INTRODUCTION TO LETTERS OF CREDIT Raman Menon owns a tea estate in Coonoor, South India. On a holiday to Hong Kong, he called on a Chinese businessman, Edwin Lui, who was a tea merchant. Mr. Lui tasted the tea samples Mr. Menon had taken along with him and was impressed. He was keen to enter into a regular trading relationship. Both Mr. Menon and Mr. Lui have concerns though. Mr. Menon : o Had never exported his tea before and he was not familiar with export requirements. o Knew nothing of Mr. Lui and was concerned whether he would be able to pay on time if at all. o Was concerned that on exporting his tea he would not be paid at all. He was concerned too that he would not, in such a situation, get his goods back. Mr. Lui had concerns too. o He was concerned whether Mr. Menon would be able to deliver on time. o Mr. Lui wondered whether the tea he would be sold would be of the same quality as the tea that he had tasted and been impressed with. These are concerns most buyers and sellers have. Other
LETTERS OF CREDIT
Nov 13, 2014
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INTRODUCTION TO LETTERS OF CREDIT
Raman Menon owns a tea estate in Coonoor, South India. On a holiday to Hong Kong, he called on a Chinese businessman, Edwin Lui, who was a tea merchant. Mr. Lui tasted the tea samples Mr. Menon had taken along with him and was impressed. He was keen to enter into a regular trading relationship. Both Mr. Menon and Mr. Lui have concerns though. Mr. Menon :
o Had never exported his tea before and he was not familiar with export requirements.
o Knew nothing of Mr. Lui and was concerned whether he would be able to pay on time if at all.
o Was concerned that on exporting his tea he would not be paid at all. He was concerned too that he would not, in such a situation, get his goods back.
Mr. Lui had concerns too.
o He was concerned whether Mr. Menon would be able to deliver on time.
o Mr. Lui wondered whether the tea he would be sold would be of the same quality as the tea that he had tasted and been impressed with.
These are concerns most buyers and sellers have. Other concerns that do arise are :
o Whether financing would be available to the buyer to enable him to pay for the goods after he sells them.
o Currency fluctuations. As currencies fluctuate both the buyer and the seller would want to protect themselves from the possibility of the currency moving to their detriment.
o The seller may be purchasing the goods from another and reselling it to the buyer. He would not want the buyer to find out who the supplier is in order to prevent the buyer from contacting the supplier directly.
In short the seller requires :
o An assurance that he would be paid in full and on time.
o Receipt of his dues at his own bank or through a bank in his own country.
o Finance to purchase the goods that he sells.
o Advice and help in handing the documents to effect the sale.
The buyer, on the other hand requires :
o An assurance that the goods that he receives are of the same quality as the samples that he has approved.
o Confirmation that he does not need to pay for the goods until the seller has met his commitments.
o Credit to enable him to pay for the goods after he has sold them.
o Guidance and help in handling complex documentation and dealing with specific import procedures and requirements.
It is in situations such as this when sellers and buyers need several assurances and have concerns that commercial letters of credit come into their own as the ideal instrument to facilitate trade. It is important to mention at this stage that commercial letters of credit (credit) are used in both international and domestic trade.
Letter of Credit
What is a letter of credit (credit)? A credit is a letter written by the buyers bank to the seller advising him that he may draw a bill of exchange upto a particular amount for the shipment of certain goods and assuring him of payment on his submitting certain specified documents. It is in short an undertaking or a guarantee by a bank of payment should certain conditions be met. It is defined by the International Chamber of Commerce
(ICC) in the Uniform Customs and Practice for Documentary Credits (UCP) as 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 :
i) Is to make a payment to or to the order of a third party (the beneficiary)or is to accept bills of exchange (drafts) drawn by the Beneficiary.
or
ii) Authorises another bank to effect such payment or to accept and pay such bills of exchange (draft(s)).
or
iii) Authorises another bank to negotiate against stipulated document(s) provided that the terms are complied with. Branches of bank in different countries are considered another bank. (Article 2 UCP 500).
It is to be noted that as banks deal only in documents and payment is made on the submission of documents. (Article 4, UCP 500).
EXAMPLE
Name of Issuing Bank Irrevocable documentary credit
TRADING BANK LTD
Nariman Point, Bombay
Date and Place of Expiry
15 October 1994 at Bombay
_________________________________________________________________
Applicant Beneficiary
Edwin Lui Raman Menon
Tsim Sha Sui Homedale Estate
Hong Kong Coonoor India
_________________________________________________________________
Advising Bank Amount US Dollars 20,000
Tea owners Bank Credit Available by
33, Tiger Hill Road acceptance and beneficiarys
COONOOR draft at 90 days sight
__________________________________________________________________
1. Signed invoice in three copies certifying goods are in accordance with sample shown and approved.
2. Bill of lading evidencing despatch of goods to Hong Kong by 8th October 1994.
It would be noted that Trading Bank will pay the beneficiary either directly or through its correspondent bank the amount agreed or upto $ 20,000 provided the documents stipulated are presented to the Bank before a specific date. In this example the documents stated have been purposely kept simple. The documents usually required are the invoices, insurance policy, certificate of origin and bill of lading / air consignment note. There can be others too such as certificate of fumigation, certificate of inspection of goods and the like.
At this stage it is important that the parties to a letter of credit are identified.
1. The Buyer or Importer The buyer is the person at whose instance the letter of credit is opened. He is therefore called or known as the Opener. Until the letter of credit is opened he is the applicant.
2. The Buyers Bank The buyers bank is the one that, at the buyers request, opens the letter of credit. It is therefore known as the Opening or Issuing Bank.
3. The Seller The seller is called the beneficiary of the credit as he is the one who will receive the payment on the letter of credit.
4. Intermediary Bank The opening bank does not usually correspond directly with the beneficiary but through another bank. The intermediary bank is often located in the same country as the seller. The intermediary bank advises the beneficiary of the letter of credit having been opened and the conditions stated therein. These intermediaries are known as advising or notifying banks.
5. Correspondent Bank A correspondent bank is one with which a bank has a business relationship. The correspondent bank may have an account with the bank or may advise and confirm letters of credit or may issue guarantees on behalf of the bank. A bank will normally have, as a consequence, a list of the authorised signatories of the bank in order for it to verify that the instructions received are in order. The usefulness of a correspondent bank is evident in situations where a letter of credit or a guarantee has to be advised or issued in a country in which the bank does not have a branch. In such a situation the bank utilises the services of its correspondent bank to advise/confirm a letter of credit or issue a guarantee.
6. Advising Bank An advising bank advises the beneficiary (seller) that a letter of credit has been issued in his favour. Implicit in the advise is that it is genuine as the bank would advise a letter of credit issued only by one of its own branches or one of its correspondents. Prior to advising the letter of credit, the advising bank will check that it is properly signed by those authorised to issue it. This is extremely important to sellers. He needs an assurance that the letter of credit that he receives be it from the United States of America or Zaire is genuine. The advising bank is invariably a bank in the sellers (beneficiarys) country - a bank that he knows and trusts. This gives him the assurance that the document is genuine. It is important to realise though that an advising bank advises the beneficiary with no responsibility for payment. It performs the function of a courier or an informer informing the beneficiary that a letter of credit has been issued in his favour. The only assurance implied, as mentioned earlier, is that the letter of credit is genuine. This is why letters of credit are never sent to a beneficiary directly by the issuing bank but through another bank.
7. Confirming Bank. The beneficiary in another country is often concerned about payment. He may have received a genuine letter of credit but he may be worried whether he would be paid. There was an instance of a company in India that entered into an agreement to sell certain articles to a company in Nigeria. The Nigerian company had its bank in Nigeria open a letter of credit and actually deposited the entire value of the letter of credit with the bank. The goods were exported but the seller was not paid as the Nigerian government, on account of a lack of foreign exchange, did not permit the bank in Nigeria to pay the seller. This worry is negated by a confirmed letter of credit. A bank in the sellers country confirms the letter of credit and by doing this that bank takes the position and liabilities of the issuing bank. That bank would then, should the documents be in order, pay the seller.
8. Negotiating Bank. The negotiating bank is one with whom the documents may be negotiated. Letters of credit may specify through which bank/banks the letter of credit may be negotiated or they may be freely negotiable through any bank.
9. Paying Bank The paying bank is that bank at whose counters the seller would be paid. This can be a bank other than the issuing bank and this is often the case in instances such as:
o When payment had to be made in a currency that is alien to both the opener and the beneficiary.
o When there are exchange controls regarding remittance
in the country in which the opener resides.
It must be remembered (Article 3 UCP 500) that credits are separate transactions from the sales or other contracts on which they may be based and banks are in no way bound by such contracts. Therefore the undertaking or agreement of a bank to pay, accept or negotiate and/or to fulfill any other obligation under the credit is not subject to claims by the applicant resulting from his relationships with the issuing bank or the beneficiary. Similarly a beneficiary cannot avail of, as a defence, the contractual relationship existing between the bank or between the applicant and the issuing bank.
OPENING OF A LETTER OF CREDIT
Mr. Edwin Lui from Hong Kong wishes to purchase tea from Mr. Raman Menon. They discuss terms and price and arrive at an agreement. This is the first stage-the sale contract. Mr. Menon in order to be certain of payment within a specified time asks Mr. Wong to confirm the sale contract by sending him a letter of credit.
The letter of credit is, as explained earlier, 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:
(i) Is to make a payment to or to the order of a third party (the beneficiary) or is to accept and pay bills of exchange drafts drawn by the beneficiary.
or
(ii) Authorises another bank to effect such payment, or to accept and pay such bills of exchange
or
(iii) Authorises another bank to negotiate against stipulated document(s) provided that the terms and conditions of the credit are complied with.
The letter of credit is therefore issued on the instructions of the buyer. The bank follows the instructions and issues the credit. It does not make any assurance on the credit worthiness or honesty of the buyer nor does the bank give any guarantee on the quality, quantity or price of the goods. It merely concerns itself with documents. It is therefore important that the seller checks into the antecedents and reputation of the buyer before the purchase contract is entered into. The undertaking given to the seller is only conditional. The bank undertakes to pay only if he meets all the requirements of the letter of credit.
Credit Application
The applicant (buyer) must, before a letter of credit is actually issued make an application. This is known as an application for a letter of credit or a documentary credit application.
The instructions which will be addressed to the issuing bank will normally detail :
1. The full name and address of the seller. It is important that this is stated as this would ensure that the seller will receive the letter of credit.
2. The date of the application. The date of the application is detailed to check and ensure that the letter of credit is issued within a reasonable time. Often time is of the essence and delays could result in the transaction falling through. Many banks, as a measure of quality, take pride in the fact that they issue letters of credit within hours of receiving the application.
3. The amount of the credit. The amount of the credit is the figure upto which the issuing bank agrees to pay and it is imperative that the amount be specified. In fact no bank would agree to issuing a credit without specifying an amount as that would expose the bank to an unlimited commitment.
4. The type of credit. Letters of credit can be either revocable or irrevocable. These are discussed in detail in a subsequent chapter but are briefly as follows :
o Revocable - a revocable credit can be amended or cancelled at any time without advising the seller. This places the seller at enormous risk as the buyer can change any or all the terms of the credit after the seller has spent monies in the manufacture or purchase of the goods to be sold. The seller may have even shipped the goods. Buyers naturally prefer these but they are for the obvious reasons mentioned unacceptable to sellers. Revocable letters of credit are rarely issued.
o Irrevocable - Irrevocable credit can be amended or cancelled only with the prior agreement of the seller. Sellers usually insist on an irrevocable letter of credit as it gives a buyer very little flexibility.
o Confirmed Irrevocable credit - These are irrevocable credits that are confirmed (for payment) by a bank in the sellers country. These consequently gives the seller comfort to the extent that a bank in his own country has undertaken to pay under the credit. This is in addition to the assurance of payment given by the issuing bank. Buyers normally do not instruct the bank to seek the confirmation of a bank unless it is insisted upon by the seller as it is more expensive since a confirmation fee would have to be paid to the confirming bank.
5. The manner the credit or payment is to be available. This is of primary importance to the seller. He needs to know how and where he will be paid. This may be on the presentation of documents, on acceptance or by negotiation.
6. The draft to be drawn. Payment is always made on the presentation of a draft which is
essentially a bill of exchange. The draft would normally state whether it is payable on sight or at a future date. The draft would also clearly state to whom it is payable.
7. The goods. The application will always detail the goods that are being bought including the price at which it is being purchased. It may even specify markings and type if these factors are very important.
8. Freight. Freight can be expensive and the contract price is usually agreed after it has been decided on who (the seller or the buyer) is to bear the cost of freight. This is why the cost is stated as CIF (Cost Insurance Freight), FOB (Free on board),C & F (Carriage & Freight), C & I (Carriage and Insurance) and the likes.
9. Documents to be submitted.Banks deal with documents and the issuing and confirming bank undertake to pay the seller on the submission of certain documents.
10. Shipment. The application normally states where the shipment is to take place and by when. It also specifies where the goods are to be shipped to. This is crucial as the goods would need to be procured by the buyer by a particular date.
11. Transhipment. Many buyers are concerned about transhipment and may state that transhipment are not allowed. Transhipment occurs when the goods are transferred from one ship to another. There could be breakages or losses for some other reasons.
12. Partial Shipments. The application normally specifies whether partial shipments are allowed. Partial shipments may be acceptable if a large quantity of goods are being purchased and these are required over a period of time.
13. The period within which the documents must be presented. The applicant would normally want to take possession of the goods as early as possible (especially if they are perishables or in great demand). Consequently he may stipulate the time within which the documents must be presented for payment, acceptance or negotiation. The usual wording is documents to be presented within 7 days after the date of issuance of the transport documents but within the validity of the credit.
14. Date and place of expiry of the credit. The letter of credit is never issued for an indefinite period of time. It requires the seller to ship the documents and comply with the requirements within a specified time. The undertaking therefore given by the bank is that payment will be made if the requirements are completed on or by a specific date. A place is also usually specified and it is usually the place wherein the beneficiary resides.
15. Whether transferable. The applicant can permit the credit to be transferable either in part or whole to another. If the credit is transferable the beneficiary can transfer his rights by endorsement and signature to another supplier and this new supplier will be entitled to claim upon the issuing bank payment under the credit. This facility is prevalent in certain industries. In order for the credit to be transferable the applicant must specifically state
that it be so. Otherwise the credit issued would be non transferable.
16. Manner credit is to be advised The credit could be advised by post or by telex or by fax (facsimile) or by telegram. The applicant must clearly stipulate the manner the credit is to be advised.
17. Authorisation. The application must be signed by individuals authorised to sign the application and instruct the bank.
18. Permission. In certain countries free imports are not permitted and for certain items the permission of a governmental body or a license is required. If there is such a requirement the application will contain a notification to that effect and a copy of the permission/license.
Application Processing
On receipt of the application the bank initially checks whether the application is signed properly by those authorised to instruct the bank. After this is ascertained, it is checked whether the applicant has a letter of credit facility and whether he has sufficient balance available for the credit to be issued. If Edwin Lui has a facility with Loo Loo Bank for the issuance of 180 day letters of credits for $ US $ 2,000,000, Loo Loo Bank will not, without having the credit facilities extended properly amended and approved, issue a credit for $ 2,500,000 or for 210 days.
If these are alright, the application is normally forwarded to the Banks Letter of Credit department or its Trade Finance department where it is assigned a number.
At the Letter of Credit Department the application is scrutinised in detail with special reference to
o Completeness - whether all the required and necessary information is stated.
o Clarity - whether the language is clear and precise.
o Consistency - whether any terms contradict each other.
o Legality - whether any requirement in the application contravenes a regulation or a law.
If the review uncovers a problem or if further information is required, the applicant is contacted and clarification is sought. Once all the problems are clarified, the Bank prepares the letter of credit.
Once the letter of credit is prepared it is once again checked with the application and if everything is in order the letter of credit is signed by those authorised to do so. It is now ready to be sent out.
Issuance of a letter of Credit
Once the letter of credit is prepared and signed it is not usually handed over to the credit opener or buyer to send to the seller. This is for several reasons :
(a) The seller would need an assurance and would need to be convinced that the credit is genuine.
(b) The buyer may not know to whom it is to be sent or how it is to be sent.
(c) It is necessary to involve banks to ensure payment and the smooth flow of documents.
The Issuing bank therefore forwards the credit to a branch in the country wherein the seller (beneficiary) resides or to a bank with which it has a correspondent relationship to forward it to the beneficiary with the specific request of either:
(a) Advising the credit
(b) Confirming the credit
This may be by telex or by letter. If it is by telex, the telex is usually sent with a test code and is known as a tested or coded telex. The test code is an unique number that can be deciphered only by the sender and the recipient and is arrived at by taking into account all or a combination of the currency, the amount, the date, the issuing banks unique number, the advising banks unique number, the number of the credit and the number of the message.
