packing List Insurance Policy/Certificate

SAMPLE
Signed Commercial Invoice In 03 Original(s)

SAMPLE

Full (3/3) Set Of Original And 03 Non-negotiable Clean Shipped On Board Bill Of Lading Made Out To Order Of Sacombank- Tan Phu Branch ,Blank Endorsed; Marked Freight Prepaid And Notify Applicant; Showing The Name And Address Of Shipping Agent At (Place)hochiminh City, Vietnam

SAMPLE

Detailed Packing List In 03 Original(s)

SAMPLE
Full Set Of Insurance Policy/Certificate For 110% Of The Invoice Value, Irrespective Of Percentage, Indicating Number Of Original Folds Issued, Blank Endorsed And Showing The Claim Payable Agency Or Survey Agent Or Settlement Agent (With Name And Full Address Stated) In Hochiminh City ,Vietnam, Covering Icc (A)

Participating parties
Applicant: the one who request a bank to issue an L/C

Participating parties
Beneficiary: the one in whose favour an L/C is issued

Participating parties
Issuing bank: the bank issue an L/C

Participating parties
Advising bank: the bank inform beneficiary about the availability and terms of an L/C

Procedure
Applicant / Importer (2) (8) Issuing Bank (1) (5) Beneficiary / Exporter (4) (6) (7)

(3)
(6) (7)

Advising Bank

Procedure
Applicant / Importer (2) (8) (1) (5) (3) (6) Beneficiary / Exporter (4) (6) (7)

Issuing Bank

(7)

Advising Bank

Procedure

Advantages of Documentary Credit

Advantages of L/C
Security Versatility Guaranteed Payment

Financial benefits

Flexibility

To the Exporter/Seller
Open doors to international trade by providing a secure mechanism for payment

A bank is substituted for the buyer as the source of payment

Financing opportunities

Bank expertise is made available

Payment for the goods shipped can be remitted to the exporters own bank or a bank of his choice

To the Importer/Buyer
Payment will only be made when the terms and conditions are complied with.

The importer can control the shipping dates and

call for a variety of documents Cash resources are not tied up. The importer pays only on production of documents of title conforming to the documentary credit terms Importers obtain rebates & discounts more easily

Disadvantages of Documentary Credit

To the Importer/Buyer
Ties up the business credit line Expensive

Seller's bank controls the shipping documents The goods shipped may not conform (inferior quality for example) to the order.

To the Exporter/Seller

Strict compliance is required for payment.

Inhibits export growth.

Q&A

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