Documentary Credits Explained

DOCUMENTARY CREDITS
TYPES
OPENING AND AMENDMENT
Prof. b.p.mishra
XIMB
p
p
FOREIGN TRADE REGULATIONS
-Foreign Trade is Regulated by the Directorate
General of Foreign Trade (DGFT) under Ministry of
Commerce, Dept. of Commerce. GOI.
AUTHORISED DEALERS TO ENSURE THAT THEY ARE
IN CONFORMITY WITH FOREIGN TRADE POLICY AND
FEMA PROVISIONS IN FORCE.
BANKS TO FOLLOW NORMAL BANKING PROCEDURES
AND UCPDC PROVISIONS FOR ALL LETTERS OF
CREDIT OPERATIONS
Saturday, September 28,
2013
RISKS IN INTERNATIONAL TRADE
+ GEOGRAPHICALLY SEPARATED

+ NOT KNOWN TO EACH OTHER

+ DIFFERENT LANGUAGES

+ SUBJECT TO DIFFERENT
LEGAL/POLITICAL SYSTEMS

+ DIFFERENT CURRENCY AREAS

2013
METHODS OF TRADE
SETTLEMENT
WITHOUT BANKS INVOLVEMENT
C OPEN ACCOUNT SHIPS THE GOODS IN
ADVANCE
C ADVANCE PAYMENT SHIPS THE GOODS
LATER

WITH BANKS INVOLVEMENT
C DOCUMENTARY COLLECTIONS
C UNDER LETTERS OF CREDIT

2013
Documentary Credit Generic
Understanding
Letter of Credit
Commercial Credit
Documentary Credit
Standby Letter of Credit

2013
DOCUMENTARY CREDITS
E TO OVERCOME THE SELLER AND BUYER RISKS
E DOCUMENTARY CREDITS PROVIDE SOME
SECURITY
E SELLER NEED NOT WORRY ABOUT BUYERS
CREDITWORTHINESS
E LC HELPS SELLER TO AVAIL CREDIT
FACILITIES FROM HIS BANKER
E BUYER CAN NEGOTIATE FO FAVOURABLE
CREDIT TERMS FROM SELLER AS HIS CREDIT
RATING IS NOT AN ISSUE

2013
WHAT IS DOCUMENTARY
CREDIT
DOCUMENATRY CREDIT IS DEFINED
Any Arrangement, however named or described,
that is Irrevocable and Thereby Constitutes a
Definite undertaking of the Issuing Bank to
honour a Complying Presentation.
Art 2
2013
DOCUMENTARY CREDITS ARE
SUBJECT TO :
UCPDC 600 (2007 REVISION)
URR 725
INCOTERMS 2000
ISBP 681
FEMA REGULATIONS
TRADE CONTROL REGULATIONS
CREDIT NORMS OF RBI
KYC GUIDELINES
BANKS INTERNAL PROCEDURES
2013
International Chamber of Commerce
E International Chamber of Commerce is the voice of world
business. (iccwbo.org)
E It
Sets rules and standards
Promotes growth and prosperity
Spreads business expertise
Defends multilateral trading system
E ICC is Paris based.
E ICC is the main business partner of the United Nations and
its agencies.
2013
UCPDC PROVISIONS
FRAMED BY BANKING COMMISSION OF ICC
FOR STANDARDISATION OF RULES AND REGULATIONS
LATEST PUBLICATION UCPDC 600 ( 2007 Revision )
LOCAL LAWS PREVAIL OVER UCPDC PROVISIONS

SINCE TRANSACTIONS UNDER LC ARE DONE ON THE BASIS OF
INTERPRETATION OF TERMS OF CREDIT AND DOCUMENTS SUBMITTED
BY THE SELLER AND SCOPE FOR DISAGREEMENT IS WIDE
PROBLEM OF JURISDICTION
Saturday, September
28, 2013
Parties to a credit
Applicant : Buyer who initiates the process
The party on whose request the Credit is issued.
Beneficiary : Seller to whom the guarantee
issued
The party in whose favour a Credit is issued.
Issuing bank : Issues guarantee of payment
The bank that issues a credit at the request of an
applicant or on its own behalf.
Advising bank : Guarantees authenticity of credit
The bank that advises the credit at the request of
the Issuing Bank
Saturday, September
28, 2013
Confirming bank : Adds its own guarantee to that of the
issuing bank
The bank that adds its confirmation to a credit upon the
issuing banks authorisation or request.
Nominated Bank : Makes payment of proceeds to seller
and claims reimbursement from opening bank
The bank with which the credit is available or any bank in
case of credit available with any bank.
Transferring Bank : A nominated Bank that transfers the
credit (in case credit is available with any bank, then
issuing bank has to specifically authorise a bank to
transfer the credit and that bank transfers the credit.
Issuing bank can also be the transferring bank.)
Rights and liabilities governed by provisions of UCPDC
600.No party has a right to claim or liability to pay, unless
under a complying presentation.