Liability of Issuing bank
Article 9 of UCP 500 clearly details the liability of issuing banks. It states an irrevocable credit constitutes a definite undertaking of the issuing bank, provided that the stipulated documents are presented to the nominated bank or the issuing bank and that the terms and conditions of the credit are complied with:
(i) If the credit provides for sight payment to pay at sight.
(ii) If the credit provides for deferred payment to pay on the maturity date(s) determinable in accordance with the stipulations of the credit.
(iii) If the credit provides for acceptance
(a) by the issuing bank - to accept draft(s) drawn by the beneficiary on the issuing bank and pay them at maturity or
(b) by another drawee bank to accept and pay at maturity draft(s) drawn by the beneficiary on the issuing bank in the event the drawee bank stipulated in the credit does not accept draft(s) drawn on it, or to pay such drafts accepted but not paid by such drawee at maturity.
(iv) If the credit provides for negotiation to pay without recourse to drawers and/or bonafide holders, draft(s) drawn by the beneficiary and/or document(s) presented under the credit. A credit should not be issued available by draft(s) on the applicant. If the credit nevertheless calls for draft(s) on the applicant, banks will consider such draft(s) as an additional document(s).
ADVISING LETTERS OF CREDIT
This means exactly what it states. The advising bank at the request of the issuing bank advises the beneficiary that a credit in his favour has been opened.
What does the advising bank do? On receiving the letter of credit from its branch or correspondent bank (and if it is prepared to advise the credit) it checks whether the signatories of the credit are properly authorised, and if they are, advises the beneficiary after allotting a number to the credit for its own reference.
In regard to the advising banks liability Article 7 of UCP 500 states clearly, a credit maybe advised to a beneficiary through another bank (the advising bank) without engagement on the part of that bank. If it elects to advise the credit, it shall take reasonable care to check the apparent authenticity of the credit which it advises. If the bank elects not to advise the credit it must so inform the issuing bank without delay. The emphasis is on the apparent authenticity of the credit. The bank is not expected to delve deeper if the credit appears authentic.
The article goes on to say, If the advising bank cannot establish such apparent authenticity it must inform without delay the bank from which the instructions appear to have been received that it has been unable to establish the authenticity of the credit and if it elects nonetheless to advise the credit it must inform the Beneficiary that it has not been able to establish the authenticity of the credit.
Letters of credit are not always sent by post. They are often, especially so if time is of great significance and importance, telexed or faxed. In such cases (Article 11, UCP 500) state that when an issuing bank instructs an advising bank by an authenticated teletransmission to advise a credit, the teletransmission will be deemed to be the operative credit instrument, and no mail confirmation should be sent. Should a mail confirmation nevertheless be sent it will have no effect and the advising bank will have no obligation to check such mail confirmation against the operative credit instrument or the operative amendment received by teletransmission. If the teletransmission states full details to follow (or words of similar effect) or states that the mail confirmation is to be the operative credit instrument or the operative amendment, the issuing bank must forward the operative credit instrument or the operative amendment to such advising bank without delay.
It must be noted that if the letter of credit is advised through one bank, all amendments must also go through that bank. This is to ensure that there is proper intimation and ensure against multiplicity of amendments.
Article 11(C)of UCP 500 also states that, a preliminary advice of the issuance or amendment of an irrevocable credit (preadvice), shall only be given by an issuing bank if such bank is prepared to issue the operative credit instrument or the operative amendment thereto. Unless otherwise stated in such preliminary advice by the issuing bank, an issuing bank having given such preadvice shall be irrevocably committed to issue or amend the credit, in terms not inconsistent with the preadvice, without delay. The purpose
of the preadvice is to advise the beneficiary that the credit has been opened so that he can begin manufacture of the articles that he is to despatch (as the actual letter of credit properly authenticated may take some time to arrive as it has to be sent through an advising bank).
It is recommended that letters of credit sent by facsimile be advised without any commitment until the original is received by the advising bank as there have been instances of errors and material changes to the credit. If the instructions received are incomplete or unclear, the bank requested to act on such instructions may notify the beneficiary for information only and without responsibility. The advising bank must also inform the issuing bank of the action taken and request it to provide the necessary information. The issuing bank in this instance, has a responsibility to provide the necessary information without any delay and the credit will only be advised after complete and clear instructions have been received (Article 12 UCP 500).
In the illustration mentioned earlier, Mr. Edwin Lui in order to import the tea may open an irrevocable letter of credit through his bankers, the Bank of Pacific who in turn would send the letter of credit to their correspondents in India, the Tea Planters Bank in Coonoor to advise the credit. It is not necessary that the Tea Planters Bank be Raman Menons bank. It will advise Raman Menon that a credit has been opened naming him as the beneficiary.
CONFIRMING LETTERS OF CREDIT
Apart from advising a credit, a branch or correspondent bank of the issuing bank may be requested by the issuing bank to confirm the credit.
What occurs? On being requested, the branch or correspondent bank confirms the credit and thereby assumes the responsibility of the issuing bank. It confirms that if the documents that need to be presented are presented in the manner stipulated that it would pay the beneficiary for the value of the goods sold upto the amount of the credit.
It is clearly enunciated in Article 9(b) of UCP 500 in the following manner A
confirmation of an irrevocable credit by another bank (the confirming bank) upon the authorisation or request of the issuing bank constitutes a definite undertaking of the confirming bank, in addition to that of the issuing bank provided that the stipulated documents are presented to the confirming bank or any other nominated bank and that the terms and conditions of the credit are complied with:
(i) if the credit provides for sight payment to pay at sight.
(ii) if the credit provides for deferred payment to pay on the maturity date(s) determinable in accordance with the stipulations of the credit.
(iii) if the credit provides for acceptance:
(a) by the confirming bank - to accept drafts drawn by the beneficiary on the confirming bank and pay them at maturity.
or
(b) by another drawee or bank - to accept and pay at maturity draft(s) drawn by the beneficiary on the confirming bank, in the event the drawee bank stipulated in the credit does not accept draft(s) drawn on it or to pay draft(s) accepted but not paid by such drawee.
(iv) if the credit provides for negotiation - to negotiate without recourse to drawers and/or bonafide holders, draft(s) drawn by the beneficiary and/or document(s) presented under the credit. A credit should not be issued available by draft(s) on the applicant. If the credit nevertheless calls for draft(s) on the applicant, banks will consider such draft(s) as an additional document(s).
There is no requirement for a bank requested to add its confirmation. Banks requested to do so normally check whether it has a banking relationship with the issuing bank and if it is prepared to take a risk on the issuing bank and a confirmation is a commitment to pay. If on request the bank is not prepared to do so then it must inform the issuing bank without delay (Article 9(C)(i) of UCP 500). A bank should be specially requested by an issuing bank to add its confirmation. Otherwise a credit should not be confirmed.
Edwin Lui, to import tea from Raman Menon has had his bankers, the Bank of Pacific to open a letter of credit. The Banks correspondent bank is the Tea Planters Bank in Coonoor to advise the credit. Raman Menon, for additional assurance (as he is dealing
with Edwin Lui and the Bank of Pacific) for the first time may insist on the credit being confirmed. In that case the Bank of Pacific would request the Tea Planters Bank to confirm the credit. This will give Raman Menon additional assurance (the assurance he needs) that a bank he knows and trusts has committed to pay. The Tea Planters Bank, is entitled to, however, refuse to confirm the credit. In that case, the Bank should so advise the Bank of Pacific without any delay.
It must also be noted that the instructions received from the issuing bank must be clear and complete. If they are not, the confirming bank should go back to the issuing bank for classification and should add its confirmation only after clear instructions have been received. In the meantime it can inform the beneficiary for information only and without responsibility.
A confirmed letter of credit gives a seller (beneficiary) additional comfort as the confirming bank is an additional guarantor guaranteeing to pay. Furthermore, the confirming bank is usually a bank situate in the country the beneficiary resides in.
AMENDMENTS TO LETTERS OF CREDIT
Letters of credit are not cast in stone. After they have been issued and advised (and confirmed), there may be a need to change one or a number of terms. The reasons may range from extending the date of expiry of the credit, increasing the amount to the shipping documents required and the manner the goods are to be shipped.
A revocable credit can be amended or cancelled by the issuing bank at any moment. However, issuing banks are bound to honour acts such as negotiation and payment by another bank with which the revocable credit has been made available for sight payment, acceptance or payment if that other bank had acted prior to the notice of amendment or cancellation against documents which appeared to be in accordance with the terms and conditions of the credit.
The position is different in regard to a irrevocable credit. First of all an irrevocable credit can neither be amended nor cancelled without the agreement of the issuing bank, the confirming bank if any and the beneficiary. If one of these do not agree the credit cannot
be amended (Article 9(d)(i)UCP 500). The only exception is in transferrable credits when credits can be transferred to other beneficiaries without the assent of the other parties involved.
However, the issuing bank - the bank that issues the amendment (which will also be the credit opening bank) will be irrevocably bound by any amendment issued by it from the time it issues the amendment.
Confirming banks have a choice. They can extend their confirmation and if thy do so they will be irrevocably bound from the time it advises the amendment. They may however choose to, if they so wish, to advise the amendment without extending its confirmation. If it decides on this course, as a matter of courtesy, it must advise the issuing bank of this decision without any delay.
The terms of the credit will remain in force until the beneficiary communicates his acceptance of the agreement to the bank that has advised the amendment. The beneficiary is required to notify acceptance or rejection of the amendment. If the beneficiary does not, or fails to communicate acceptance or rejection, then the submission of documents by the beneficiary to the nominated or issuing bank will be deemed to be notification of acceptance by the beneficiary of the amendment and the credit will be assumed to have been amended from the time the documents were submitted. Upto that time, it will be assumed that the credit has not been amended.
A letter of advise may contain more than one amendment. In that case all the amendments in the letter must be accepted. It is not possible to accept some and reject others.
In situations when a bank receives unclear or incomplete instructions to amend a credit, it should go back to the issuing back and seek clarifications and it should only officially advise and confirm (if applicable) after it has received the clarifications sought. In the meantime, if it chooses to inform the beneficiary it should clearly do so for information only and without responsibility.
TYPES OF LETTERS OF CREDIT
There are different types of letters of credit that banks may issue to suit the requirements of buyers and sellers.
1. Revocable and Irrevocable Letters Of Credit
Letters of Credit issued may be either:
o Revocable or
o Irrevocable.
In the absence of such an indication, the credit is deemed to be irrevocable.
a) Revocable Credit
A revocable credit is a credit that may be withdrawn, amended or canceled by the credit opening (issuing) bank unilaterally at any moment and without notice or reference to the beneficiary. Consequently it does not constitute a legally binding undertaking between the banks and the beneficiary as the credit can be modified or canceled at any time without notice to the beneficiary. A problem can arise if the letter of credit is withdrawn after the advising / negotiating bank has without notice of the withdrawal made payment. To protect the negotiating bank against this possibility, the issuing bank must :
i. reimburse another bank with which a revocable credit has been made available for sight payment, acceptance or negotiation, for any payment, acceptance or negotiation made by such bank prior to receipt by it or notice of amendment or cancellation, against documents which appear on their face to be in accordance with the terms and conditions of the credit.
ii. reimburse another bank with which a revocable credit has been made available for deferred payment, if such branch or bank has, prior to receipt by it of notice of amendment or cancellation, taken up documents which appear on their face to be in accordance with the terms and conditions of the credit.
In short the withdrawal, amendment or modification occurs only when the other bank receives the information from the opening bank. This is only fair.
b) Irrevocable Credit
An irrevocable letter of credit, is on the other hand, a definite undertaking by the issuing bank that if the stipulated documents are presented and the terms and conditions of the credit are complied with.
(i) To pay on sight if the credit provides for sight payment.
(ii) To pay on the maturity date stipulated if the credit provides for deferred payment.
(iii) To accept drafts drawn by the beneficiary if the credit provides for acceptance and payment at maturity if the credit stipulates that they are to be drawn on the applicant for the credit or any other drawee stipulated in the credit.
(iv) To pay without recourse to drawers and for bonafide holders of the draft drawn by the beneficiary at sight (if a sight draft) or on the due date (if a usance draft) if the credit provides for negotiation.
Irrevocable credits are more practical and popular as their terms cannot be changed without the agreement of all parties.
2. Confirmed Letters of Credit
The issuing bank may request its branch or correspondent in the country in which the seller resides to add its confirmation. When it does, the credit becomes a confirmed credit. Such a confirmation is a definite and clear undertaking by the confirming bank that if the stipulated documents are presented and the terms and conditions of the credit are met:
(i) To pay if the credit provides for sight payment.
(ii) To pay on the date stipulated if the credit provides for deferred payment.
(iii) To accept drafts drawn by the beneficiary if the credit provides for acceptance or to be responsible for their acceptance and payment at maturity if the credit stipulates that they are to be drawn on the applicant for the credit or any other drawee stipulated in the credit.
(iv) To pay without recourse to the drawers and/or bonafide holders of the draft drawn by the beneficiary at sight (if a sight draft) or on the due date (if a usance draft) if the credit provides for negotiation. In short, the confirming bank takes onto itself the
responsibilities of the issuing bank. Sellers prefer this as confirmed credits therefore have the undertaking of two banks (the opening bank and the confirming bank) and these banks cannot cancel or modify the terms without the agreement of all the parties to the credit.
As far as the seller or exporter is concerned this is the best form of credit to have as he is assured of payment by a bank in his country if he presents the documents asked for in the manner stipulated.
3. With and Without Recourse Credits
These deal with the liability of a drawer. Normally the drawer of a bill is liable to pay on the bill and this liability is discharged only if the drawee pays. In short, a drawer may draw a bill on another (the drawee) and discount it with a third party for value received. The holder in due course (the third party) gets good title and can hold the drawer responsible if the drawee does not pay ie. the holder in due course has recourse on the preceding holders or the drawer for payment. If a seller draws a bill without recourse on him, the holder in due course cannot fall back on the seller for payment and the holder would need to seek payment from the drawer. Normally, a bill will be with recourse to the seller or beneficiary unless there is a provision to the opposite in the credit.
It should be noted however that under an irrevocable credit, the opening bank will not have recourse to the drawer of the bill (beneficiary) as that would not be in keeping with the undertaking given by the bank. In confirmed credits neither the opening (issuing) bank or the confirming bank will have recourse to the beneficiary.
4. Revolving Credit
A revolving credit is a credit where the amount is renewed or reinstated from time to time without a specific amendment.
They can be revocable or irrevocable and can revolve in relation to time or value. If a credit revolves in relation to time and credit upto $ 50,000 per month is available for six months, credit of $ 50,000 is available each month irrespective of whether any sum was drawn the previous month. These credits can be cumulative or non cumulative. If it is cumulative any amount not utilised during the first period can be carried forward and utilized during a subsequent period. If it is non cumulative this cannot be done.
On the other hand in regard to a credit that revolves in relation to value, the amount of the credit is reinstated upon utilisation within a given overall period of validity. The credit may allow for automatic reinstatement on presentation of specified documents or after receipt of documents by the issuing bank. As this type of credit does result in the bank and the buyer being unable to ascertain their full liability, an overall amount is usually specified in the credit.
A letter of credit is not usually transferable from one party to another. This is because a credit is not a negotiable instrument and ownership cannot be transferred. The instrument that is negotiable instrument is a draft drawn under a letter of credit. However, a credit can be transferable if the opening bank specifically assents and issues a transferable credit. Terms such as divisible, fractionable, assignable and transmissible add nothing to the meaning of the transferable and is not to be used as it does not make the credit transferable. In short a credit can be transferred only if it is expressly designated as transferable by the issuing bank.
The benefit of a transferable credit is that if the beneficiary is only an intermediary (middleman) between the opener and the manufacturer and is keen only on the spread that he can make, he can earn his profit without tying up his funds. In other words the beneficiary can pass on or transfer the credit to a third party to his profit. If the beneficiary does not want the person to whom it is transferred to know the name of the opener of the credit, he can ask the advising/confirming bank or any other bank entitled to effect negotiation to transfer the credit for a lesser amount after substituting his name for that of the opener. A transferable credit may be used where a middleman operates between the buyer and the seller of the goods - the buyer requests the middleman (the first beneficiary) to acquire goods for him and the middleman then finds a seller (the second beneficiary) for these goods. This releases the middleman of the problem of financing the purchase of the goods.
The bank requested to effect the transfer (the transferring bank) whether it has confirmed the credit or not, is under no obligation to effect the transfer except to the extent and in the manner expressly agreed to by the bank. The bank charges relating to the transfer are payable by the first beneficiary unless otherwise specified and the transferring bank shall be under no obligation to effect the transfer until these charges are paid.
