Documentary Credits Explained
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A documentary credit is a bank's commitment to pay the beneficiary upon fulfillment of specified conditions, separating it from underlying sales contracts. It enhances security for buyers and sellers by ensuring payment for shipped goods while mitigating commercial and political risks. Various rules govern documentary credits, including the need for precise documentation and adherence to established international standards.
Documentary Credits Explained
- 1. DOCUMENTARY CREDIT A short description www.thebenche.com
- 2. DEFINITIONS A Documentary Credit is an undertaking by the issuing Bank to pay the beneficiary a stipulated amount if the latter fulfils the terms and conditions of the credit. A Documentary Credit is a separate transaction from the sales or other contracts on which it may be based. Banks are not concerned with or bound by underlying contracts even if any reference to such contract is included in the Credit. Banks deal with documents, and not with goods, services and/ or performances to which the documents may relate. www.thebenche.com
- 3. PURPOSE To make it easier for the parties to buy/sell goods and/ or services by: guaranteeing the seller his payment against presentation of documents in accordance with the terms & conditions of the L/C, e.g. that goods or services agreed upon have been shipped/performed. giving the buyer a reasonable security that the seller has fulfilled its part of the agreement before payment is made www.thebenche.com
- 4. BACKGROUND Uniform Rules for Documentary Credits have existed since the beginning of the 20th century The basic idea is that the Issuing Bank pays as soon as it is informed about the shipment of the goods. The main information carrier was and still is paper. The development of the Transport and the Banking Industries has influenced the revision of the UCO for Documentary Credit issued by ICC (International Chamber of Commerce). www.thebenche.com
- 5. THE TRANSACTION Seller - Beneficiary Buyer -Applicant The Advising Bank The Issuing Bank www.thebenche.com
- 6. THE TRANSACTION 1. Contract Seller - Beneficiary Buyer -Applicant The Advising Bank The Issuing Bank www.thebenche.com
- 7. THE TRANSACTION 1. Contract Seller - Beneficiary Buyer -Applicant 2. D/C Application The Advising Bank The Issuing Bank www.thebenche.com
- 8. THE TRANSACTION 1. Contract Seller - Beneficiary Buyer -Applicant 2. D/C Application 3. Issuance of D/C The Advising Bank The Issuing Bank www.thebenche.com
- 9. THE TRANSACTION 1. Contract Seller - Beneficiary Buyer -Applicant 4. D/C - 2. D/C Advice Application 3. Issuance of D/C The Advising Bank The Issuing Bank www.thebenche.com
- 10. THE TRANSACTION 1. Contract 5. Shipment Seller - Beneficiary Buyer -Applicant 4. D/C - 2. D/C 6. Documents Advice Application 3. Issuance of D/C The Advising Bank The Issuing Bank www.thebenche.com
- 11. THE TRANSACTION 1. Contract 5. Shipment Seller - Beneficiary Buyer -Applicant 4. D/C - 2. D/C 6. Documents Advice Application 7. Documents 3. Issuance of D/C The Advising Bank The Issuing Bank www.thebenche.com
- 12. THE TRANSACTION 1. Contract 5. Shipment Seller - Beneficiary Buyer -Applicant 4. D/C - 2. D/C 6. Documents 8. Documents Advice Application 7. Documents 3. Issuance of D/C The Advising Bank The Issuing Bank www.thebenche.com
- 13. WHERE IS THE RISK? 1. If discrepancies in the documents the risk is on ... Seller - Beneficiary Buyer -Applicant The Advising Bank The Issuing Bank www.thebenche.com
- 14. WHERE IS THE RISK? 1. If discrepancies in the documents the risk is on ... Seller - Beneficiary Buyer -Applicant 2. If unconfirmed D/C and the docs are clean, the risk is on ... The Advising Bank The Issuing Bank www.thebenche.com
- 15. WHERE IS THE RISK? 1. If discrepancies in the documents the risk is on ... Seller - Beneficiary Buyer -Applicant 3. If confirmed by the Advising Bank and the 2. If unconfirmed D/C and the docs docs are clean, the risk is are clean, the risk is on ... on ... The Advising Bank The Issuing Bank www.thebenche.com
- 16. WHO APPROVES THE DOCS? If discrepancies in the documents ... Seller - Beneficiary Buyer -Applicant If payable/negotiable at If payable at the advising bank Issuing Bank ... = Nominated Bank The Issuing Bank The Advising Bank www.thebenche.com
