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Trade Finance

Documentary Letters of Credit

A Documentary Letter of Credit is the most secure means by which an importer and an exporter of goods involved in an international trade settlement conduct the trade in a lawful and fair manner.

The Documentary Letter of Credit is an irrevocable commitment which an issuing bank makes on the request of an importer to give a specific amount of money to an exporter. This is carried out when the documents, in compliance with terms of credit, are shown or presented within a stipulated timeframe. The documentary credit is internationally recognized and subject to the uniform customs and practices (UCP) for documentary credits of the International Chamber of Commerce (ICC). As an effective, fast and recognized means of securing and processing payments, the documentary credit is the most complete risks coverage instrument.

Parties involved

Applicant The applicant here is the buyer/importer who instructs to get his documentary open.
Issuing Bank The bank whose services the buyer/importer uses for issuing the documentary credit.
Advising Bank The advising bank is the issuing bank’s agent that advises documentary credit to the exporter or the beneficiary without committing in favor of the latter. The issuing bank is usually positioned in the seller’s country.
Confirming Bank The confirming bank is usually the advising bank that pays the exporter or the beneficiary instead of getting the process delayed by waiting till the issuing bank pays.
Beneficiary The beneficiary is the seller of the goods, the exporter, to whom the documentary credit is issued.

Process

Conclusion of
commercial contract
The seller and the buyer come to an agreement and sign the commercial contract. The settlement will be carried out by documentary credit.
Initial request for
documentary credit
The buyer requests his bank to open a documentary credit in favor of the seller.
Issuance of the
documentary credit
The buyer`s bank (issuing bank) issues the DC and sends it to a correspondent bank in the seller`s country.
Notification or
confirmation of the DC
The correspondent bank (advising or confirming bank) authenticates and advises the DC to the seller.
Shipment of Goods The seller ships the goods.
Availability of DC The seller presents documents to the correspondent bank for payment/negotiation/acceptance. the correspondent bank checks the documents and pays the seller if the documents conform to the terms and conditions of the documentary credit.
Sending of documents The correspondent bank sends the documents to the issuing bank and claims the payment.
Delivery of documents
to the applicant and
reception of goods
The issuing bank delivers the documents to the buyer after settlement. The buyer presents the documents for the delivery of goods.

Types

Revocable documentary
credit
This can be amended or cancelled without prior notice to the exporter. It provides a relative guarantee of payment and is rarely used.
Irrevocable documentary
credit
This ensures the firm commitment of the issuing bank to pay the beneficiary, for the account of the importer, against submission of documents in conformity with the terms and conditions of the credit. It cannot be amended or cancelled without the agreement of all the parties involved. Thus it covers only the commercial risk (buyer`s insolvency), not the bank or country risks (non transfer or banking risks on the issuing bank).
Irrevocable and
confirmed documentary
credit
The issuing bank, as well as the confirming bank, undertake to pay the beneficiary against submission of documents in conformity with the terms and conditions of the credit, whatever the issuing bank and political or economic situations of the buyer`s country. It provides the seller high security coverage against commercial, country, and bank risks.

Availability

Availability under
documentary credits
By sight payment
The money transaction, here payment, is carried out against presentation of documents in agreement with the credit.
Deferred Payment The beneficiary or the seller or the exporter grants a term of payment to the importer (payment after a specific time period is mentioned in documentary credit; this doesn’t require a draft).
Acceptance Acceptance payment mode is similar to Deferred payment mode however it differs in – the seller issuing a draft that must be drawn on the issuing bank or confirming bank or the advising bank. The exporter here is the receiver of the acceptance of draft from advising bank /confirming bank or the issuing bank thus ensuring the payment is effected at maturity.
Negotiation In this, the nominated bank (or every other bank) gives the values to the seller against drafts or specified documents.

Special Types

Red-clause 
documentary 
credit
The money transaction, here payment, is carried out against presentation of documents in agreement with the credit.
Revolving documentary 
credit
This is a credit that is automatically reinstated after each drawing or upon receipt of authorization, from the DC issuing bank, with limits as to the duration of the facility and as to the amount involved for each drawing. This technique is used when a purchaser wishes to have certain partial quantities of the ordered goods delivered at specified intervals (multiple delivery contract).
Transferable
documentary credit
This documentary credit permits the original beneficiary (first beneficiary or transferor) to transfer all or some of the rights and obligations under the credit to a second beneficiary or to several beneficiaries. It can only be transferred once to a second beneficiary.
Back to back
documentary 
credit
A documentary credit known as a master documentary credit whose recipient is generally a company acting as an intermediary which in its turn opens a second credit in favor of the supplier of goods.

Advantages

By securing your
commercial transaction
You choose the list of documents representing the good you want to obtain against payment. These documents will permit you to clear the goods through customs as stipulated on the contract (methods, term of delivery, quantities, quality). We undertake to pay your supplier against submission of documents in conformity with the documentary credit. The interpretation of the documents is carried out following the UCP 500 of the ICC, recognized worldwide.
By paying cash or at
term in the best
conditions
We can issue sight credits, or else deferred payment or acceptance credits. In the latter cases, you can benefit from a term of payment. The standby letter of credit is an international bank guarantee upon first demand and is issued under a letter of credit to secure the good performance of a contact. It is subject to the uniform customs and practices (UCP). The standby letter of credit is a simple and flexible means of payment that offers you commercial coverage.