Credits cannot be transferred again and again. A transferrable credit can be transferred only once. Consequently, the credit cannot be transferred at the request of the second beneficiary to any subsequent third beneficiary. However, fractions or a portion of the credit can be transferred separately provided that the aggregate of these transfers does not exceed the total quantity/value of the credit. It is only possible to transfer portions if partial shipments are allowed though. The aggregate of such transfers will be considered as constituting only one transfer of the credit.
It is to be remembered that the credit can be transferred only on the terms and the conditions specified in the original credits - the exceptions only being the amount of the
credit, of any unit prices stated, of the period of validity, of the last date of presentation of documents and the period for shipment. Any or all of these exceptions may be reduced or curtailed. The percentage for which insurance cover is to be effected could be increased in such a way as to provide the amount of cover stipulated in the original credit. Furthermore, the name of the first beneficiary can be substituted for that of the applicant for the credit. However, if the name of the applicant is specifically required by the original credit to appear in any document other than the invoice, that requirement has to be fulfilled.
The first beneficiary has the right to substitute his own invoices and drafts in exchange for those of the second beneficiary, for amounts not in excess of the original amount stipulated in the credit and for the original unit prices. Upon substitution of the invoices the beneficiary can draw under the credit for the difference between his invoices and the second beneficiarys invoices. It is to be noted that where a credit has been transferred and the first beneficiary is to supply his own invoices (in exchange for the second beneficiarys invoices) but does not do so on first demand, the bank (be it the paying, accepting or negotiating bank) has the right to deliver to the issuing bank the documents received under the credit including the second beneficiarys invoices and without any further responsibility to the first beneficiary.
Unless it is not permitted in the credit, the first beneficiary of a transferable credit can request that :
o The credit be transferred to a second beneficiary in the same country or another county.
o The payment or negotiation be effected to the second beneficiary at the place to which the credit has been transferred and without prejudice to the first beneficiarys right to substitute his own invoices for those of the person to whom it has been transferred and to claim any difference due to him.
It is to be noted that a credit can only be issued as a transferable one on the specific instructions of the applicant. Consequently this must be noted on both the credit application form and the credit itself.
At the time of making a request for a transfer and prior to transfer of the credit, the first beneficiary must irrevocably instruct the transferring bank whether or not he retains the right to refuse to allow the transferring bank to advise amendments to the second beneficiary(ies). If the transferring bank agrees to this condition, it must advise the second beneficiary of the first beneficiarys instructions regarding amendments. If, however, a credit is transferred to more than one beneficiary(ies), refusal of an amendment by one or more second beneficiaries does not invalidate the acceptance by the other second beneficiary with respect to whom the credit will be amended accordingly. In regard to the second beneficiary who rejected the amendment, the credit will remain
unamended.
The fact that a credit is not stated to be transferable shall not affect the beneficiarys right to assign any proceeds to which he may be or may become entitled under the credit.
Transferable credits are widely used in the garment trade and in chemicals as items often have to be sourced form multiple sources.
6. Credit Available By Installments
A credit available by installments is a credit requiring specific quantities to be shipped weekly or monthly and allowing part shipments.
7. Back to Back Credit
A back to back credit is issued on the strength of a credit already received. It is in fact a secondary or counter credit of a primary credit and is issued if, for some reason, a credit cannot be issued in a transferable form.
The seller as the beneficiary of the first credit offers it as security to the advising / confirming bank for the issuance of the second credit. The seller thus becomes the opener of the second credit and is responsible for reimbursing the bank for payments made under it irrespective of whether or not he is paid under the first credit.
The prime beneficiary of the credit can thus issue a credit to his supplier from his own bank.
It should be ensured that the second credit terms are identical to those of the first credit - the difference being mainly on the date of expiry and the amount.
o The second credit must expire before the first credit.
o The amount of the second credit will have to be less than that of the first credit. This is for the markup of the first beneficiary.
These are issued to enable the exporter to get his suppliers on credit.
These are issued mainly when the primary beneficiary does not want the buyer to know who the supplier of the goods sold are (in trading operations) or when the opener is not prepared to open a transferable credit.
8. Counter Credit
A counter credit is similar to a back to back credit. Its identifying factor is that the seller has his own bank (as opposed to the advising/confirming bank) to issue the credit as a counter to the first one.
9. Red Clause Credits
Red Clause credits are a method of financing before shipment and are so called because the clause relating to the provision for finance was originally written in red ink on the credit to draw attention to this special feature. Normally the beneficiary under a credit receives payment only after shipping the goods and submitting the documents stipulated in the credit.
This credit authorises the advising or commercial bank to make advances to the beneficiary before presentation of documents. This is to enable him to purchase or process goods to be shipped. These advances together with the accrued interest is to be repaid by the beneficiary with the proceeds of the draft negotiated after the shipment or adjusted at the time the draft is negotiated.
The onus of final repayment is on the buyer who would be liable for repayment of the advances if the seller fails to submit the documents called for under the credit. He would also be liable for all costs incurred by the issuing and the advising/confirming banks.
10. Green Clause Letter of Credit
Green Clause letters of credit are an extension of the Red Clause credits in that it envisages the grant of storage facilities at the port of shipment over and above preshipment finance.
These are not usually issued.
11. Standby letters of Credits
A standby letter of credit is not really a credit but is a guarantee for the performance of a contract and is realisable on the presentation to the issuing bank of a declaration that a named party has not fulfilled the contract.
12. Acceptance Credits
Letters of credit are normally payable on sight. Payment is to be made on the presentation of the documents. Acceptance credits expect the beneficiary to draw a bill of exchange (bill) for a period of time (30 days, 60 days etc.). The bill may be drawn on a bank and the bank accepts it and pays the bill on maturity. These are used when the transaction involves suppliers credit. The beneficiary can, if he needs finance, discount the draft (bill) with his bankers. If the bill is accepted by the bank it is known as bankers acceptance. The beneficiary is assured then of payment on due date.
In these types of credit the shipping documents are usually handed over to the opener on his accepting the bill.
This is the form of credit most favored by importers as they are able to, often sell the goods and pay their dues from the proceeds without resorting to bank finance.
13. Deferred Payment Letter of Credit
Deferred payment credits are usually used in the import/export of capital goods. They are similar to acceptance credits. Payment is made in installments and each instalment is covered by a separate draft. The drafts will be accepted by the issuing bank when the documents are submitted in accordance with the terms of the letter of credit.
The exporter can have the drafts discounted with his banker or the issuing bank if the drafts are drawn under the credit. However, drafts under a deferred credit drawn for a very long time may not be rediscountable. Additionally no discount may be possible if drafts are not drawn as the draft is the negotiable instrument.
14 Transit Credit
A transit credit involves the confirmation of a letter of credit by a bank in a country other than that of the buyer or the seller. This bank may also open the credit.
These credits are used if:
o The issuing bank is unknown in the exporters country.
o Settlement is in the currency of the country in which the advising/confirming bank operates.
o Direct communication is not possible for political reasons.
Some other types of letters of credit that Banks issue on behalf of their customers are:
1. Credit Available By Installments
A credit available by installments is a credit requiring specific quantities to be shipped weekly or monthly and allowing part shipments.
2. Back to Back Credit
A back to back credit is issued on the strength of a credit already received. It is in fact a secondary or counter credit of a primary credit and is issued if, for some reason, a credit cannot be issued in a transferable form.
The seller as the beneficiary of the first credit offers it as security to the advising / confirming bank for the issuance of the second credit. The seller thus becomes the opener of the second credit and is responsible for reimbursing the bank for payments made under it irrespective of whether or not he is paid under the first credit.
The prime beneficiary of the credit can thus issue a credit to his supplier from his own bank.
It should be ensured that the second credit terms are identical to those of the first credit - the difference being mainly on the date of expiry and the amount.
o The second credit must expire before the first credit.
o The amount of the second credit will have to be less than that of the first credit. This is for the markup of the first beneficiary.
These are issued to enable the exporter to get his suppliers on credit.
These are issued mainly when the primary beneficiary does not want the buyer to know who the supplier of the goods sold are (in trading operations) or when the opener is not prepared to open a transferable credit.
3. Counter Credit
A counter credit is similar to a back to back credit. Its identifying factor is that the seller has his own bank (as opposed to the advising/confirming bank) to issue the credit as a counter to the first one.
4. Red Clause Credits
Red Clause credits are a method of financing before shipment and are so called because the clause relating to the provision for finance was originally written in red ink on the credit to draw attention to this special feature. Normally the beneficiary under a credit receives payment only after shipping the goods and submitting the documents stipulated in the credit.
This credit authorises the advising or commercial bank to make advances to the beneficiary before presentation of documents. This is to enable him to purchase or process goods to be shipped. These advances together with the accrued interest is to be repaid by the beneficiary with the proceeds of the draft negotiated after the shipment or adjusted at the time the draft is negotiated.
The onus of final repayment is on the buyer who would be liable for repayment of the advances if the seller fails to submit the documents called for under the credit. He would also be liable for all costs incurred by the issuing and the advising/confirming banks.
5. Green Clause Letter of Credit
Green Clause letters of credit are an extension of the Red Clause credits in that it envisages the grant of storage facilities at the port of shipment over and above preshipment finance.
These are not usually issued.
6. Standby letters of Credits
A standby letter of credit is not really a credit but is a guarantee for the performance of a contract and is realisable on the presentation to the issuing bank of a declaration that a named party has not fulfilled the contract.
7. Acceptance Credits
Letters of credit are normally payable on sight. Payment is to be made on the presentation of the documents. Acceptance credits expect the beneficiary to draw a bill of exchange (bill) for a period of time (30 days, 60 days etc.). The bill may be drawn on a bank and the bank accepts it and pays the bill on maturity. These are used when the transaction involves suppliers credit. The beneficiary can, if he needs finance, discount the draft (bill) with his bankers. If the bill is accepted by the bank it is known as bankers acceptance. The beneficiary is assured then of payment on due date.
In these types of credit the shipping documents are usually handed over to the opener on his accepting the bill.
This is the form of credit most favored by importers as they are able to, often sell the goods and pay their dues from the proceeds without resorting to bank finance.
8. Deferred Payment Letter of Credit
Deferred payment credits are usually used in the import/export of capital goods. They are similar to acceptance credits. Payment is made in installments and each instalment is covered by a separate draft. The drafts will be accepted by the issuing bank when the documents are submitted in accordance with the terms of the letter of credit.
The exporter can have the drafts discounted with his banker or the issuing bank if the drafts are drawn under the credit. However, drafts under a deferred credit drawn for a very long time may not be rediscountable. Additionally no discount may be possible if drafts are not drawn as the draft is the negotiable instrument.
9. Transit Credit
A transit credit involves the confirmation of a letter of credit by a bank in a country other than that of the buyer or the seller. This bank may also open the credit.
These credits are used if:
o The issuing bank is unknown in the exporters country.
o Settlement is in the currency of the country in which the advising/confirming bank operates.
o Direct communication is not possible for political reasons.
These are the other types of credits that banks issue on behalf of their customers.
SHIPPING DOCUMENTS
In documentary credit operations, all concerned deal in documents. Thus the documents assume a most important role. The various documents dealt with in letter of credit operations are collectively called Shipping Documents. As banks deal solely with documents an understanding of these documents is imperative.
It must be remembered that banks do not assume any responsibility for the form, sufficiency, accuracy, genuineness, falsification or legal effect of any document(s) or the general and/or the particular conditions stipulated in the document(s) or super imposed thereon; nor do they assume any responsibility for the description, quantity, weight, quality, condition, packing, delivery, value or existence of the goods represented by any document(s) or for the good faith or acts and/or omissions, solvency, performance or standing of the consignors, the carriers, the forwarders, the consignees or the insurers of the goods or any other person whomsoever (Article 15 UCP 500). It should be noted that a condition under a credit for a document to be authenticated, validated, legalised, visaed, certified or indicating such a requirement will be satisfied by any signature, mark, stamp or label on such document that on its face appears to satisfy these conditions.
Article 20 of UCP 500 goes on to say that Terms such as first class,well known,independent, official, competent. local and the like shall not be used to describe the issuers of any document(s) to be presented under a Credit. If such terms are incorporated in the Credit, the bank will accept the relative document(s) as presented, provided that it appears on its face to be in compliance with the other terms and conditions of the credit and not to have been issued by the beneficiary.
There are a few other factors that must be remembered too.
1. Unless it is otherwise stipulated banks will accept as an original document(s),a document(s) produced or appearing to have been produced by photocopy, computerised systems or carbon copies provided that the documents are marked as original and are signed. Additionally banks will accept as a copy a document either labelled copy or not
marked as an original. A copy need not be signed.
2. In regard to signature it is stated that documents may be signed by handwriting, by facsimile signature, by perforated signature, by stamp, by symbol, or by any other mechanical or by any other mechanical or electronic method of authentication.
3. The requirement of credits for multiple copies will be satisfied by the submission of an original and the required number in copies.
The more common shipping documents called for in a credit and their essential features are as follows :
Bill of Lading
A bill of lading is a document issued to the shipper (usually the exporter), by the carrier transporting the goods. It is signed by or on behalf of the master of the ship. It acts as a receipt for the goods accepted for carriage. It can be used with any form of transport, not just shipping.
A bill of lading is issued to the exporter by the shipping company usually in sets of two or three originals, all signed by the shipping company. Any one of the originals give title of the goods to the holder.
The bill of lading can be negotiable if signed by the exporter. Signed bills of lading are documents of title to the goods and can be negotiated to obtain payment before the goods are released by the exporter. This document can also serve as collateral, against which funds can be obtained by the exporter before payment is received from the importer.
A bill of lading is prepared by the exporter and forwarded to the shipping company for
completion. The shipping company will then issue one of two types of bill :
. Clean bill of lading - the bill does not state that there is any defect in the goods or their packaging.
. Foul or dirty bill of lading - the bill contains a statement by the shipping company that the goods received or their packaging are in some way damaged or defective.
The shipping company will only hand over the goods to the consignee (ie the receiver of the goods) when the consignee presents an original signed copy of the Bill of Lading.
a. Main Types of Bill of Lading
(1). Short-Form Bill of Lading
This is a Bill of Lading which does not contain the shipping companys conditions and terms of carriage. Because of this, this cannot be a contract of carriage between the shipping company and the exporter / importer. It usually refers to a master document which details all the clauses of the contract.
(2). Combined Transport Bill of Lading
This is also known as Through Bill of Lading. This is issued where the transfer of goods from seller to buyer involves two or more carriers, using different forms of transport (eg rail and sea).
(3). Liner Bill of Lading
This is a bill issued for ships operating on a strict timetable.
(4). Charter-Party Bill of Lading
This is issued when a person or company hires (charters) a vessel from its owner and there is surplus space available on board for extra cargo. An exporter may use up the surplus space by arranging with the hirer of the vessel to ship his goods on that vessel. The contract of carriage is between the exporter and the hirer of the vessel, not with the owner.
The bill of lading issued for the journey will state subject to charter party. The contract of carriage is subject to the vessels hire contract. Such bills of lading will normally be rejected by banks handling Documentary Credits as they violate Uniform Customs and Practice for Documentary Credits. Banks will, however, accept these if the Credit calls for or permits a charter party bill of lading which:
o Contains any indication that it is subject to a charter party.
o Appears on the face to have been signed or otherwise authenticated by the owner or a named agent. The signatory must identify himself as owner/agent.
O Does or does not indicate the name of the carrier.
o Indicates the goods have been loaded on board or shipped on a named vessel. This may be by pre printed wording on the bill of lading. In such instances the date of issuance of the Bill of lading will be assumed to be the date of loading on board and the date of shipment. In other cases loading on board must be evidenced by a notation on the bill of lading which gives the date on which the goods have been loaded on board.
o Indicates the port of loading and the port of discharge stipulated in the credit.
o Consists of a sole original bill of lading or if issued in more than one original, the full set issued.
o Contains no indication that the carrying vessel is propelled by sail only and
0 Meets all the conditions and stipulations of the credit.
It may be noted that if the credit requires presentation of a charter party contract in connection with a charter party bill of lading, banks will not examine the contract but will pass it on without responsibility on their part.
2. Non Negotiable Sea or Liner Waybill
This is a transport document which gives details of a consignment of goods. A Waybill is a list of goods carried. This is a receipt only and not a document of title (i.e. not negotiable). The shipping company will deliver the goods to the named consignee, without the consignee having to give an original copy of the waybill to the company.