Parties to a credit
2013
Definitions
E Advising Bank
E Applicant
E Banking Day
E Beneficiary
E Complying Presentation
E Confirmation
E Confirming Bank
E Honour
E Issuing Bank
E Negotiation
E Nominated Bank
E Presentation

2013
Introduction to Documentary Credits
E Documentary Credits are separate
Transactions (Art 4)
E Documentary Credit Vs Loan Application
E Documentary Credit Vs Bank Guarantee
E Payment under Documentary Credit is
Independent of Performance under Contract
(Art 5)
2013
Law and Disputes
E Export contracts are governed at least in
part by the laws of the country of one of the
parties involved.
E Usually, judges and arbitrators resolve the
issue by applying the law of the country that
is most closely connected with the contract
i.e. the place of destination.
2013
Effective Sales Agreement
E The terms of delivery of goods
E The point at which the risk in respect of goods
passes from seller to buyer
E Who should clear the goods through customs and up
to what point
E Who arranges for Insurance
E What precise risks to goods need to be covered
E Whether any other documents are needed and who is
to issue such documents
2013

2013
IMPORTER/APPLICANT EXPORTER/BENEFICIARY
OPENING BANK
R
E
Q
U
E
S
T
L
C
TRANSMITS THE LC
ADVISING/CONFIRM
ING/NEGOTIATING
BANK
A
D
V
I
S
E
S
S
U
B
M
I
T
S

D
O
C
S

E
X
A
M
I
N
E
/
P
A
Y
FORWARD DOCS
E
X
A
M
I
N
E
&
D
E
B
I
T
SALES CONTRACT
SIMULATION
PAYMENT/REIMBURSEMENT
2013
BROAD TYPES OF DOCUMENTARY
CREDITS
BASED ON SECURITY TO BENEFICIARY
REVOCABLE IRREVOCABLE CONFIRMED UNCONFIRMED
BASED ON MODE OF SETTLEMENT
DEFFERRED
PAYMENT
ACCEPTANCE
NEGOTIATION
INVOLVING MIDDLEMEN
TRANSFERABLE
BACK TO BACK
INVOLVING REPEATED TRANSACTIONS
STANDBY REVOLVING

Saturday, September
28, 2013
REVOCABLE AND IRREVOCABLE CREDITS
-Revocable credits can be cancelled or amended any
time after issue by the opening bank

-This does not afford much of protection to the
beneficiary

-Irrevocable credit cannot be amended or cancelled
without the consent of the beneficiary

-A credit is irrevocable even if there is no indication to
that effect. (Art 3)

-A confirmed irrevocable credit offers maximum
protection

-Amendment to a confirmed credit needs the
concurrence of the confirming bank.

2013
BACK TO BACK CREDIT
E Exporter receives a credit from his buyer
E He has to procure goods from other suppliers
E He opens a credit for purchase of the goods.
E Second credit is said to be back to back to the first one.
E Bill proceeds of the export LC will be used to meet liabilities
under the second.
E Amount of back to back credit will be lower.
E Usance period of the back to back credit should be equal to or
more than that of the export credit.
E Bank still at risk if the customer fails to export
E No concession in margin and security norms.

2013
Buyer
Merchant
Benef/ applct
Seller
Issuing/ Buyers
Bank
Advising bank
Merchants bank
Confirming Bank
Issuing Bank
Advising/
Suppliers Bank
L
C

