[IBT] - G8 - Documentary Credit

Documentary Credit

Group 8

Mai Phương

Documentary Credit

Letter of credit

CreditsCommercial Letters of Credit Documentary Letters of Credit

L/C or LC

=

Documentary Credits simply

defined

Mai PhươngDefinition

A way of reducing the payment risks associated with the movement of goods

L/C is a bank undertaking of payment separate from the sales or other contracts on which it is based.

Mai PhươngUCP The Uniform Customs and Practice for Documentary Credits is an internationally agreed upon set of rules for all parties involved in all types of letter of credit transactions.

“The latest version, called the UCP600, formally

commenced on 1 July 2007.”

Mai Phương

• Letters of credit are separate transactions from the sales or other contracts on which they may be based, and banks are in no way involved with or bound by such contracts, even if reference to them is included in the letter of credit.

• In letters of credit transactions, all parties deal with documents and not with the underlying contracts to which the documents may relate.

GENERAL PRINCIPLES OF UCP

Mai Phương

- the form or genuineness of documents;

- the goods described in the documents;

- or the performance of the seller of the goods

GENERAL PRINCIPLES OF UCP

• Banks bear no responsibility for:

Types of Documentary

Credits

Basic types•Revocable L/C• Irrevocable L/C•Confirmed L/C•Sight payment L/C•Deferred payment L/C

By Ngọc Thi

Can be revoked any time before it has been performed.

By Ngọc ThiREVOCABLE L/C

REVO

KED

Ngọc ThiREVOCABLE L/C

Seller (Exporter)

Buyer (Importer) Issuing bank

L/C

RISK

The issuing bank as well as importer don’t have the right to revoke the credit

before a specific time.

Only be cancelled if

all of parties made an

agreement

Ngọc ThiIRREVOCABLE L/C

I have no enough money

Where’s my

money???

Don’t worry.

I’ll help u

Seller (Beneficiary) Confirming bank Issuing bank

Ngọc ThiCONFIRMED L/C

A confirming bank will undertake the responsibility of payment in case the issuing bank can not make a payment.

If beneficiary or seller presents a perfect set of documents, he will get immediately payment.

Perfect set of documents

Money

NO DELAY

NO RETURN

Seller

Issuing Bank

Ngọc ThiSIGHT PAYMENT L/C

The seller (exporter) allows the buyer (importer) the option of deferred payment in a definite period of time.

2000$35000$2800$

Seller Buyer Partial payment is accepted

Ngọc ThiDEFERRED PAYMENT L/C

Some special types of L/C

• Standby• Revolving• Back-to-back• Transferable

By Minh Thu

By Minh ThuStandby L/C• Applicant: Importer• Beneficiary: Exporter• To be issued in favor of the exporter for the purpose of "backing-up" or insuring certain specified obligations of the Importer

Irrevocable

By Minh ThuRevolving L/C• Applicant: Importer• Beneficiary: Exporter• To be used for regular trade between

an exporter and an overseas buyer. • The credit amount is to be renewed

or reinstated automatically without changes to the credit

Irrevocable or confirmed

One L/C

By Minh ThuBack-to-back L/C

• Applicant: Importer; Intermediary (Exporter)

• Beneficiary: Intermediary(Exporter); Supplier

• To be issued on the security of the other when an exporter (not a manufacturer), obtains goods from a supplier by acting as an export agent for the supplier

Irrevocable

Two

L/Cs

By Minh ThuTransferable L/C• Applicant: Importer• Beneficiary: Intermediary; Supplier• To be used when the exporter is the

importer's agent or a middleperson between real supplier and importer• The exporter can transfer all or part

of his/her rights to another party. Irrevocable

One L/C

How to operate a Documentary

Credit

Operating process

• Major components of an L/C• Sample • Participating parties• Procedure

• L/C number 20 LC84E0081/99• Place & date of issue • Type of L/C irrevocable, transferable,…• Name and address of parties Applicant, Beneficiary,…• Date and place of expiry• Date of delivery• Goods description • Documents to be presented• Engagement of the bank • Signature

Kim ThanhMajor Components of L/C

Kim ThanhSAMPLE

Commercial Invoice

Bill of Lading

Certificate quantity and quality

Certificate of Origin

Detailed Packing List

Insurance Policy/Certificate

Kim ThanhDocuments accompany L/C

• Signed Commercial Invoice In 03 Original(s)

Kim ThanhSAMPLE

Full (3/3) Set Of Original And 03 Non-negotiable Clean Shipped On Board Bill Of Lading Made Out To Order Of Sacombank- Tan Phu Branch ,Blank Endorsed; Marked Freight Prepaid And Notify Applicant; Showing The Name And Address Of Shipping Agent At (Place)hochiminh City, Vietnam

Kim ThanhSAMPLE

• Detailed Packing List In 03 Original(s)

Kim ThanhSAMPLE

Full Set Of Insurance Policy/Certificate For 110% Of The Invoice Value, Irrespective Of Percentage, Indicating Number Of Original Folds Issued, Blank Endorsed And Showing The Claim Payable Agency Or Survey Agent Or Settlement Agent (With Name And Full Address Stated) In Hochiminh City ,Vietnam, Covering Icc (A)

Kim ThanhSAMPLE

Thu HươngParticipating parties

Applicant: the one who request a bank to issue an L/C

Thu HươngParticipating parties

Beneficiary: the one in whose favour an L/C is issued

Thu HươngParticipating parties

Issuing bank: the bank issue an L/C

Thu HươngParticipating parties

Advising bank: the bank inform beneficiary about the availability and terms of an L/C

Procedure Thu Hương

Applicant / Importer

Beneficiary / Exporter

Issuing Bank

Advising Bank

(1)

(2)

(3)

(4)

(5)(6)

(6)(7)

(7)(8)

Procedure Thu Hương

Applicant / Importer

Beneficiary / Exporter

Issuing Bank

Advising Bank

(1)

(2) (3)

(4)

(5)(6)

(6)

(7)

(7)(8)

Procedure Thu Hương

Advantages of Documentary

Credit

Kim TramAdvantages of L/C

Security

Guaranteed Payment

FlexibilityFinancial benefits

Versatility

To the Exporter/SellerOpen doors to international trade by providing a secure mechanism for payment

A bank is substituted for the buyer as the source of payment

Financing opportunities

Kim Tram

Bank expertise is made available

Payment for the goods shipped can be remitted to the exporter’s own bank or a bank of his choice 

To the Importer/BuyerPayment will only be made when the terms and conditions are complied with.

 The importer can control the shipping dates and call for a variety of documents

Cash resources are not tied up.

Kim Tram

The importer pays only on production of documents of title conforming to the documentary credit terms

Importers obtain rebates & discounts more easily

Disadvantages of Documentary

Credit

To the Importer/Buyer Xuan Quynh

Ties up the business credit line

Expensive

Seller's bank controls the shipping documents

The goods shipped may not conform (inferior quality for example) to the order. 

To the Exporter/Seller Xuan Quynh

Strict compliance is required for payment. 

Inhibits export growth.

Q & A

THANK YOU FOR YOUR LISTENING

!!!