Banks will accept these, unless it is specifically prohibited in the credit if it:
o Appears on its face to indicate the name of the carrier and is signed or authenticated by the master or a named agent.
o Indicates that the goods have been loaded or shipped on board a named vessel. This may be by preprinted wording on the non negotiable sea way bill(date of issuance of the sea way bill will be assumed to be the date of loading on board and the date of shipment) . In other cases loading must be evidenced by a notation on the sea way bill which gives the date the goods have been loaded on board. If the term intended vessel has been indicated on the sea way bill, there must be a notation of the date when the loading took place and the name of the intended vessel must be stated even if the goods have been loaded on the vessel named as the intended vessel. If the place of receipt of the goods is different from the port of loading, the on board notation must include the port of loading stipulated in the credit and the name of the vessel on which the goods have been loaded (even if this is a vessel named in the non negotiable sea waybill).
o Indicates the port of loading and the port of discharge stipulated in the credit.
o Consists of a sole original non negotiable sea way bill or if issued in more than one original, the full set issued.
o Appears to contain all of the terms and conditions of carriage.
o Contains no indication that it is subject to a charter party and
o Meets , in all other respects, the stipulations of the credit.
Transhipment in this context means unloading and reloading from one vessel to another during the course of ocean carriage from the port of loading to the port of discharge. Banks will accept a sea way bill that permits transhipment provided this is not prohibited in the credit and the entire ocean carriage is covered by the same non negotiable sea way bill. Additionally even if the credit prohibits transhipment, banks will accept a non negotiable sea way bill which:
o Indicates that transhipment will take place as long as the relevant cargo is shipped in a container,trailer or lash barge and the entire ocean carriage is covered by one and the same non negotiable sea way bill.
o Incorporates clauses stating that the carrier reserves the right to tranship.
3. Multimodal Transport Document
Multimodal transport documents are issued where the goods are to be transported by more than one mode of transportation ie. by ship and by road.
If the credit calls for a transport document covering two or more different modes of transport, banks will accept a document which:
o Appears on its face to indicate the name of the carrier or multimodal transport operator which has been signed or otherwise authenticated by the carrier,multimodal transport operator, named agent or the master. The signatory must identify the capacity or authority under which he has signed.
o Indicates that the goods have been dispatched or loaded on board.
o Consists of a sole original multimodal transport document or, if issued in more than one original, the full set so issued.
o Appears to contain all the terms and conditions of carriage.
o Contains no indication that it is subject to a charter party and/or indication that the carrying vessel is propelled by sail only.
o In all other respects meets the stipulations of the Credit.
Even if the credit prohibits transhipment banks will accept a multimodal transport document which indicates that transhipment will or may take place provided that the entire carriage is covered by the same multimodal transport document.
4. Air Waybill (AWB)
This is a waybill for goods transported by air. It is not a document of title but a contract of carriage and a receipt by the airline for goods received for transportation. However, some
measures of control of the merchandise may be afforded by requiring the AWB to be made in the name of the issuing bank for the account of the credit. The document should bear the airlines stamp with the date of despatch. The flight number must be indicated and the document should be signed on behalf of the airline. The airline will deliver the goods to the consignee at the airport of destination. The consignee is not required to present an original copy of the Waybill. Since AWBs are issued in non negotiable forms, opening of letters of credit covering air shipment consigned to the account party are considered as clean credit risks by banks.
Banks will accept documents that indicates the name of the carrier and signed or authenticated by the carrier or a named agent on behalf of the carrier. The signatory must indicate the capacity in which he/she has signed. The airway bill must also confirm that the goods have been accepted for carriage, the airport of departure, the airport of destination and the date of dispatch. If the credit stipulates an actual date of dispatch, the date on the AWB as the date of dispatch will be deemed to be the date of dispatch.In other cases the date of the issuance of the AWB will be assumed to be the date of dispatch. Banks will accept an AWB that appears to be the original for the consignor and appears to contain all the terms and conditions of carriage and meets the other terms of the credit. In this case transhipment means unloading and reloading from one aircraft to another during the course of carriage. It must be noted that even if the credit prohibits transhipment banks will accept an AWB which indicates that transhipment will take place provided that the entire carriage is covered by one and the same air transport document.
5. Road, Rail or Inland Waterway Transport Documents
This is a receipt issued by a carrier of goods transported by road, rail or inland waterway. The receipt details:
o. Name of the consignee;
o. Place and date the carrier took charge of the goods;
o. The place of delivery;
The consignee must give proof of his identity to the authorities before the goods will be
transferred to him.
Banks will normally accept these documents if they are required in the credit and appear on its face to indicate the name of the carrier and has been signed or authenticated by the carrier or his agent. This signature or authentication must indicate in what capacity the person is signing the document ie. as agent or for the company. The bill must also show that the goods have been received for shipment. The date of issuance of the receipt is deemed to be the date of shipment unless the document contains a reception stamp. In that case the reception stamp will be deemed to be the date of shipment. The document must also clearly indicate the place of shipment and the place of destination as stated in the credit and must meet all the other stipulations of the credit.
If there is no indication on the transport document as to the numbers issued, banks will accept the transport document presented as a full set.
Transhipment in this article means unloading and reloading from one means of conveyance to another, in different modes of transport during the course of carriage. Even if the credit prohibits transhipment banks will accept a road, rail or inland waterway transport document which indicates that transhipment may take place provided that the entire carriage is covered by one and the same transport document.
6. Post Office Receipts
This is issued for goods sent by parcel post. The receipt will containthe following information :
. Senders name.
. The full name and address of the consignee.
. The date of dispatch, indicated by the post office branch.
. The signature of the checking officer in the post office.
The goods will be sent directly to the person named on the parcel.
Bank will accept, unless it is specifically prohibited in the credit, a post receipt which appears on its face to have been stamped or otherwise authenticated and dated in the place the credit stipulates the goods are to be dispatched and meets all the other conditions of the credit.
7. Courier Receipts
Courier receipts are issued by courier companies for goods dispatched through couriers. This mode is becoming increasingly popular for small consignments as couriers pick up the consignment from the senders offices/factory and deliver it to the buyers place of work.
Banks will accept a document issued by a courier if permitted by the credit which:
o Indicates on the face to indicate the name of the courier service and has been stamped,signed or otherwise authenticated by the courier agency.
o Indicates a date of pick up or of receipt. This date will be deemed to be the date of dispatch.
o Meets all the other stipulations of the credit.
7. Transport Documents Issued by Freight Forwarders
At times transport documents are issued by freight forwarders as opposed to the actual carriers. In instances such as these, unless they are authorised in the credit, banks will accept a transport document issued by a freight forwarder only if the following appears on its face:
o The name of the forwarder as a carrier or multimodal transport operator and the document is signed or otherwise authenticated by the freight operator or
o The name of the carrier or multimodal transport operator and the document is signed by the freight forwarder as an agent on behalf of the carrier.
8. Miscellaneous.
Banks will accept transport documents which does not indicate in the case of carriage by sea that the goods are or will be loaded on deck. Still banks will accept a document that states that the goods may be carried on deck provided that it does not specifically state that they are or will be loaded on deck. Furthermore, banks will accept documents that indicates the consignor of the goods a party other than the beneficiary of the credit and/or bears a clause stating shippers load or said by skipper or similar words.
Banks will not normally accept transport documents that bears a clause or notation which expresses a defective condition of the goods unless this is specifically permitted under the credit.
Banks will also accept transport documents stating that freight or transportation charges have still to be paid unless the credit stipulates that the freight has to be paid. Banks will accept documents stating costs additional to the freight such as disbursements incurred in connection with loading or similar operations unless the credit specifically prohibits this.
9. Commercial Documents
1. Pro-forma Invoices
This is a quotation given by a seller to a potential buyer. The words pro-forma act as an invitation to the buyer to place a definite order. No agreement to buy and sell goods has taken place at this stage. This acts as a price quotation and may include the terms of sale.
When a definite order is placed, a commercial invoice will be sent to the buyer and it will duplicate the pro-forma invoice.
2. Commercial Invoices
This document represents the cost of the items sold to the purchaser by the seller (beneficiary) and is a demand by the seller for payment for goods sold.
The following information details are critical and must appear face of the commercial invoice :
. Name and address of the seller. This must be the beneficiary. The only exception is in regard to transferable credits.
. Name and address of the buyer. This must be the credit applicant. Here again the only exception permitted is in regard to transferable credits.
. Date and number of invoice.
. Complete description of the goods. This must match the description given on the documentary letter of credit. In all other documents the goods must correspond with the description in the credit.
. The order or contract number.
. The unit price, other agreed charges and the total price.
. Charges for insurance and freight, if applicable.
. Terms of payment.
. Terms of delivery.
. Identification marks and details of packaging including weight of goods. These must be consistent with the other documents.
. Details of import/export licence, exchange permits etc, if applicable.
There is no requirement that the invoice is signed unless this is specifically required in the credit.
A certified invoice is a commercial invoice which may also include a statement by the exporter that:
. The goods are in the condition required under the contract.
. The goods are of a specific country of origin.
Banks would normally refuse invoices for amounts in excess of the amount permitted by the credit. However, if a bank authorised to negotiate or pay accepts such invoices then its decision will be binding upon all parties provided that such bank has not paid or negotiated for an amount in excess of that permitted in the credit.
3. Consular Invoices
These invoices are commercial invoices issued in the exporters country by the consulate of the importing country. They are used to provide customs information for that country and thus to help prevent false or misleading declarations of value. Furthermore, it helps the government of the importing country to control imports coming into the country. It also helps in the calculation of import duty.
4. Other Commercial Documents
a. A Weight Note
This is issued by the seller or by a third party. It indicates the weight of the goods and weight shown should correspond to the weight figure on all the other documents.
A weight note is required if the credit calls for an attestation or certification of weight in the case of transport other than by sea. In regard to transportation by sea, the bill of lading will detail the weight of the goods.
Banks will normally accept a weight certificate. In instances where the credit calls for a weight certification, banks will accept a weight stamp or declaration of weight which appears to have been superimposed on the transport document by the carrier or his agent. If, however, the credit asks for a separate document, then the weight must be certified on a separate document.
b. A Manufacturers / Suppliers Quality Certificate
This is a signed declaration by the manufacturer or supplier that he has inspected the goods and found them to be of the quality required under the sales contract.
c. A Third Party Inspection Certificate
This is a certificate issued by an independent inspection body declaring the finding of an examination of the goods. This certificate protects the importer against paying for sub-standard goods under a Letter of Credit.
d. Packing List and Specification
These are documents which specify both the contents and the marking of the packages. They are often required by customs authorities to enable them to make a thorough check on the contents of any particular package.
e. Certificate of Origin
Some countries insist on certificates of origin before they will allow goods into the country. This certifies where the goods are produced. The exporter inserts the relevant details, and the form has then to be authenticated by an independent body, such as the Chamber of Commerce. The terms of the credit may also require the certificate of origin to be notarised or legalised by a public notary.
5. Terms of Trade
Code Name
EXW Ex Works
FRC Free Carrier Named Point
FOR Free On Railway
FOT Free of Truck
FAS Free Along Side
FOB Free on Board
FOA Free on Board at Airport
CFR Cost and Freight (formerly C & F)
EXS Ex Ship
EXQ Ex Quary (Duty Paid or Duty for Buyers A/C)
DCP Freight or Carriage Paid
CIF Cost, Insurance and Freight
CIP Carriage and Insurance Paid
DAF Delivery at Frontier
DDP Delivery Duty Paid
10. Insurance Documents
1. Letters of Insurance
This is issued by an insurance broker to provide notification that insurance has been placed pending the development of a certificate of insurance or a insurance policy. This does not contain full details of the insurance and does not constitute documentary evidence of an insurance contract.
2. Insurance Certificates
This shows the details of the insurance cover. It gives the value and particulars of the shipment and specifies the risks covered. The certificate is signed by both the exporter and the insurance company.
A certificate of insurance is required when an exporting companys insurance policy provides open cover for all its export trade. When an exporter takes out open cover with his insurance company, a pre-printed and pre-signed insurance certificate for each individual shipment is prepared by the exporter.
Insurance certificates must appear on their face to be issued and signed by insurance companies or underwriters or their agents (Article 34(a) UCP 500). It is to be noted that cover notes by brokers will not be accepted by banks unless this is clearly stated as
acceptable. Banks would, however, unless this is specifically prohibited, accept an insurance certificate or a declaration under an open cover presigned by insurance companies or underwriters or their agents. On the other hand, if a credit calls for an insurance certificate or a declaration under an open cover, banks will accept, in lieu, an insurance policy.
Often more than one original of an insurance cover is indicated on the insurance certificate. In that case all the originals must be presented.
The insurance cover should be from the time of dispatch of the goods or loading on board or whenever the goods are indicated in the transport document. Banks will not accept an insurance certificate which bears a date of issuance later than the date of loading or dispatch or taking in charge (as indicated in the transport document).
The insurance certificate must be in the same currency as the credit. Furthermore, the minimum amount of the insurance should be the CIF ( Cost, insurance and freight) or CIP (Carriage and Insurance Paid) value of the goods plus 10%. If, however the CIF or CIP value cannot be determined banks will accept 110% of the amount for which payment is requested or 110% of the gross value of the invoice whichever is the greater.
To guard against ambiguity, credits should whenever possible stipulate the type of insurance that is required. Imprecise or unclear terms such as usual risks and customary risks should not be used as these are ambiguous and leads to interpretation and confusion. If these imprecise terms are used, banks will accept insurance certificates as presented without responsibility for any risks being covered. It should also be noted that in the absence of anything to the contrary banks would accept an insurance document which indicates that the cover is subject to a franchise or an excess (deductible). If a credit stipulates that the goods be insured against all risks banks would normally accept an insurance document which contains any all risks notation or clause even if the insurance document indicates that certain risks are excluded without responsibility for any risks not being covered.
Financial Documents
1. Bills of Exchange
A Bill of exchange is an unconditional order in writing addressed by one person (drawer) to another (drawee), signed by the person giving it (drawer), requiring the person to whom it is addressed (drawee), to pay on demand, or at a fixed or determinable future time, a sum certain in money to or to the order of a specified person (payee) or to the bearer. (Bills of Exchange Act 1882).
Bills of exchange or drafts as they are often known are used in nearly all trade transactions. They are negotiable instruments and ownership can be passed onto another for value received by endorsement and delivery. The holder in due course will get good title and would have recourse on previous holders if a default occurs ie. payment is not made.
Bills of exchange deal with importers desire to withhold payment until the goods are received and the exporters desire for immediate payment on dispatch of the goods. A bill of exchange which is also called a draft, deals with the time lag between these two dates.
Banks usually act as intermediaries between the importer and exporter in international trade. This occurs by means of documentary collection and letters of credit.
At times the exporter issues more than one bill to protect against loss or delay of a bill. Payment is however only made against one bill; the other bills are left unpaid.
The drawer is the person who draws or signs the bill giving an order to another person to pay the amount mentioned on the face of the bill. By drawing the bill, the drawer is liable on the bill until it is accepted. He is also liable if the bill is dishonoured as the drawer is bound to compensate the payer.
The drawee of a bill is the person to whom the bill of exchange is addressed. This person becomes the acceptor, when he commits himself to pay the bill at maturity by signing his
name across the bill.
The payee is the person named on the bill to whom payment will be made. If the payee is not the bearer (the exporter), the payees name must appear on the bill.
When the payee signs his name on the bill of exchange he becomes the endorser. The bill may be endorsed by more than one person. If the bill is dishonoured the endorser becomes liable to pay the holder and any subsequent endorsers on the bill who made payment. He has the right to claim previous endorsers, the payee and the drawer.
Bills of exchange are used between trading parties to make the process of payment for goods more efficient under the guidance and instruction of certain financial conditions specified by the bill.
There are 2 types of Bills of Exchange - sight and term or usance bills
a. Sight Bills
When a bill of exchange is marked payable on sight, this implies that payment is due immediately on sight of the bill (ie on presentation of the bill).
b. Term Bills (Tenor/Usance)
These are payable at a stipulated future date. The buyer is required to make payment at a fixed or determinable future time. This may be a certain number of days after the date of the bill or a certain number of days after sighting the bill or some other date as specified in the bill. Usance bills are drawn for the period of credit given to the buyer and are usually for 30, 60, 90, 120 or 180 days.
When a usance bill is presented to the drawee he normally signs it to signify his acceptance indicating the date the bill is accepted. By accepting the bill the drawee
acknowledges his obligation to pay on the date agreed. This obligation is legally binding and the drawee is bound to pay the bill on maturity.
If payment is not made on the due date the bill is considered dishonored. A bill that has been dishonored can be used in its own right for legal action.
2. Other Types of Bills
a. Bank Bills
These are drawn on and accepted by banks, usually by the importers banks.
b. Trade Bills
These are drawn by one trader on another (ie drawee is the buyer of the goods).
c. Documentary Bills
These are bills or orders to pay which are unaccompanied by other documents (documents of title).
Bills of Exchange are preceded by letters of credit that
specifiy the nature of the bill to be drawn up.