A
p
p
l
i
c
a
t
i
o
n

LC & Req. to add
confirmation
C
o
n
f
i
r
m
e
d

L
C

L
C

A
p
p
l
i
c
a
t
i
o
n

LC
L
C

Goods
D
o
c
u
m
e
n
t
s

P
a
y
m
e
n
t

Documents
Payment
D
o
c
u
m
e
n
t
s

P
a
y
m
e
n
t

Documents
Payment
D
o
c
u
m
e
n
t
s

Back-to-Back Letter of Credit
2013
TRANSFERABLE CREDITS
E Credit has to be opened as transferable
E The beneficiary is normally a trader or agent
E He transfers credit to his supplier - second beneficiary.
E Transferred by a bank at the request of first beneficiary
E Second beneficiary can supply goods and negotiate documents
as if he had received the credit.
E He may pay commission to first beneficiary for the order
E There can be more than one second beneficiary.
E Normally no third beneficiary is permitted
Saturday, September
28, 2013
Transferable credits
The following parameters may be changed while
transferring a credit
Amount of credit, unit price and quantity of
goods
Date of expiry, last date of shipment and last date
of negotiation can be brought forward
% of insurance cover may be increased.
First beneficiary has the right to substitute
documents negotiated by second beneficiary
and claim difference amount from that
bank.

Saturday, September
28, 2013
Buyer
Merchant
First Benef
Seller / Second
Beneficiary
Issuing/ Buyers
Bank
Advising bank
Merchants bank
Nominated Bank
Transfering Bank
Advising/
Suppliers Bank
L
C

A
p
p
l
i
c
a
t
i
o
n

Transferable LC
T
r
a
n
s
f
e
r
a
b
l
e

L
C

R
e
q
.

f
o
r

t
r
a
n
s
f
e
r

O
f

L
C

t
o

2
n
d

b
e
n
e
f

Transfer of LC
L
C

Goods
D
o
c
u
m
e
n
t
s

P
a
y
m
e
n
t

Documents
Payment
D
o
c
u
m
e
n
t
s

P
a
y
m
e
n
t

Documents
Payment
D
o
c
u
m
e
n
t
s

Transferable Letter of Credit
2013
REVOLVING CREDITS
E Credit is opened to cover a series of regular transactions
over a longer period
E Beneficiary will submit a series of documents
E Maximum value of each document will be fixed and is the
revolving limit
E LC amount is the maximum value of documents that can
be handled under the credit.
E The credit may be reinstated automatically or after
payment of earlier bill.
E It can be opened as cumulative or non cumulative.
E Normally usance drafts are not allowed

2013
STANDBY CREDITS
E Credit is issued for a particular amount and for a
particular period
E Trade takes place on running account basis.
E Beneficiary does not submit documents to bank.
E If there is a default, he can claim funds from opening
bank giving a certificate of default
E No quibbling over discrepancies and documents
E Opening bank will pay on demand
E Works like a bank guarantee
E UCPDC is applicable if so declared in the credit (ISP98)

2013
Settlement Methods Under LC
E Sight Payment
Means that payment should be made when the
presentation is seen or sighted. It also means that
payment should be made on demand.
Nominated Bank need not necessarily have to
accept its nomination by the issuing bank (Art
12)
2013
Settlement Methods under LC
E Deferred Payemnt
The payment is not
Immediate
Payment is at a future date, determinable in
accordance with the documentary credit
Draft is not required

2013
Settlement Method under LC
E By Acceptance
The payment
is not immediate
drafts are required to be presented
payment is on the maturity date of the draft

2013
E By Negotiation
Negotiation means the purchase by the
nominated bank of drafts and/or documents
under a complying presentation, by advancing
or agreeing to advance funds to the
beneficiary on or before the banking day on
which reimbursement is due to the nominated
bank.

2013
E By Negotiation
Payment may or may not be immediate
drafts may or may not be required
payment, if the documentary is not negotiated
earlier, is on receipt of documents by the
issuing bank (sight) or on maturity date (if
usance)
2013
WHAT OPENING BANK SHOULD LOOK
INTO WHILE OPENING DOCUMENTARY
CREDIT
- CREDITS SHOULD BE OPENED ONLY FOR CUSTOMERS (KYC
NORMS)

- EXAMINE THE APPLICANTS CREDITWORTHINESS
APPRAI SAL AND SANCTI ON
CASH FLOW STATEMENT
OPI NION REPORT ON BUYERS (LARGE VALUE I MPORTS)
MARGI N
- EXAMINE THE APPLICATION- CUM- GUARANTEE FROM TRADE
AND EXCHANGE CONTROL ANGLE
GOODS FREELY I MPORTABLE (NON NEGATI VE LI ST)
DULY STAMPED, CONTI NUI NG GUARANTEE CLAUSE
I MPORT LI CENCE
DULY SI GNED
- SCRUTINES THE TERMS
- NO CONDITIONS DETRIMENTAL TO BANKS INTEREST
- ALL CONDITIONS SUPPORTED BY DOCUMENT (ART 14 h)

