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WORLD
TRADE DOC's > Documentary Credit
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What is Documentary
Credit?Documentary Credits (letter of credit) and Standby Documentary Credits mean any arrangement, however named or described, whereby a bank (the issuing bank) acting at the request and on the instructions of a customer (the applicant) or on its own behalf, is to make payment to, or to the order of a third party (the beneficiary) or authorizes another bank to effect such payment against stipulated documents, provided that the terms and conditions of the Documentary Credit are complied with. In Documentary Credit activities, all parties deal with documents and not with the goods or services to which they relate.
Documentary Credits can in practice be of two main types: Revocable and Irrevocable. A Revocable Credit can be cancelled or amended at any time without prior notification to the beneficiary. An Irrevocable Credit cannot either be amended or cancelled without the prior consent of the issuing bank, the beneficiary and the confirming bank, if any. A confirming bank is a bank, usually in the beneficiary's country which adds its undertaking to pay in addition to that given by the issuing bank.
The terms of a Documentary Credit always include an amount, an expiry date, the parties involved, the documents required and brief details of the underlying transaction.
As appropriate, it will also include details of INCOTERMS, insurance and transport. Typical documents required are Bill of Lading, Packing List and Certificate of Origin. A Documentary Credit Application by the applicant initiates the Documentary Credit that, in turn, triggers shipment.
| What
are Documentary Credits used for? Commonly, payments in international sales contracts are executed by a documentary credits procedure, subject to rules set forth in the Uniform Customs and Practice for Documentary Credits (ICC 1983). In such transactions payment for the goods is made not on the delivery of the goods themselves but on the presentation of stipulated documents, which may include a commercial invoice, an insurance certificate, a certificate of origin and a transport document (e.g. a bill of lading or airway bill) among others. The seller receives payment by presenting the stipulated documents to bank (the advising bank) that the buyer has instructed to make payment. There are two good reasons to use EDI/EDIFACT in such transactions. First, these procedures involve numerous agents (who often must interact in disparate languages). The agents in an international sale using documentary credits may include two or three banks, a forwarder/broker, a linear-agent, a land transport carrier, a customs official, an insurance agent, a stevedore (to loads the goods on the ship), a ship captain and several others in addition to buyer and seller. Second, these procedures are mired in bureaucratic complexity and are subject to a host of confusing rules depending on the countries of the exporting/importing parties. At one time as many as 100 forms (that is performative communications) were required to ship goods from one country to another and to arrange payment. |
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A simplified schematic of information flow is shown (click
to
expand / collapse each item). | Buyer |
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| Because the documentary credit is a conditional undertaking, payment is made on behalf of the buyer against documents, which may represent the goods and give the buyer rights to them. It is the exporter. | |
| Seller |
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| Because the documentary credit is a bank undertaking, the seller can look to the bank for payment, instead of relying upon the ability or willingness of the buyer to pay. However, because the undertaking is conditional, the seller only has the right to demand payment if he meets all the requirements of the credit. It is, therefore, unwise for the seller to proceed with shipment until he is aware of these requirements and is satisfied he can meet them. It is the importer. | |
| Issuing bank |
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| The company that issues the credit card to the customer. It is the importer's bank. | |
| Paying bank |
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| Usually is the exporter's banks, which receives the order from the issuing bank to pay or get engaged for the required documents. It is convenient a payer bank exists in exporter's country. | |
| Corresponding bank |
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| It is the corresponding iussing bank in exporter's country. It is only required for notifying to buyer about credit opening. | |
| Confirming bank |
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| Guarantees the payment on behalf of issuing bank. It is used when guarantees offered by issuing bank are considered not enough. Usually is the paying bank. | |
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