3. Promissory Note
A Promissory Note is an unconditional promise in writing made by the buyer to the exporter, signed by the buyer, agreeing to pay on demand, or a fixed or determinable
future date a certain sum of money to, or to the order of a specified person or to bearer.
The important difference between a promissory note and a bill of exchange is that a promissory note is written and drawn by the buyer and sent to the person that is owed payment (ie the exporter). In contrast, a bill of exchange is drawn by the exporter and sent to the buyer who accepts it.
4. Dishonouring a Bill
A bill can be dishonoured in three ways:
. When a sight bill is unpaid on presentation to the drawee.
. When a term bill is not accepted on presentation to the drawee.
. When a term bill is not paid at maturity.
When a bill is dishonoured, the drawer has the right to take legal action to recover the money due to him.
5. Protesting a Bill
In order to recover the money due to him, the drawer must first protest the bill by providing the court with evidence the bill has been presented and dishonoured for the reasons given in the deed of protest.
6. General
If documents other than the usual documents (invoices, bill of lading, airway bill and insurance certificate) the credit must clearly state the wording and content of these documents and by whom these should be issued. If this is not stipulated banks may and will accept documents presented whose data content is not inconsistent with any other document presented (Article 21, UCP 500).
It is also to be noted that banks will accept documents dated prior to the date of the credit (unless this is specifically prohibited) provided that it is presented within the time limits set out in the credit (Article 22, UCP 500).
The expression shipment will normally be understood to include expressions such as loading on board, dispatch, accepted for carriage and the like. However words which are open to interpretation such as prompt, immediately and the like should not be used. If these are used banks will disregard them. Banks will interpret terms like on or about as a stipulation that shipment must be made five days before or after that date.
The words to, until, till, from and the likes will include the date mentioned. However, the word after will exclude the date mentioned. Therefore a statement that shipment will be from December 1, 1994 will include that date whereas a statement that it would be after December 1, 1994 will be understood to mean that shipment will be after that date. Similarly the first half will mean from the 1st to the 15th and the second half will be from the 16th to the last day of the month. The tem beginning, middle and end of the month will be assumed to be the 1st to the 10th, the 11th to the 20th and the 21st to the last day of the month respectively.
The words about, approximately,circa or similar expressions used in connection with the amount, quantity or unit price are to be construed as allowing a difference not to exceed 10% more or less than the factor the expression refers to.
Unless the credit specifically states that the quantity of the goods must not be exceeded or reduced a tolerance of 5% more or less is permissible provided that the amount of drawings does not exceed the amount of the credit. This tolerance will not apply in instances where the credit stipulates the quantity in terms of a stated number of packing units or individual items.
A tolerance of 5% less in the drawings would be permissible unless the credit prohibits partial shipments or clearly stipulates that the quantity must not be exceeded or reduced. This is provided that if the credit stipulates the quantity of goods, the entire quantity is shipped in full and if a unit price is stated in the credit, that unit price is not reduced.
Partial drawings and/or shipments are allowed unless these are specifically prohibited by the credit.
Even if transport documents show different dates of shipment and/or different ports of loading, places of taking in charge or despatch, it will not be regarded as a partial shipment if the documents indicate that shipment has been made on the same means of conveyance, for the same journey and the goods are sent to the same destination. Similarly shipments by post or courier will not be considered partial shipments if the receipts are stamped, signed or otherwise authenticated in the place from which the credit states the goods are to despatched and are on the same date.
If drawings and/ or shipments by installments within specific periods are stipulated in the credit and any instalment is not drawn or shipped within the period allowed, then the credit ceases to be available for that and any subsequent credit. This is because it is assumed that this is an integral part of the credit.
All credits must state an expiry date and a place where the documents are to be presented for payment, acceptance or for negotiation (unless it is freely negotiable). The expiry date for payment, acceptance or negotiation is considered the expiry date for the presentation of documents. Documents must be presented by the expiry date unless that date is a date on which the bank is closed (sunday, public holiday etc.), the expiry date will be the first following day on which the bank is open. The latest date of shipment, however, cannot be extended for the reason that banks are closed as shipment is not dependant on whether the bank is open or closed. If a latest date of shipment is not given in the credit banks will accept documents that show shipment before the expiry of the credit.
In addition to stipulating an expiry date, credits that call for transport documents must stipulate a specified period of time after the date of shipment during which presentation must be made in compliance with the terms and conditions of the credit. If this is not stipulated, banks will not accept documents presented to them later than 21 days after the date of shipment. Documents must be presented, without exception, not later than the expiry date of the credit.
If an issuing bank states that credit will be available for a defined period of time ie. one month or six months but does not specify the date from which the time is to run, the date of issuance of the credit will be considered to be the first day.
Banks will accept documents during normal working hours. They are
under no obligation to accept presentation of documents outside their banking hours. Additionally, the Bank to which presentation is made has to make a statement that the documents are presented within the time limit (before the expiry date).
NEGOTIATION OF LETTERS OF CREDIT
The seller or beneficiary on receiving the letter of credit (credit) will purchase/manufacture the goods to be sold and then ship them to the buyer. The seller would then present the transport documents and the other documents specified in the credit (invoices, draft, insurance etc). to his bank or the negotiating bank for payment.
It is a requirement that all credits must clearly indicate whether they are available by sight payment, by deferral payment, by acceptance or by negotiation. Unless the credit stipulates that it is available only with the issuing bank, all credits must nominate the bank which is authorised to pay, to incur a deferral payment undertaking, to accept draft (s) or to negotiate. In a freely negotiable credit, any bank is a nominated bank. Presentation of documents must be made to the issuing bank or the confirming bank, if any, or any other nominated bank.
On receiving the documents the bank examines the documents to ensure that they are in conformity with the terms of the credit. If they are the bank will negotiate the documents.
Documents which appear on their face to be inconsistent with one another will be considered as not in compliance with the terms and conditions of the credit.
Often documents not stipulated in the credit are also sent along with the other documents. In such cases these documents need not be and are not examined by the bank. They should however return them to the presenter or pass them on without responsibility.
It should be noted that the bank involved (the issuing, confirming or nominated bank) shall be allowed reasonable time to examine the documents. Reasonable time is not, in this case to exceed seven working days following the receipt of documents. The bank must within this time determine whether to take up or refuse the documents and to inform the party from whom it received the documents accordingly. Additionally if a credit details conditions without detailing the documents to be presented in
compliance therewith, banks will disregard these conditions.
When the issuing bank authorises another bank to pay, accept drafts or negotiate against documents that appear on their face to be in compliance with the terms and conditions of the credit, the issuing bank and the confirming bank, if any, are bound :
(i) To reimburse the negotiated bank and
(ii) To take up the documents
If the documents are not in compliance the bank would either:
(a) Return the documents to the beneficiary to have them amended for resubmission within the validity of the credit and within the period of time after date of issuance specified or
(b) Send the documents on collection or
(c) Return the documents to the seller to send through his own banks or
(d) If permitted by the seller, cable or write to the issuing bank for authority to pay, accept or negotiate or
(e) Ask the beneficiary for an indemnity and pay, accept or negotiate with the clear understanding that any payment made will be refunded along with interest and all charges if the issuing bank refuses to provide reimbursement against the documents.
(f) The bank may agree to pay, accept or negotiate under reserve (retain right of recourse) if the issuing bank does not provide reimbursement against documents that do not meet the credit requirements.
(g) The bank may refuse the documents. If it decides on this course it must give notice of this by telex or facsimile as fast as possible and without any delay and no later than the close of the seventh banking day of the receipt of the documents. The notice given to the bank from whom the documents have been received must state all the discrepancies. It must also state whether it is holding the documents at the disposal of, or is returning them to the presenter. The issuing / confirming bank can then claim from the remitting bank refund with interest for any reimbursement made to that bank.
Banks that do not adhere to these provisions are precluded from claiming that the documents are not in compliance with the terms and conditions of the credit.
(h) If the issuing bank determines that the documents appear not to be in compliance with the terms of the credit, it may in its sole judgement approach the credit opener (the applicant or buyer)for a waiver of the discrepancies (with the exception of the period of seven working days permitted to examine the documents).
It should be noted that the uniform customs and practice does not define nor does it differentiate between a minor or major discrepancy in the documents. A discrepancy is a discrepancy and banks will not pay or negotiate till it safeguards its interests in case the issuing bank or issuer refuses to pay.
Payments Under Letters of Credit
There are two kinds of letters of credit usually issued - sight and usance.
In a sight letter of credit the bank undertakes to make payment upon receipt of the documents called for in the credit provided all the terms and conditions called for are met. The negotiating bank would later obtain payment from the paying bank or opening bank who will in turn receive payment from the buyer on whose instruction the credit was issued.
A usance letter of credit is an undertaking to pay on a certain future date. This undertaking is conditional on the beneficiary providing a draft and all the documents called for under the credit and complying with all the terms and conditions. Usance letters of credit are established when it has been agreed with the seller that payment will be made after a period of time.
Settlement by Payment
Settlement may be by payment on the presentation of documents. This occurs usually in
the case of sight letters of credit. Payments are made when documents called for in the credit are submitted to the Bank. The terms sometimes used is documents against payment or DP.
The credit must nominate the Bank which is authorised to pay. The negotiating bank after making the payment will send the documents to the paying bank for reimbursement. The paying bank will in turn be reimbursed by the issuing bank who will collect the amount due including all charges from the opener.
Settlement by Acceptance
A. Nature of Acceptance
Settlement by acceptance occurs where the exporter presents the required documents under a letter of credit which includes a term bill of exchange. The bank checks the documents and if they are in order under the terms of credit, it accepts the bill and returns it to the exporter.
When someone other than the drawer signs, dates and indicates Accepted on a bill of exchange or a draft, this means he accepts the terms as stated on it. This is an unconditional liability for a specific amount to be due on a fixed or a determinable future date which will be payable to the order of a party or a bona fide holder. Once the bill of exchange has been accepted, it may be bought and sold in the discount market (secondary market). In the secondary market, they are discounted and sold to investors and are redeemed at par at maturity.
Acceptance Credit Line is an arrangement whereby a bank agrees to accept bills drawn upon it by a customer, against the security of a trade bill.
The usual process with an acceptance credit line:
1. The exporter instructs the remitting bank to initiate a documentary collection.
2. The exporter draws a bill for a proportion of the trade bill. This has a later maturity date than the trade bill.
3. The bank accepts this bill and then discounts it. The exporter receives the proceeds.
4. The importer ultimately pays for the goods and the exporters trade bill is paid.
5. When the bill drawn on the bank matures, the bank debits the exporters account with what is owed plus an acceptance commission.
Acceptance Credit Lines are also available to importers:
1. A bill is drawn on the importers bank.
2. The bank accepts the bill and discounts it.
3. The proceeds of this bill is used to pay the exporter.
4. The importer usually gives the bank a certificate of pledge and all the shipping documents as security.
5. These are released to him against a trust receipt at a
later date when the goods arrive.
6. The importer then sells the goods and places the funds in his bank upon maturity of the bill.
B. Type of Acceptance
There are two types of acceptances : Traders and bankers.
1. Traders Acceptance
A traders acceptance is a draft drawn on and accepted by an individual or corporation, usually the buyer of goods in a trade transaction. By accepting the draft, the accepting party (the individual or corporation) assumes an unconditional obligation to pay the face amount of the draft at maturity to a bonafide holder.
It is the responsibility of the issuer of the bill to make funds available at maturity when it is presented by the holder.
2. Bankers Acceptance
A bankers acceptance is a time draft or bill of exchange drawn on and accepted by a bank. By accepting the draft, the accepting party (the drawee bank) assumes an unconditional obligation to pay the face amount of the draft at maturity to a bona fide holder.
Bankers Acceptance is different from most forms of bank lending. This is a discountable instrument. When discounted, the amount of dollars extended to the drawer of an accepted draft is less than the face amount of the draft. The amount received is the net amount after deducting the acceptance commission charges and market discount rate.
An acceptance is a negotiable and marketable instrument for which a well-established and active secondary market exists. The drawer has the option to hold that draft until maturity or to obtain funds immediately by discounting the instrument. The drawer usually discounts the draft with the accepting bank.
Settlement by negotiationSettlement by negotiationSettlement by negotiation
It is required that all credits must nominate the bank which is authorized to negotiate (negotiating bank) unless the credit allows negotiation by any bank.
Unless the nominated bank is the confirming bank nominated by the issuing bank does not constitute any undertaking by the nominated bank to pay, to incur a deferred payment undertaking, to accept draft(s) or to negotiate. Except where expressly agreed to by the nominated bank and so communicated to the beneficiary, the nominated banks receipt of and/or examination and/or forwarding of the documents does not make that bank liable to pay, to incur a deferred payment undertaking, to accept draft(s) or to negotiate.
It must be noted that by nominating another bank, or by allowing for negotiation by any bank or by authorising or requesting another bank to add its confirmation, the issuing bank authorises that bank to pay, accept draft(s) or negotiate as the case may be, against documents which appear on their face to be in compliance with the terms and conditions of the credit and undertaking to reimburse such bank in accordance with the provisions of these articles.
The seller in this instance sends the documents evidencing shipment and those called for in the credit to the bank where the credit is available (negotiating bank) along with a draft drawn on the drawee specified in the credit. The bank after ensuring that the terms of the credit have been met will negotiate the draft. Negotiation by the issuing or confirming bank will be without recourse to the seller whereas by any other bank will be with recourse to the seller.
The negotiating bank, if other than the issuing bank will send the documents and the draft to the issuing bank for reimbursement.
FINANCING UNDER LETTERS OF CREDIT
When goods are delivered the buyer has to pay. There are at times the need for sellers to be financed too - as they may need to purchase the goods that are to be shipped.
The more common methods of financing are :
Financing the Buyer on a Sight Letter of Credit
The buyer is required to make payment on the presentation or sighting of the draft. If the buyer is unable to make payment he may seek financing from his bank for a period in order to take delivery of the goods and repayment will be made from the sale proceeds. Banks normally finance these by a trust receipt or a bankers acceptance.
Financing the Buyer on a Usance letter of Credit
A usance bill is an indication that the seller has agreed to give the buyer some credit. Documents are released and the buyer takes delivery of the goods on his accepting the
draft. The buyer then sells the goods and repays the bank. It must be noted that the bank is obliged to make payment even though the buyer may default.
Financing the Seller on a Sight Letter of Credit
In a sight letter of credit, the seller usually draws a sight draft either on the buyer or on the issuing bank or whoever is named in the credit. He, along with the draft, submits all the documents called for in the credit and would request his bank to negotiate the documents and pay him immediately. If the documents are in conformity with the credit, the Bank would negotiate the documents and make payment. It will in due course obtain payment from the issuing bank.
Financing the Seller on a Usance Letter of Credit
In regard to usance letters of credit, the seller can if he wishes wait to be paid on maturity or request his bank to negotiate the draft and purchase it. The negotiating bank will be reimbursed on the maturity of the draft.
Packing Loans
Packing loans are loans advanced to sellers to purchase goods and pay for services. These are at concessional rates of interest in many countries to encourage exports.
Overdraft
An overdraft is an account maintained by an account that fluctuates and is usually in credit (the bank being the lender).
Overdraft facilities are given to customers for working capital purposes - to purchase goods, to pay wages etc and the proceeds of sales are usually deposited in these accounts.
Importers are not normally given overdrafts unless it is for a short period. Credit is given to them normally be trust receipts and bankers acceptances.
On the other hand overdrafts are given to sellers to enable them to purchase raw materials and meet the cost of manufacture.
Term Loans
Term loans are given by banks normally for large expensive transactions like the purchase of assets for the company. These are repayable over a number of years. Term loans are not normally given for the purchase of items that are traded or bought for resale.
Trust Receipt
Trust receipts are used normally to finance imports.
A trust receipt is a document executed by a customer to a bank when the documents of the title are released to him by the bank to enable him to sell the goods and pay the proceeds to the bank.
A trust receipt :
o Acknowledges receipt of the documents.
o Holds the goods as trustees to the Bank.
o Agrees to pay the proceeds of the sale.
o Agrees to insure and warehouse the goods.
o Authorizes the bank to recover proceeds of sale from third parties.
o Undertakes to keep the transaction separate.
It must be noted that when a trust receipt is executed, the property or title to the goods will rest with the bank. The bank permits the buyer to take delivery to sell the goods and repay the bank on receipt of dues.
Buyers normally execute trust receipts on imports under sight credits. On a sight credit payment has to be made on presentation or sighting of the documents. The client, not wishing to tie up cash, would execute a trust deed to have the goods released. Trust receipts are normally not executed for usance credits as credit is already given by the seller to the buyer. There is therefore no need to execute a trust deed.
Trust receipts are of a tenor of between 60 and 180 days. They do not normally extend beyond that.
On receiving the trust receipt properly executed, the bank releases the document of title to the buyer. The buyer then takes delivery of the goods from the shipping company by presenting the bill of lading.