2013
SCRUTINY OF APPLICATION
+ IEC CODE NO.
+ TERMS ARE NOT INCONSISTENT WITH
EACH OTHER (Art 14 d)
+ REASONABLE TIME FRAME BETWEEN
SHIPMENT AND SUBMISSION OF DOCS
+ DESCRIPTION OF DOCS PRECISELY
MENTIONED
+ CREDIT SPECIFIED THE ISSUER OF
DOCUMENTS AND THEIR CONTENTS
(Art 14 f)
+ VERIFY WITH COPY OF PURCHASE
ORDER/PROFORMA INVOICE

2013
SCRUTINY OF APPLICATION
+ IF ON FOB, OBTAIN INSURANCE COVER
NOTE

+ DECLARATION-CUM-UNDERTAKING UNDER
FEMA
(VERIFY WHETHER IN BUILT IN FORM A1/LC APPLICATION
CUM GUARANTEE FORM)

+ UNDERTAKING FOR CRYSTALLISATION OF
FOREIGN CURRENCY LIABILITY

2013

E Application of UCP 600 Art 1
E Loss of Original Credit
E Singular and Plural (Art 3)
E Credit Must not be issued available by a Draft
on Applicant (Art 6 c)
E Availability (Art 6 b)

Opening - Issues
2013
Article 7 - Issuing Bank Undertaking

E The issuing bank must honour a complying presentation if the credit is
available by:

sight payment, deferred payment or acceptance with the issuing
bank;
sight payment with a nominated bank and that nominated bank
does not pay;
deferred payment with a nominated bank and that nominated
bank does not incur its deferred payment undertaking or, having
incurred its deferred payment undertaking, does not pay at
maturity;
acceptance with a nominated bank and that nominated bank
does not accept a draft drawn on it or, having accepted a draft
drawn on it, does not pay at maturity;
negotiation with a nominated bank and that nominated bank
does not negotiate.
2013
E b. An issuing bank is irrevocably bound to honour as of the
time it issues the credit.
E c. An issuing bank undertakes to reimburse a nominated bank
that has honoured or negotiated a complying presentation and
forwarded the documents to the issuing bank.
E Reimbursement for the amount of a complying presentation
under a credit available by acceptance or deferred payment is
due at maturity, whether or not the nominated bank prepaid or
purchased before maturity.
E An issuing bank's undertaking to reimburse a nominated bank
is independent of the issuing bank's undertaking to the
beneficiary.

Article 7 - Issuing Bank Undertaking

Even if the beneficiary
has not received it due
to loss/ error/ delay in
transmission
That is if the confirming bank
/ nominated bank have not
negotiated/ honoured the
complying presentation.
2013
Confirming Bank undertaking
E Negotiate without recourse
E Liable to honour or negotiate as of the time it
adds its confirmation
E If not prepared to add confirmation, inform
the Issuing bank without delay and may
advise the credit without confirmation

2013
Advising of Credits
E No obligation to honour or negotiate
E Apparent authenticity of credit
E Second Advising bank
E Use the service of Advising bank to advise
amendments
E Non advise to be informed without delay to
Issuing Bank

2013
AMENDMENTS TO LC
> CONSENT OF BENEFICIARY, ISSUING BANK,
CONFIRMING BANK (ART 10 a)

> CONFIRMING BANK HAS THE OPTION TO CONFIRM
THE AMENDMENT (ART 10 b)

> AMENDMENT IS NOT BINDING ON THE BENEFICIARY
UNLESS HE CHOOSES TO ACCEPT IT (ART 10 c)
2013
Complying presentation

a presentation that is in accordance with

the terms and conditions of the credit,
the applicable provisions of these rules (UCP 600) and
international standard banking practice.

Honour

a. to pay at sight if the credit is available by sight payment.

b. to incur a deferred payment undertaking and pay at maturity if
the credit is available by deferred payment.

c. to accept a bill of exchange ("draft") drawn by the beneficiary and
pay at maturity if the credit is available by acceptance.
2013
FAQs - Availability of Credit
E Last date for presentation is 24.02.2009. The
beneficiary presents the documents to his bank on
24.02.09, who courier them to the nominated bank
immediately and the Nominated bank receives them
on 25.02.09. can this be treated as a late
presentation?