- 17. UNCONFIRMED DOCUMENTARY CREDIT PAYABLE/NEGOTIABLE AT THE BANK The beneficiary has the commercial and the political risk on the Issuing Bank until the payable bank is reimbursed for the payment under the D/C. Payable means in principle that the bank shall have immediate access to the funds from the Issuing Bank Negotiable means mostly that the bank must wait for reimbursement until the documents have www.thebenche.com
- 18. WHEN TO ASK FOR A D/C? Commercial Risk Political Risk Unknown counterpart Political unstable countries Financial weak counterpart Financial weak countries Unknown counterpart Special designed goods Seasonal goods www.thebenche.com
- 19. DOCUMENTARY CREDIT - RISK COVER Company Financial Commercial Risk Exchange Political www.thebenche.com
- 20. TERMS OF THE D/C The Credit to be issued on ..... at Transshipment allowed the latest... Shipment from .... Issuing Bank Who pays the bank charges and Payable/negotiable at X-Bank courier service Currency/amount Confirmed/uncorfirmed Validity period At sight - deferred payment Shipment period Goods description Partial Shipments allowed Document specification Terms of delivery - INCO-terms 2000 www.thebenche.com
- 21. TERMS OF D/C (CONTD) The term & conditions shall be simple and not be designed as an obstacle for payment Documents to be presented shall only be those needed for the Buyer to import the goods and to give him reasonable safety against fraud Unknown Sellers could be controlled through third party inspection and/or performance bonds. www.thebenche.com
- 22. D/C - PROS & CONS FOR THE BUYER Advantages Disadvantages Opportunity to control the High costs delivery time A need for credit line in the A way to avoid advance Issuing Bank payment Not possible yo withdraw Facilitate business with from the deal certain markets ICC UCP govern the banks www.thebenche.com
- 23. TIME LIMITS If a time period ends on a holiday .... .... then the validity is extended until the next following banking day If the last date for presentation of documents (the 21 days rule) is on next following banking day. The latest day for shipment will not be prolonged www.thebenche.com
- 24. QUANTITIES The word ”About” in connection with amount or quantity = +/- 10% deviation is allowed +/- 5% deviation is allowed for the goods if the quantity is given in weight, cubic measure or length If the quantity is given in number of units no deviation is allowed- for example ”1.000 pcs at 25 kg each”. Up to 5% negative deviation of the amount is acceptable if: the above mentioned is not applicable full quantity is shipped the unit price, if given, has been used www.thebenche.com
- 25. MOST COMMON DISCREPANCIES The D/C has expired ”Notify address” in transport documents not as per D/C Late shipment Transport documents erroneously Late presentation of documents consigned Goods description not as per Documents not legalised D/C Contradictory information in the ”On board” notation not correct documents ”Notify address” in transport documents not as per D/C www.thebenche.com
- 26. INVOICE Issued by the Beneficiary and made out in the name of the Applicant Goods description corresponding with that appearing in the D/C In the currency of the D/C If a trade term is part of the goods description in the credit the invoice must state the term specified Shipping marks required in the credit should correspond with the shipping marks in the documents. www.thebenche.com
- 27. INSURANCE POLICY Dated the same day, at the latest, as the transport document Same currency as the D/C If nothing else is given in the D/C, it must cover at least 110% of the CIF/CIP value of the goods Cover from point to point of discharge or final destination. An insurance document may contain reference to any exclusion clause. www.thebenche.com
- 28. BILL OF LADING ”On-board” notification Consigned as per D/C Goods loaded on deck not allowed Signed by the carrier or the captain or their agents ”Full set” Shipping marks ”Feeder” - ocean vessel/on board notation/transhipment www.thebenche.com
- 29. LAW VS . RULES & REGULATIONS ICC’s rules are no laws Local law overrides UCP Most lawyers are of the opinion that the laws of the country, where the D/C is payable, prevails. But you can never be sure! Most courts take ICC’s rules in strong consideration before they judge www.thebenche.com