After selling the goods the buyer uses the proceeds to settle the amounts due to the bank.
A trust receipt has several advantages.
o It is a simple document to execute.
o It does not need to be treated as a bill of sale.
o The bank can take possession of the goods if there is a default of the debt. The trust receipt can be enforced separately from any other security document that might have been taken by the bank.
o The bank is the owner of the goods and therefore no one can have a prior charge on the goods if the buyer goes into liquidation.
A trust receipt is not like a bill of exchange a negotiable instrument. Banks could also find it difficult to monitor goods taken under trust receipts. It may also be difficult to differentiate between goods under trust receipt and others with the client. Trust receipts should thus be an additional security and not the one the bank totally relies on and takes comfort from.
DISCLAIMERS
Banks act in good faith and in the belief that the parties are acting in good faith. They deal in documents and promise to negotiate and pay if the documents stipulated in the credit are presented. Consequently, there are some protections.
Effectiveness of documents
Banks do not, under article 15 of UCP 500 assume any responsibility for the firm, accuracy, genuiness, falsification or legal effect of any document(s), or for the general and/or particular conditions stipulated in the document(s) or superimposed thereon, nor do they assume any liability or responsibility for the description, quantity, weight quality, condition, packing, delivery, value or existence of the goods represented by any document(s) or for the good faith or acts and/or omissions, solvency, performance or standing of the consigners, the carriers, the forwarders, the consignees or the insurers of the goods or any other person whomsoever.
Transmission of Messages
Banks do not assume any liability or responsibility or responsibility for the consequences arising out of delay and/or loss in transit of any message(s), letter(s) or document(s) or for delay, mutilation or other error(s) arising in the transmission of any telecommuniction. Banks assume no liability for errors in the translation and/or interpretation or technical terms and reserve the right to transmit credit terms without translating (Article 16, UCP 500).
Force Majeure
Furthermore, banks will not assume any responsibility for the consequences arising out of the interruption of their business by acts of god, riots, civil commotions, insurrections, wars or any other causes beyond their control, or by any strikes or lockouts. It must also be noted that banks will not, unless it is specifically authorised, upon resumption of their business pay, incur a deferred payment undertaking, accept draft(s) or negotiate under credits which expired during such interruption of their business (Article 17, UCP 500).
Acts of an Instructed Party
Article 18 of UCP 500 states :
(a) Banks utilizing the services of another bank or other banks for the purpose of giving effect to the instructions of the applicant do so at the risk of such applicant. In short if Raman Menon instructs that the Bank of Kowloon be used, then the Bank deals with the Bank of Kowloon at Raman Menons risk.
(b) Banks assume no liability or responsibility should the instructions they transmit not be carried out, even if they have themselves taken the initiative in the choice of such other bank(s). This clause absolves banks from any responsbility for errors, omissions or negligence of other banks.
RESPONSIBILITY TO OTHERS AND FOR CHARGES
In a letter of credit transaction parties act on the instruction of another - the issuing bank acts on the instruction of the applicant; the negotiating bank acts on the instruction of the issuing bank and so on. Consequently there are responsibilities and these must be accepted and followed.
1. The applicant is bound by and liable to indemnify the banks involved again all obligations and responsibilities imposed by foreign laws and usages (Article 18).
2. A party (bank or applicant) instructing another party to perform services is liable for any charges including commissions, fees, costs or expenses incurred by the instructed party in connection with its instructions.
3. In situations wherein it is clearly stipulated in the credit that charges for the account of
a party other than the instructing party, and charges cannot be collected, the instructing party will be liable for its payment.
4. If an issuing bank intends that reimbursement to which a paying, accepting or negotiating bank is entitled shall be obtained by such bank claiming on another bank (reimbursing bank), the issuing bank should issue in time instructions or authorisation to honor such reimbursement claims. Claiming banks do not need to supply certificates of compliance with the terms and conditions of the credit to the reimbursing banks.
5. Issuing Banks will not be relieved of its obligation to reimburse claiming banks if the reimbursing bank does not provide reimbursement.
6. Issuing banks are responsible for any loss of interest suffered by claiming banks as a consequence of reimbursement not being provided by the reimbursement bank on first demand.
7. The reimbursing banks charges should be for the account of the issuing bank. if, however the charges are for some other party, the issuing authority must state this on the credit and in the reimbursement authorisation. In situations where the reimbursing banks charges are for any party they can be collected from the claiming bank. In other cases the reimbursing banks charges will be the obligations of the issuing bank. In other cases, reimbursing banks charges are the obligation of the issuing bank.
Reimbursement and Payments
Banks do not provide services free. There is a cost attached to these and this is recognized in the Uniform Customs and Practices for Documentary Credits.
Normally, the credit will state who will bear the charges and who will reimburse the bank performing the services.
1. When letters of credit are opened at the request of an applicant, the opening bank would charge the applicant fees for opening the letter of credit.
2. When a credit is to be advised, the advising bank would charge the beneficiary an advising fee being their charge for advising the credit. Similarly, beneficiaries are also normally charged confirmation fees by banks confirming credits.
3. Article 18 of UCP 500 also states that when a party instructs another party to perform services, that party is liable for any charges, fees, costs or expenses incurred by the instructed party. Additionally, if a credit stipulates that charges are for the account of a party other than the instructing party and the charges cannot be collected, the instructing party will be liable for the payment.
4. The applicant is bound and liable to indemnify banks against all responsibilities and obligations imposed by foreign laws and usages.
5. If an issuing bank expects reimbursement through another bank, that bank should provide proper instructions in good time.
6. Issuing banks are under obligation to provide reimbursement if and when reimbursements are not received by the claiming bank from the reimbursing bank.
7. A claiming bank does not need to supply a certificate that all the documents conform to the credit.
8. Issuing banks are responsible to claiming banks for loss of interest resulting from delays is claiming refunds.
9. Reimbursing bank charges are to the account of the issuing bank. There can be situations however where the charges are for the account of another. In such cases, it should be stated in the credit and in the reimbursement authorisation.
CHECKLISTS
A. LETTER OF CREDIT OPENER
A.1. Prior to opening letter of credit
1. There is a sales contract from the seller wherein all the terms of sale such as price, items, quantity and the likes have been agreed.
2. There is sufficient credit available (credit lines)with the credit opening or issuing bank to open the letter of credit. Alternatively ensure there is sufficient cash available.
3. The goods may be imported into the country.
4. There are no restrictions in the import and that the required permissions/license (if required) has been obtained.
5. A proper application for the opening of the letter of credit has been given to the Bank. There must be no ambiguities and must be consistent with the terms of the sales contract.
6. All the requirements of the seller are met (confirmation, shipment details etc.)
7. Adequate safeguards are built in (shipment, expiry date, authentication of goods).
8. To avoid confusion and misunderstanding excessive detail is not included.
A.2. Completing application for a letter of credit
1. The correct type of credit is opened (revocable, irrevocable or confirmed)
2. The currency and the amount of the credit is as agreed and are as specified.
3. It is clear who is to receive the funds (beneficiary) and that entitys name and address is detailed and complete.
4. Address (applicant for a letter of credit) and name is correctly stated.
5. It is clarified as to who would pay the freight charges.
6. It is clear which documents (and how many copies) would need to be presented.
7. The maximum amount that can be paid/negotiated/accepted under the letter of credit is stated.
8. There is a precise description of the goods including its nature, quantity, weight, markings etc.
9. It is clear to whom the documents should be submitted for negotiation/payment.
10. It is clear on whom the drafts are to be drawn.
11. The place of shipment, whether or not partial and transhipment are allowed and when the goods must be shipped are detailed.
12. The manner the letter of credit is to be advised i.e. by telex, cable or mail is clear.
13. It is clear (if applicable) who the confirming bank/negotiating bank or paying bank is.
14. It is clear from whom (and the manner) payments are to be claimed.
15. The last date of shipment and the expiry date of the credit for presentation of document is specified.
16. All instructions are clear, precise and free from excessive detail.
17. All other specific requirements have been entered.
A.3. On receipt of letter of creditA.3. On receipt of letter of creditA.3. On receipt of letter of credit
1. The letter of credit issued is in accordance with the application made in every way.
Note : If there is any variance the issuing bank must be contacted.
B. LETTER OF CREDIT OPENING BANK (ISSUING BANK)
B.1. Letter of credit issuance
1. The applicants credit worthiness and integrity has been checked.
2. All the documentation required to secure the collateral for this facility has been completed.
3. The goods may be imported into the country.
4. The applicant has procured the required import license (if applicable).
5. The applicant has made an application to open the letter of credit and there are no ambiguities. The instructions are clear and precise.
6. The applicants signature has been verified.
7. The application has been signed by authorised signatories who have been empowered to make the application.
8. There are no terms or clauses in the letter of credit that are in conflict with Central Bank (Reserve Bank of India) directives.
9. The documentation required under the letter of credit protects the issuing bank(complete set of the bill of lading; insurance policy names bank as loss payee and endorsed in the banks favour and the likes).
10. Payment to the nominated bank or the beneficiary is permitted.
11. The letter of credit issued is exactly as required by the applicant.
12. In regard to credits issued in a different currency (Dollar credits issued from India) the applicant has booked a forward contract to safeguard against fluctuations.
13. Accounting entries have been passed to recognise the contingent liability.
C. ADVISING BANK
C.1. Advising Letter of CreditC.1. Advising Letter of CreditC.1. Advising Letter of Credit
1. Has the letter of credit been received from a branch or a correspondent bank and does the credit name the bank as the advising bank?
2. Was preliminary notification of receipt sent to the beneficiary?
3. Was sufficient care taken to ensure that the credit was authentic?
If the authenticity could not be established was the bank from whom the credit was received informed promptly?
If inspite of not being able to establish its authenticity was the credit advised? If so was the beneficiary informed that the authenticity could not be established?
4. Have the signatures on the letter of credit been checked to ensure if it is authentic? If the letter of credit has been received by telex has the test number been checked.
5. Has a number been allotted?
6. Was the credit advised promptly?
7. Has the advising costs been collected?
8. Has a copy of the credit that has been advised returned?
9. Has it been ensured that the letter of credit was not for goods that are illegal and that there was nothing on the face of the credit that would make it difficult to confirm?
10. If it was not possible to advise the credit, has the opening bank been advised promptly?
D. CONFIRMING BANK
D.1. Advising and Confirming Letter of Credit.
1. Was the letter of credit received from a branch or a correspondent bank and does the credit name the Bank as the Confirming Bank?
2. Has sufficient care been taken to ensure that the credit is authentic?
3. Have the signatures on the letter of credit been checked to ensure that it is authentic? If the letter of credit has been received by telex has the test been checked?
4. Does the issuing bank have sufficient and unutilized credit facilities available to enable the confirmation of the credit?
5. Has a number been allotted?
6. Was the banks usual covering letter used to confirm the credit?
7. Have the costs confirmation been collected?
8. Was the credit confirmed promptly?
9. Was it ensured that the letter of credit was not for goods that are illegal and that there was nothing on the face of the credit that would make it difficult to confirm?
10. If it was not possible to confirm the credit, was the opening bank advised promptly?
11. Have all currency risks been protected against?
12. Has a copy of the confirmed credit been retained?
13. Has accounting entries been passed to recognize the contingent liability?
E. EXPORTERS (BENEFICIARIES)
E.1. On receipt of letter of creditE.1. On receipt of letter of creditE.1. On receipt of letter of credit
1. Does the letter of credit conform to requirements?
. Is it irrevocable?
. Is it confirmed?
. Is it of the special type you asked for?
. Is it in agreement with the sale contract you have entered into?
2. Does it have an expiry date that is acceptable?
3. Are the payment terms acceptable?
(a) At sight?
(b) At a future date?
(c) The paying bank?
(d) The place of payment?
4. Are the items exported correct?
(a) In regard to the items agreed to be sold?
(b) In regard to the value of the items sold?
5. Is the value stated on the letter of credit correct?
6. Are those charges agreed to be borne by the importer not included in the letter of credit?
7. Is your/companys name (beneficiarys) and address stated correctly on the letter of credit?
8. Have you agreed to the various preshipment requirements if applicable?.
a. Packing?
b. Inspection?
c. Certificate of origin?
d. Consular certificate?
e. Fumigation?
f. Documents checking?
g. Insurance cover?
9. In regard to shipment are the details as you have agreed in regard to:
a. Partial shipment?
b. Transhipment?
c. Last date of shipment?
10. Are the delivery details as you quoted (FOB,CIF)?
11. Is there any need to procure an export or import license and if so has it been procured?
12. Can all the requirements of the letter of credit be met?
13. Are there any contradictions in the letter of credit?
14. Is the letter of credit a proper operative document?
15. Have all the amendments been agreed to?
16. Are all the documents exactly as stipulated in the letter of credit?
17. Have all the terms been complied with?
E.2. Documents
1. Letter of Credit
a) The letter of credit should not have expired.
b) All conditions stipulated should have been met.
c) All documents stipulated should have been submitted.
d) All restrictions should have been met.
e) Those documents that require authentication should have been authenticated.
f) Descriptions should be consistent and be as required.
g) There should be no spelling mistakes
h) All documents should be dated.
2. Bill of exchange
a) It must be dated
b) It must be signed by the drawer
c) It must contain the letter of credit number
d) It should be drawn on the correct person (as stated in the letter of credit)
e) It must be endorsed (if necessary)
f) It must be drawn for the correct amount
g) It should be of the nature stipulated (sight or usance)
h) The figures and words must agree
i) There must be no misspelling.
3. Invoice
a. The invoice must be on the companys letterhead
b. The invoice must be dated and signed
c. The invoice must be in the name of the buyer and should be properly addressed.
d. There must be no spelling mistakes
e. There must be as many copies as stipulated
f. The description of the goods, value weight and shipping marks must be consistent with the letter of credit, transport documents and other documents.
g. The invoice should state the letter of credit number.
h. It should be (if required) authenticated.
i. It should state (if applicable)the import license number.
4. Transport Document
a. It should be dated and signed.
b. A full set must be submitted.
c. It must not be stale.
d. It must state the consignees name in full.
e. There should not be any spelling mistakes.
f. It must clearly adhere to terms of the letter of credit (transhipment/conference vessel etc.)
g. The date of shipment should be stated.
h. It should show the date of shipment.
i. It should be endorsed (if necessary).
j. It must be consistent with the other documents (invoice, bill of exchange, letter of credit etc.).
5. Insurance Document
a. It should be dated. The date should be before that of the transport document.
b. It should be properly addressed.
c. It should be signed.
d. It must be consistent with all the other documents.
e. It must be for the correct value(normally CIF plus 10 percent).
f. It must cover all risks stipulated.
g. It should be endorsed.
h. There must be no spelling mistakes.
6. Others
a. All other documents asked for in the credit should be submitted.
b. All documents must be consistent with each other.
c. There should be no spelling mistakes.
F. NEGOTIATING/ACCEPTING/PAYING BANK
1. Is the beneficiary the same as the one who prepared the documents? If not has the credit been properly transferred?
2. Is the negotiation of the letter of credit restricted?
3. Is the paying bank named?
4. Is the letter of credit confirmed?
5. Is there anything that restricts negotiation/payment?
6. Has the letter of credit expired?
7. Is there any forward purchase contract covering the transaction?
8. Letter of Credit
a) Have all the documents stipulated under the letter of credit been presented?
Is the credit issued under UCPDC500 (1993 revision)?
b) Have all the conditions of the letter of credit been met?
c) Has the authenticity of the credit been checked?
d) Is the credit confirmed?
9. Invoice
a) Is the invoice addressed in the name of the buyer and one the Companys letter head?
b) Has the exporter submitted as many copies of the invoices as required?
c) Are all the invoices signed
d) Is everything spelt correctly?
e) Has the arithmetical accuracy of the invoice been checked?
f) Is there any reduction shown as undrawn balance? If so is it provided for in the credit?
g) Are the goods shipped properly described and in a manner consistent with the letter of credit.
h) Do the shipping marks, quantity and weight agree with all other documents (bill of lading/transport document, letter of credit etc)?
Note: a 5% variation is acceptable on quantity
i) Have the documents have been authenticated (by consulate etc) if required?
j) Are the invoices dated?
k) Is the value stated on the invoice consistent with the letter of credit (price per item and total value)?
l) Is the import license stated correctly?
m) Does the amount of the invoice agree with the draft?
n) Is there any deduction towards Agency Commission payable or to pay such commission?
o) Is it in the same currency as the credit?
10. Customs Invoice
a) Is it in the prescribed form applicable to the country of import ?
b) Is it signed by the exporter and dated?
c) Does it contain all the particulars mentioned on the commercial invoice?
d) Is it in conformity with all other documents?