E Credit expires on 24.02.2009. Beneficiary submits to
the nominated bank, a set of documents which
include a usance bill with maturity date 24.05.09. is
it advisable to get the LC validity extended to
24.05.09?

Expiry date is the last date of presentation at the
counters of the nominated/ issuing bank. This is a
late presentation.
Not necessary, provided the documents are
presented within the latest presentation date, the
maturity of accepted drafts or DP undertaking may
occur beyond the stated expiry date.
2013
E If a credit stipulated available with issuing
bank by negotiation can any other bank
negotiate the documents under credit?
FAQs - Availability of Credit
This is wrong. Credit can not be made
available with Issuing bank by negotiation.
2013
Q. You receive a credit issued by Foreign Trade
Bank, New York to be advised to your client. As
FTB is not your correspondent, you are not
able to establish the authenticity of the credit.
Your customer has already kept the
consignment ready to be dispatched
immediately on advise of LC. What will you
do?
2013
Article 9 Advising of Credits and
Amendments

E If a bank is requested to advise a credit or amendment but cannot satisfy
itself as to the apparent authenticity of the credit, the amendment or the
advice, it must so inform, without delay, the bank from which the
instructions appear to have been received. If the advising bank or second
advising bank elects nonetheless to advise the credit or amendment, it
must inform the beneficiary or second advising bank that it has not been
able to satisfy itself as to the apparent authenticity of the credit, the
amendment or the advice.

E A bank utilizing the services of an advising bank or second advising bank to
advise a credit must use the same bank to advise any amendment thereto.
2013
Article 10 -Amendments
E The terms and conditions of the original credit (or a
credit incorporating previously accepted amendments)
will remain in force for the beneficiary until the
beneficiary communicates its acceptance of the
amendment to the bank that advised such amendment.
The beneficiary should give notification of acceptance or
rejection of an amendment. If the beneficiary fails to
give such notification, a presentation that complies with
the credit and to any not yet accepted amendment will be
deemed to be notification of acceptance by the
beneficiary of such amendment. As of that moment the
credit will be amended.
2013
Q. You confirm a credit issued by Foreign Trade
Bank, New York. The credit is later amended to
add an inspection certificate to the list of
documents. The amendment contained a
clause This amendment will be deemed to be
accepted unless we hear from you to the
contrary within 15 days of issue. The
amendment is advised with your confirmation.
The beneficiary does not respond but after a
months submits documents as per original LC
? Are you expected to pay ?
2013
Article 10 -Amendments

E A provision in an amendment to the effect
that the amendment shall enter into force
unless rejected by the beneficiary within a
certain time shall be disregarded.
E Partial acceptance of an amendment is not
allowed and will be deemed to be notification
of rejection of the amendment.
2013
MT 700: Issue of a Documentary Credit
MT 705: Pre-Advice of a Documentary Credit
MT 707: Amendment to a Documentary Credit
MT 710: Advice of a Third Bank's Documentary Credit
MT 720: Transfer of a Documentary Credit
MT 730: Acknowledgement
MT 732: Advice of Discharge
MT 734: Advice of Refusal
MT 740: Authorisation to Reimburse
MT 742: Reimbursement Claim.
MT 747: Amendment to an Authorisation to Reimburse
MT 750: Advice of Discrepancy
MT 752: Authorisation to Pay, Accept or Negotiate
MT 754: Advice of Payment/Acceptance/Negotiation
MT 756: Advice of Reimbursement or Payment
MT 790: Advice of Charges, Interest, and Other Adjustments

Swift Message Types
2013
MT 750: Advice of Discrepancy
MT 752: Authorisation to Pay, Accept or Negotiate
MT 754: Advice of Payment/Acceptance/Negotiation
MT 756: Advice of Reimbursement or Payment
MT 790: Advice of Charges, Interest, and Other
Adjustments
MT 791: Request for Payment of Charges, Interest, and
Other Expenses
MT 792: Request for Cancellation
MT 795: Queries
MT 796: Answers
MT 798: Proprietary Message
MT 799: Free Format Message
Swift Message Types
2013
EXPIRY OF DOCUMENTARY
CREDIT
BY UTILISATION

BY CANCELLATION

BY NON- UTILISATION

Saturday, September 28, 2013
Prof.b.p.mishra
XIMB

Documentary Credits Explained

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