Documentary and stand–by letters of credit
1) Documentary letter of credit is a conditional undertaking by the issuing bank, acting at the request of an importer (buyer/applicant), to pay or to ensure a deferred payment to the exporter (seller/ beneficiary) of a specified amount against documents. The documents representing the goods/service should comply with the terms of the letter of credit and should be deposited with the Bank during the period of validity of the letter of credit .
Upon the request of the exporter, a letter of credit may be confirmed. A confirmation to the letter of credit is added by the advising bank or by another bank intermediating in the transaction. A Bank, when adding a confirmation to a letter of credit, makes its own under-taking to make a payment against documents, under terms identical to those undertaken by the issuing bank when issuing the letter of credit.
Types of documentary credit
depending on the bank’s role in the transaction
own (import or domestic) – the bank issues a letter of credit in accordance with the terms stipulated by the importer;
third party (export or domestic) - the bank handles a letter of credit issued by another bank.
depending on the method of cancellation or amendment of the terms of the letter of credit:
revocable- the issuing bank has the right to amend or revoke its undertaking without prior consent of the letter of credit beneficiary;
it cannot be amended or cancelled without the consent of all parties to the letter of credit.
depending on the role of the advising bank or the intermediating bank
confirmed – the advising bank or the intermediating bank makes its own undertaking, in addition to the undertaking made by the bank issuing the letter of credit, to pay or to guar-antee the payment of the letter of credit, on terms identical to the terms undertaken by the issuing bank;
unconfirmed – the advising bank delivers the contents of the terms of the letter of credit to the beneficiary without making its own undertaking to pay. The decision to pay is made by the bank issuing the letter of credit.
A differentiation is made between an unconfirmed letter of credit with authorization/without an authorization to negotiate documents.
depending on the method of payment of the letter of credit:
payable at sight – the payment is made after presentation by the beneficiary of docu-ments required under the letter of credit;
with a deferred payment date – the payment is made at a stipulated (deferred) payment date; this date may fall after the expiry of the letter of credit.
2) A stand-by letter of credit has the nature of a bank guarantee. When issuing this letter of credit, the Bank undertakes to pay a stipulated amount of money at the beneficiary’s first demand. A payment is conditional on the presentation by the beneficiary of:
a declaration (in the form stipulated in the text of the letter of credit) that the applicant did not punctually perform its obligations guaranteed under the letter of credit,
and/or other documents required under the terms of the letter of credit.
The types of documents required under a credit:
- an invoice
- an insurance document
- a transport document
- other: a certificate of quality, a certificate of origin, packing list etc.
The advantages and the inconveniences for the exporter:
The advantages:
when receiving the letter of credit, the exporter is assured that the bank will pay him for documents that are consistent with the letter of credit, and that the payment will not in any way be dependent on the importer, e.g. on his financial standing;
the exporter may refuse to accept the letter of credit if he cannot agree to the terms of the letter of credit or he may demand an amendment to be made in the letter of credit;
if the letter of credit is confirmed or available from his bank, he will receive the payment immediately after presentation of the required documents.
The inconveniences:
if he makes any errors when issuing the documents, the banks’ undertakings cease to apply and he must then rely on the importer’s willingness to accept the discrepancies. If the importer does not accept the documents, he must seek a new buyer in the country of destination for the goods.
The advantages and the inconveniences for the importer:
The advantages:
by demanding documents he secures his own interests;
he rests assured that the goods were sent in accordance with his instructions;
he is insured and the policy gives him an assurance of the refunding of the incurred costs if the goods are lost or are damaged;
if the documents contain defects, the bank will not accept the documents and will re-quest that he should approve the discrepancies.
The inconveniences:
he cannot revoke the obligation unless all the parties to the transaction give their con-sent for this.
Documets to upload:
Documentary credit application
Documentary letter of credit-tariff
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