11. Consular Invoice
a) If called for by the credit, has it been submitted?
b) Has the invoice been authenticated by the consulate of the importing country in India?
Note :The authentication is usually done on the invoice. There is no separate consular invoice.
12. Certificate of Origin
a) If called for by the credit, has it been submitted?
b) Has it been issued by the appropriate authority?
c) Does it refer to the shipment?
d) Is it in conformity with all other documents?
13. Packing List and Weight List
a) Do the number of packages, and quantity correspond with those in other documents?
b) Does the gross weight and the net weight shown in the weight list correspond with all the other documents?
c) Has the arithmetic accuracy of these documents been checked?
14. Bill of exchange (B of E)
a) Has the B of E been dated and signed by the beneficiary?
b) Is it drawn on the applicant or a specified drawee?
c) Has the B of E been properly endorsed?
d) Does the B of E have the letter of credit number?
e) Is the amount and currency stated correctly?
f) Has the B of E been drawn on the correct entity/person?
g) Does the value agree with the invoice?
h) Do the words and figures agree?
i) Does it conform with the letter of credit requirement (payable on sight or at a future date).
j) If it is a usance bill has it been stamped as per the stamp act?
k) Has it been drawn unconditionally and is it free from extraneous conditions?
15. Transport Document
a) Is the transport document consistent with the manner the goods have been transported (transhipment/partshipment)?
b) Have all the copies of the transport documents been submitted?
c) Are the transport documents stale?
d) Has the document been consigned properly?
e) Has the consignees name been spelt correctly?
f) Have the goods been transported from the correct port to the correct port?
g) Has the freight been paid?
h) Is the date of shipment stated?
16. Insurance Document
a) Have the goods been adequately insured?
b) Are the goods correctly stated (value and quantity) Should be CIF value plus 10%.
c) Are all the risks required covered?
d) Does the document name the negotiating bank the loss payee or is it properly endorsed (negotiable form)?
e) Is the document dated prior to the date of shipment?
f) Has it not been issued by brokers?
g) It has been signed?
h) Is the currency of insurance the same as the currency of the credit?
i) Does it indicate the port of shipment and destination or point of insurance coverage and point of termination of coverage?
17. Other documents
a) Are all the other documents required by the letter of credit submitted?
b) Are they properly worded?
c) Are they consistent with all the other terms of the letter of credit?
d) Are they signed and dated?
Note :The documents must be examined carefully to determine whether they are in accordance with the terms and conditions of the credit.
18. If the documents do not comply with the terms and conditions of the credit has notice within a reasonable time been given to the bank from whom the documents have been received in the most expedious manner?
The notice should state the discrepancies and whether the documents are being kept at the disposal of the remitting bank or being returned.
19. If the documents have been returned, has a claim been lodged with the remitting bank for refund or reimbursements made (if any)?
20. If documents have been refused and are being held at the disposal of the presenter, has the presenters instructions been sought?
Note : If the documents do not conform, negotiating banks may make paymentunder reserve?
21. In such a case, has the presenter bank from whom documents been received from intimated that payment has been made under reserve, detailing the discrepancies?
22. If the documents conform exactly to the terms of the credit has the amount due been
claimed from the paying bank/opening bank or letter of credit opener and the documents sent?
23. If the credit provides for acceptance, has the draft been accepted?
24. Have the appropriate accounting entries been passed?
G. AUDITORS
G.1. Credit Facility
1. Were Clients files reviewed to determine whether the client had adequate approved limits?
2. Is the clients rating current?
3. Has this transaction been properly approved?
G.2 Opening or amending a letter of credit
1. Was the application for the credit properly completed by the applicant? The major items include :
o the name and address of beneficiary;
o whether the credit is revocable or irrevocable;
o the amount of credit in words and figures;
o the expiry date;
o the settlement method;
o the details of the documents required;
o the latest shipment date;
o the ports of loading and destination.
2. Was the Application for the Credit signed by the client and was the signature verified?
3. Was proper approval authority for issuing or amending the credit obtained?
4. Was it ensured that the clients liability was within his approved credit risk limit?
5. Does the actual letter of credit opened agree exactly with the terms and conditions of the application?
6. Was there proper approval authority for the signing of the letter of credit or for issuing the telex copy of the letter of credit?
7. Was a copy of the insurance policy retained on file (especially if the beneficiary did not arrange for insurance, (i.e. when shipping terms likes Free-On-Board, Cost-and-Freight are used)? Insurance coverage should be adequate to cover at least the same amount of the commercial invoice, but it is usually 110% of the amount.
8. Were proper control records maintained?
9. Were charges accurately calculated and collected?
10. Was cash collateral collected ?.
11. Were accounting entries promptly and correctly posted?
12. Were documents held in a fire-proof cabinet overnight?.
13. Was there follow-up action with clients to purge expired credit?.
14. Does the credit include a clause This credit is subject to the Uniform Customs and Practice For Documentary Credit, International Chamber of Commerce (1993 Revision), Publication no. 500.?
G.3. Advising / Confirming Letters of Credit.
1. Was there evidence of the signature / test key verification on the copy or telex copy of the credit?
2. Had reasonable time lapsed between date of receipt and advice to beneficiary?
3. Were charges accurately calculated and collected?
4. Regarding confirmed letters of credit, was the issuing banks liability within its credit limit?
5. Were accounting entries promptly and correctly posted?
G.4. Acceptances
1. Have the operating records been verified against the exhibits?
2. Were the documents listed on the applicable letters of credit submitted and verified?
3. Does the amount and date on the draft agree to those on the letters of credit? The amount of the draft should not be greater than the commercial invoice.
4. Has the draft been properly signed, dated and accepted?
5. Has proper records been maintained (such as a diary for maturity date)?
6. Were documents under dual control held in a fire-proof cabinet overnight?
7. Were charges accurately calculated and collected?
8. Were accounting entries promptly and correctly posted?
G.5. Discounts or Negotiations
1. Have documents been verified against the letter of credit?
2. Does the amount and date on the draft agree to the terms of payment as stated on the letter of credit and commercial invoice?
3. Has the draft been properly signed, dated and accepted by the client for discounting?
4. Was the transaction within the clients credit approved limit?
5. Have appropriate approvals been procured for the advances made?
6. In regard to negotiation, was the issuing banks liability within the approved credit limit?
7. Was there any discrepancy? If so was the discrepancy accepted by the importer or was a letter of indemnity signed by the beneficiary or was payment made under reserve?
8. Were charges accurately calculated and promptly collected?
9. Were accounting entries promptly and correctly posted?
10. Were the documents under dual custody and put if fire-proof cabinets overnight?.
11. Test settled items?
12. Follow-up action on any past-due documents should be adequate?
G.6. Packing Loans
1. Have the outstanding balances on the ledgers been verified against the exhibits?
2. Does the client have a packing loan facility?
3. Were appropriate approvals procured prior to the disbursement?
4. Was the loan within the clients approved credit limit?.
5. Was the application for packing loan properly completed and signature verified?
6. Have the charges been accurately calculated and promptly collected?
7. Were accounting entries promptly and correctly posted?
8. Have repayment of loans been posted?
9. Were the documents under dual custody and kept in fire-proof cabinets overnight?
G.7. Reimbursements
1. Were the documents listed on the credit submitted and verified?
2. Had any term drafts been accepted?
3. Had the importer paid the charges relating to this particular letter of credit?.
4. Was the negotiating bank paid on maturity and according to instruction?.
5. Was the reimbursement properly duly approved?
6. Were accounting entries promptly and correctly posted after reimbursement?
G.8. Shipping Guarantees
1. Was the request for the issuance of a guarantee bonafide and with reference to an invoice?
2. Does the invoice relate to a genuine movement of goods?
3. Had a letter of credit been established relating to the import?
4. If a credit had been established:
o Was full margin collected prior to the issuance of the guarantee?
o Had a trust receipt been established?
o Has collections under the credit been routed through the Bank?
5. Has the importer submitted a letter of indemnity?
6. Have particulars been entered in a shipping guarantee register and consecutive number assigned?
7. Was the letter of guarantee completed properly, dated and signed?
8. Were bank charges collected?
9. Were proper records maintained?
10. Were accounting entries promptly and correctly posted?
11. Upon receipt of the original shipping documents, were these documents sent to the carrier in exchange for the shipping guarantee?
12. Has the shipping guarantee been returned and cancelled?
13. On receipt of cancelled shipping guarantee were appropriate entries passed?
G.9. Trust Receipt
1. Was the request for the issuance of a trust receipt bonafide?
2. Did the request relate to a genuine movement of goods?
3. Had a credit been established for this transaction?
4. Was full margin collected prior to release of trust receipt?
5. Has importer submitted a letter of indemnity?
6. Were the documents listed on the letter of credit submitted and verified?
7. Was the trust receipt completed properly, dated and signed? Was the signature(s) on it was verified?
8. Was the clients liability within his approved credit limit?
9. Were the terms of loans agreed to the approved credit line?
10. Were charges accurately calculated and collected?
11. Were the documents held under dual custody and placed in fire-proof cabinet overnight?
12. Were settled items tested?
13. Were accounting entries promptly and correctly posted?
14. Was there adequate follow-up of any past-due documents?
G.10. Collections
1. Was the schedule sent to the remitting bank complete and precise?
2. Are the endorsements on the bill of lading, insurance documents, and bills of exchange correct?
3. Has the bill of exchange been properly drawn?
4. Is there a periodical review of the outstanding files? Does communications between the banks and clients show this review and follow-up?
a. Are tracers sent after a reasonable time?
b. If there follow-up with the importer after a reasonable time of sending the documents to the importer?
5. If payment to the remitting bank promptly after payment by the importer?
6. Were collection proceeds promptly credited to the beneficiary?
7. Were charges accurately calculated and collected?
8. Were documents placed under dual custody in fire-proof cabinets (especially accepted drafts)?
GLOSSARY
ANTICIPATION (Rebate on Discounted Paper)-An acceptance paid prior to maturity. This results in a partial rebate of discount where the amount is large and the period to maturity exceeds two weeks. Only occurs when prime fluctuates a great deal and it is to the buyers benefit to hold until maturity.
ASSIGNMENT OF PROCEEDS
OF CREDITS Occasionally a supplier may be willing to sell to a beneficiary of a letter of credit, provided he receives an assurance from the negotiating / paying bank that he will be reimbursed for his merchandise when shipment is made under the credit.
In such cases, the beneficiary of the credit will assign the proceeds (or part thereof) of the credit in favour of the supplier and advise the bank of the assignment, with a request to
notify the assignment to the assignee adding the banks undertaking to be bound by the assignment. This is merely a request and is not binding on the bank. If a branch agrees to the request, its letter to the assignee would pass along the instructions of the beneficiary as requested, and its commitment could be When, as and if such drafts are honored by us, we hereby undertake to comply with the foregoing instructions.
This is not an assignment of credit, but only of the proceeds. Such assignment should be in accordance with local laws.
Branches should exercise caution and consult with local attorney, if they wish to agree to such an arrangement, or when a third party would advise that they have an interest in the merchandise or in the documents covered by the letter of credit.
AUTHORITY TO PURCHASE Authority to Purchase, Authority to Negotiate, or Authority to Pay is merely an advise from a bank in the shippers country stating the bank has been authorized by a correspondent bank abroad to purchased drafts of the shipper on a named importer if accompanied by certain documents, but stating that drafts will be purchased with full recourse to the drawer. It is not a bank credit.
BACK-TO-BACK LETTER
OF CREDIT The exporter must pay under the second credit even if he has not been paid under the first. The wording and timing of the second credit must meet the requirements of the initial one.
Used in transactions where the exporter is not the supplier of the merchandise, the exporter requires financing to purchase the goods for export, or the exporter wants to keep the importers identity or the export sales price from the supplier. Two credits are issued: the first letter of credit is opened by the importer with the exporter as the beneficiary, and the second credit is opened by the exporter in favor of the supplier.
CLEAN LETTER OF CREDIT Stand-by credit; used to guarantee a customers performance and payment under a contract.
COMMERCIAL LETTER OF CREDIT Used primarily to finance transactions involving the shipment of goods.
Usually opened by the buyer of merchandise naming the seller as the beneficiary. Before the beneficiary can present a draft to secure payment, the seller must submit documents (e.g. bill of lading, commercial invoice, insurance policy/certificate) describing the contents of the shipment to the bank for review. The beneficiarys draft is honored and the buyers account is debited upon the banks certification that the documents presented meet the requirements stated in the terms and conditions of the letter of credit.
Also referred to a s adocumentary credit or documentary letter of credit.
FOREIGN CURRENCY CREDITS When a credit is issued in a foreign currency, an exchange risk is involved. By agreement this risk is borne by the account party and not by the issuing bank. However, a major change in exchange rate may make it difficult for the account party to meet his obligations when the documents arrive. As the issuing banks commitment is irrevocable, it should advise the client to cover the exchange risk by a forward contract with it, wherever considered necessary. Since the exact date of arrival of documents may not be known, the client can either fix a forward contract for delivery for the approximate date of arrival of documents and arrange for extension if necessary, or enter into an option deal with the bank.
GREEN CLAUSE Provides for advances against delivery of negotiable warehouse receipts.
IRREVOCABLE LETTER
OF CREDIT Credit may not be amended or cancelled without the approval of the beneficiary. Once one amendment is rejected, all subsequent ones are ineffective.
IRREVOCABLE, CONFIRMED
LETTER OF CREDIT The advising bank assumes the same obligation as the issuing bank to make payment. The confirming bank is required to make payment even if the issuing bank does not meet its payment obligation.
NEGOTIATION CREDIT Extends the opening banks obligation not only to the beneficiary, but also to endorsers and bonafide holders of the drafts drawn by the beneficiary. To denote this engagement, the credit usually will bear the wording: We hereby engage with drawers and/or bonafide holders that drafts drawn and negotiated in conformity with the terms of this credit will be duly honoured on presentation.
Negotiation may be restricted to a bank designated by the opening bank in the credit. This will be then known as restricted credit. If not restricted, a negotiation credit allows for presentation of drafts and documents by the beneficiary at any bank for negotiation. The bank negotiating the drafts advances funds with recourse to the drawee until such time as payment is received from the opening or paying bank. This is the most common type of credit issued by banks.
NON ACCUMULATIVE LETTER
OF CREDIT A variation of a revolving credit (specifies number of installments).
PAYMENT OR STRAIGHT
CREDIT Extends the opening banks obligation solely to the beneficiary, either directly or through a named (drawee) bank. To denote this engagement, the credit will bear the wording We engage with you that draft drawn under and in compliance with the terms of
this credit will be duly honoured. If a bank other than the opening bank is named as drawee, the opening bank will send a copy of the letter of credit to the drawee and will indicate thereon the method of reimbursement. Payment under this credit, even if made by a drawee bank is made without recourse to the drawer. This type of credit is mostly issued in Europe and may stipulated the expirty date for receipt of documents at the opening or drawee banks.
RED CLAUSE LETTER
OF CREDIT Clause contained in a documentary letter of credit authorizing the advising bank to make advance payments to the exporter before shipment of goods at the risk and responsibility of the issuing bank. This form of credit is especially useful to middlement since it provides pre-financing.
Costs incurred by any banks who are parties to the transaction are paid according to the terms of the letter of credit.
REVOCABLE LETTER
OF CREDIT Credit may be amended or cancelled by the issuing bank at any time without prior notice to the beneficiary. If the paying bank is different from the issuing bank, the issuing bank must notify the former as to any change in the status of the credit.
REVOLVING LETTER
OF CREDIT Used for transactions involving installment payments or partial shipments. After the documentary credit has been used,it is automatically reinstated for a further drawing until the complete line of credit has been used. Such drawings have to take place within the validity period.
STANDBY LETTERS
OF CREDIT A letter of credit issued in the place of a guarantee is known as a standby
letter of credit. This is not a documentary credit, as no documents of title will be required to be submitted under the terms of the credit. Because of restrictions on the issue of guarantees in the United States, standby letters of credit are common in that country.
TRANSFERABLE LETTER
OF CREDIT Beneficiary has the right to make part or all of the credit available to one or more third parties (second beneficiaries). The first beneficiary, usually an agent for the supplier, has the right to substitute his/her own invoices for those of the second beneficiary.
The transfer follows the original credit terms except as follows:
. Name and address of first beneficiary may be substituted for the applicant.
. Credit amount can be lowered (middlemans fee).
. Timing may be different.
This type of credit must be irrevocable and can only be transferred once.
PARTIES
ACCOUNT PARTY Buyer; importer; the applicant requesting the opening of the credit.
ADVISING BANK A bank which transmites the issuing banks letter of credit to the beneficiary and insures the seller that the credit is valid. Though the advising bank may
assume responsibility for sending shipping documents to the bank opening the letter of credit, it is under no obligation to make payments if the importer or issuing bank do not pay.
BENEFICIARY Seller; exporter; the party receiving the benefit of the credit. He/she must submit documents under the credit before drawing against it.
CONFIRMING BANK A bank which adds its confirmation to the credit established by another bank and by so doing gives a definite undertaking in addition to the undertaking of the issuing bank to pay, to accept and pay at maturity, or to purchase/negotiate drawings under the credit, provided terms and conditions of the credit are complied with.
NEGOTIATING BANK The bank which makes payments to the beneficiary and then looks to the opening bank for payment.
OPENING BANK Issuing bank; the bank which adds its credit standing to that of the account party and opens the credit in favor of the beneficiary.
PAYING BANK The bank on which the beneficiary must negotiate the draft under the credit; the drawee bank.
METHODS OF PAYMENT AND FINANCING
DOCUMENTS AGAINST
PAYMENT Advising bank forwards exporters shipping documents, including bill of lading, to the opening bank, which delivers them against payment to the importer.
OPEN ACCOUNT Arrangement between exporter and importer providing for payment at a specified future date but without any negotiable instrument (note, draft) proving the obligation.
DOCUMENTS AGAINST
ACCEPTANCE This is generally an arrangement between an importer and his bank. Seller forwards documents on an acceptance basis and the opening bank finances the importer while paying the exporter.
If the exporter agrees to finance, he receives an accepted draft, which he cashes on the due date. In that event, importer gets financing from exporter.
PAYMENT IN ADVANCE 1)Export Credit: The paying bank debits a loan account of the opening (exporters) bank instead of debiting the opening banks regular account at the time of payment. The opening bank thereby avoids having its balances reduced when the documents are honoured by the paying bank under the letter of credit.
2)Import Credit: The opening bank has agreed to finance the importers payments on an advance basis. Upon receipt of the draft and documents from its correspondent bank, the opening bank will debit the importers advance account and credit the account of the correspondent bank who will pay the exporter. The opening bank will usually retain the shipping documents as collateral for the advance until the shipment arrives.
REFINANCING SIGHT
PAYMENTS The importer has the opening bank issue a sight letter of credit in favour of the exporter. Upon presentation of the beneficiarys draft and documents, the bank will effect payment to the beneficiary and debit the importers account for the amount of the draft. The bank will, in turn, accept and discount the importers draft and credit the proceeds to the importers account.
In this case, the bankers acceptance is used by the importer to pay the exporter on a sight basis and then refinance the payment.
REIMBURSEMENT OF
PAYING BANK If the bank paying the draft of the beneficiary is a correspondent bank of the opening or advising bank, the paying bank will send an advice to the opening or advising bank and will obtain settlement.
When the paying bank is not a correspondent bank, the bank paying the draft would find a correspondent bank in the country of the opening bank to obtain settlement.
SIGHT DRAFT Draft drawn by seller on bank or importer (accompanied by shipping documents) which is payable upon presentation.
TIME (USANCE) DRAFT An acceptance, in which the draft is accepted upon presentation and is payable at a later predetermined date. Tenor of acceptance usually ranges from 30 to 180 days from either the date of the draft or from the date of acceptance.
PRICE QUOTATIONS
EX FACTORY Price applies to point of origin. The seller bears costs until delivery while the buyer pays export taxes and document costs.
F.O.B. - Seller arranges for transportation to shipping point.
F.A.S. - Free along side; price does not include loading onto shipping vessel.
C & F - Cost & freight.
C.I.F. - Cost, insurance and freight.
EX DOCK - Cost to dock; i.e. shipping point.
PARTIAL SHIPMENT - Credit allows goods to be shipped in installments. If no shipment is made by the first installment due date, the credit is cancelled.
INSURANCE TERMS
FREE OF PARTICULAR
AVERAGE Coverage for basic perils.
PARTICULAR AVERAGE Specific accidental loss caused by perils on the sea; e.g. fire, sinking etc.
ALL RISKS All losses, no matter what their cause. Exclusions maybe stipulated.
D. Glossary of Foreign Exchange Terms
Bear a speculator who expects a currency to become weaker and sells forward currency
expecting to make a profit on exchange.
Bid
Price a price at which the quoter is prepared to buy currency against another currency.
Broker one who brings dealers who are buyers and dealers who are sellers of foreign currency together, charging a brokerage for the service.
Bull a speculator who expects a currency to become firmer and buys forward currency expecting to make a profit on exchange
Dealer one authorized to deal on the foreign exchange market.
Discount the forward margin of a currency which is less expensive than the spot rate. The discount is added to the spot rate to which it relates.
Firm a currency which is becoming more expensive in terms of other currency
Forward a deal where the exchange is to be made more than two working days from the date of the deal
Long excess of purchase over sale
Margin the difference between the spot and forward price of a currency. If the forward price of the currency is greater than the spot price, the margin is said to be a premium if the forward value of the currency is less than the spot price, the margin is described as a
discount. Where there is no margin, the forward value is referred to as par.
Offer
Price a price at which the quoter is prepared to sell currency against another currency.
Open
Position the long or short position at any time on which an exchange risk is run.
Par when the forward rate of exchange is the same as the spot rate of exchange
Pip, or
Point one hundredth part of a unit
Premium the forward margin of currency which is more expensive forward than the spot rate. The premium is deducted from the spot rate to which it relates.
Short excess of sales over purchases
Spot the exchange must be made within two working days from the date of the deal.
Swap a spot purchase against forward sales, or spot sale against forward purchases.
Weak a currency which is becoming cheaper in terms of other currencies.
QUESTIONS CLARIFIED
Question 1
If no mention of whether the credit is irrevocable or revocable, what will it be?
Answer
Upto the recent revision in the Uniform Customs and Practices (1993) (UCP500), it was assumed that the credit would be revocable. However, UCP 500, Article 6, has changed this. In future, in the absence of an indication, the credit will be deemed to be irrevocable.
Question 2
Who can revoke a revocable credit?
Answer
A revocable credit can be revoked by the issuing bank at any time without notice to the beneficiary. However, the issuing bank is bound to reimburse another bank for any payment, acceptance or negotiation made prior to the receipt of the amendment or cancellation if that has been done against documents which are in compliance with the terms and conditions of the credit. The issuing bank is also bound to reimburse another bank with which a revocable credit has been made available for deferred payment if it has, before notice of the revocation, taken up documents which are in compliance with the terms and conditions of the credit.
Question 3
The revocable credit is freely negotiable. The issuing bank revoked the credit. The beneficiary submits the documents to a bank who is not the advising bank and is not aware of the cancellation. What should the bank to whom the documents have been submitted do?
Answer
If documents under a revocable credit are submitted to a bank that is not the advising
bank, that bank will have no knowledge of whether the credit has been amended or cancelled. The bank should therefore either :
a) contact the issuing bank and determine whether the credit is still operative, ascertain the amendment made (if any) and seek authorisation (for safetys sake)to negotiate.
b) refuse to negotiate the documents.
The second option is more preferable.
Question 4
Can a revocable credit be confirmed?
Answer
A revocable credit can be confirmed but it is foolhardy to do so.
Question 5
What is the benefit of a confirmed letter of credit?
Answer
A confirmation is an undertaking by the confirming bank (usually in the country where the importer (buyer) resides)promising to pay on the presentation of the documents stipulated in the credit. This is an undertaking in addition to that of the issuing bank. The confirming bank takes on the responsibilities of an issuing bank and thus gives the beneficiary additional comfort.
Question 6
Can the beneficiary ask his bank to confirm a credit?
Answer
This must be at the request and on the authorisation of the issuing bank.
Question 7
If the issuing bank refuses to pay does the beneficiary have a liability towards the issuing bank.
Answer
This depends on the credit.
If the credit is without recourse then the negotiating bank has no recourse to the beneficiary unless payment has been made under reserve.
If however, payment has been made by an advising bank with no other obligation then that bank has recourse to the beneficiary if payment is not made by the issuing bank.
Question 8
Can a beneficiary present documents directly to the issuing bank?
Answer
The beneficiary most certainly can. However, this is not usually very practical as the issuing bank (especially when goods are exported/imported)in another country.
Question 9
Why cant the issuing bank send the credit directly to the beneficiary?
Answer
The purpose of routing credits through a bank is to assure the beneficiary of the credits authenticity.
Question 10
If an advising bank is unable to establish the authenticity of a credit, what should it do?
Answer
The advising bank must inform, without delay, the issuing bank or the bank from whom the instructions have been received that it has been unable to establish the authenticity of the credit.
Question 11
Must a bank requested to advise or confirm a credit oblige?
Answer
Not at all. It can choose not to. In that situation the issuing bank must be informed straightaway.
Question 12
If the buyer (credit applicant) refuses to accept a bill of exchange (acceptance credit)what is the role of the credit opening bank?
Answer
The credit opening bank has the responsibility of getting the applicant to accept the bill (especially if all the documents are in conformity to the terms of the credit). In any case the opening bank has a responsibility to pay the negotiating bank. It will have recourse to the applicant.
Question 13
If the issuing bank refuses to make payment, can the negotiating bank claim reimbursement from the confirming bank.
Answer
Most certainly. This is because by adding its confirmation, the confirming bank takes on all the liabilities and responsibilities of the issuing bank.
It will after making payment, have recourse to both the opening bank and the applicant.
Question 14
Can an irrevocable credit be revoked?
Answer
In normal circumstances it cannot be. However, there have been times (especially during a war) when the laws enacted then may forbid the honoring of transactions or trade with one or more companies.
Question 15
Can an amendment to an irrevocable credit be made unilaterally?
Answer
No. The amendment will be binding only on those who have accepted it. If a confirming bank refuses to accept or agree to the amendment, it is not bound by it. It will, however, be bound and liable on the credit that it has confirmed prior to the amendment.
It should be noted that the amendment is usually at the request of the beneficiary.
Question 16
Can an amendment be advised through a bank other than the confirming bank?
Answer
It can be. However, if this is done the confirming bank is not bound by the amendment.
Question 17
How does the beneficiary consent to an amendment?
Answer
It is assumed that when a beneficiary submits documents conforming with the amendment that he has accepted or consented to the amendment.
It must be noted that the beneficiarys consent cannot be implied from the silence of the beneficiary. He must notify by word or act his acceptance. It is recommended that if he is unable to accept the amendment that he notifies the issuing / confirming bank. This is not necessary though.
Question 18
What is a paying bank?
Answer
A paying bank is the bank authorised by the issuing bank to pay. Such a bank may or may not negotiate documents.
Question 19
What is a negotiating bank?
Answer
These are banks authorised by the issuing banks to negotiate documents under a letter of credit. Credits may specify negotiating banks or may permit credits to be freely negotiable. In the latter case, all banks negotiating the documents would be `negotiatingbanks.
Question 20
A bank negotiates documents and sends them to the issuing bank who refuses to reimburse the paying bank as there are discrepancies. Does the paying/negotiating bank have recourse against the beneficiary?
Answer
If the payment has been made without recourse the negotiating bank will not be able to recover monies paid especially if it had not detailed discrepancies and made the payment `under reserve.
Question 21
If a credit provides for the draft to be drawn on the advising bank, is the advising bank bound to negotiate the credit.
Answer
The advising bank merely advises the beneficiary of the credit and confirms its authenticity. It is not under any obligation to negotiate or pay.
If a credit provides for the draft to be drawn on the advising bank, the advising bank should not advise the credit but should return it to the opener for this requirement to be changed (especially if it does not wish to negotiate the documents). This is because although legally the advising bank is not bound to negotiate, in practice the advising bank is expected to negotiate drafts drawn on it.
Question 22
If the advising bank is nominated as the paying bank, is it expected to pay when a claim is lodged?
Answer
An advising bank acts with no obligation to negotiate or make payment. It merely advises on the authenticity of the credit. If the credit does name an advising bank as the paying bank, the advising bank should bring this to the notice of the issuing bank. Otherwise, if the credit is advised and payment is claimed, the advising bank will, in practice, be expected to make payment even
though it is not obliged to under the law.
Question 23
Can an amendment be partially accepted?
Answer
No. It must be accepted in toto.
Question 24
Is a credit received from China in Chinese acceptable?
Answer
Not unless the beneficiary and the confirming bank (if applicable)understand Chinese and accept it. Otherwise it will be construed as incomplete or with unclear instructions and the bank requested to act on these instructions would request for a clarification.
The issuing bank must provide the necessary clarification and the credit will only be advised, confirmed or amended after clear and complete instructions have been received.
Question 25
What should a bank do if it receives documents that are not stipulated in the credit?
Answer
Documents not required will not be examined by banks. These are to be returned or passed on without responsibility.
Question 26
How soon must documents submitted be examined?
Answer
The documents must be examined within a reasonable time. Reasonable time in this context has been defined as seven banking days following the day of receipt.
Question 27
If there are some very minor discrepancies in the documents presented, can they be ignored?
Answer
This is not advisable. Definitions of minor discrepancies vary and credit with discrepancies that have been considered as very minor have been refused. The prerogative of accepting or rejecting a discrepancy rests with the buyer and if there is a doubt - the discrepancy should be brought to the buyers attention and his opinion sought.
If there are discrepancies and a bank does wish to negotiate the documents, the bank should negotiate the credit under reserve citing the discrepancies so that should the documents be rejected, the bank has recourse on the beneficiary.
Question 28
Can a bank be held liable for incorrect or fraudulent documents?
Answer
No. Banks assume no responsibility for incorrect or fraudulent documents.
Question 29
Can a bank confirm a credit that is restricted to another bank?
Answer
The issuing bank can request a bank to confirm a credit even if it is restricted to another bank for negotiation or payment.
Question 30
Can a bank be held liable for delays in the transmission of messages or loss in transit of messages or documents?
Answer
No. Banks assume no responsibility for the consequence of delays or loss in transit of messages or documents.
Additionally they assume no liability for the consequences arising out of interruptions by riots, acts of god, war and other causes beyond their control.
Question 31
Must a remitting bank draw the attention of the issuing/confirming bank to any discrepancy and payment under reserve?
Answer
This affects only the remitting bank and the entity with whom it has dealt with.
The issuing bank has to examine all the documents and determine on the basis of the documents whether they comply with the terms and conditions of the credit.
Question 32
Who is responsible for reimbursement?
Answer
The issuing bank is responsible to claiming and paying banks. If there is a paying bank, the issuing bank must ensure that the reimbursement to which a paying, accepting or negotiating bank is entitled to is obtained by the bank. The issuing bank should also provide the reimbursing bank with proper instructions in good time. Additionally
o the issuing bank will be responsible to the claiming bank for any loss of interest if reimbursement is not provided by the reimbursing bank on first demand.
o the reimbursing banks charges are for the account of the issuing bank unless otherwise specified.
Question 33
Are carbon copies or photocopies acceptable?
Answer
Carbon copies, computer printouts, photocopies and the likes are acceptable provided
they are marked as original and signed.
Question 34
Do all signatures on documents have to be manual (by hand)?
Answer
Banks will accept documents signed by handwriting, by facsimile signature, by perforated signature, by stamp, by symbol or by any other mechanical or electronic method of authentication.
This is in the absence of a specific requirement in the credit.
Question 35
Are documents bearing a date prior to the date of the credit acceptable?
Answer
They are unless it is otherwise stipulated.
Question 36
Will banks accept a non negotiable sea-way bill that indicates transhipment if the credit prohibits transhipment?
Answer
Banks will accept documents if the sea-way bill indicates that the cargo is shipped in containers, trailers and or LASH barge and the entire ocean carriage is covered by one and the same non-negotiable sea-way bill.
Question 37
Are insurance cover notes acceptable?
Answer
These are not acceptable unless it is specifically authorised in the credit.
Question 38
What should the insurance cover be for?
Answer
Unless otherwise stipulated the cover should be for the cost, insurance and freight (CIF) plus 10%. If the CIF value cannot be determined the minimum amount acceptable would be 110% of the amount for which payment, acceptance or negotiation is requested or 110% of the gross amount of the invoice, whichever is greater.
Question 39
Do banks insist on certain risks being insured?
Answer
No. Unless it is specifically required in the credit, banks will accept insurance documents as presented without any responsibility for risks not being covered. However, the issuing banks usually do, in practice, insist on the goods being insured for their own protection.
Question 40
Does the price and quantity of the goods have to be exactly as stated in the credit.
Answer
Unless the credit clearly states that the quantity of goods specified should not be exceeded or reduced, a tolerance of 5% more or 5% less will be allowed provided the amount of the credit is not exceeded. This will not apply when the credit stipulates the quantity in terms of a stated number of units or individual items.
Words such as `about, `approximately and the likes used in connection with the unit price, quantity or the amount of the credit permits a difference not to exceed 10% more or 10%
less than the item it refers to.
Question 41
Are partial shipments allowed?
Answer
They are, unless, the credit stipulates otherwise.
Question 42
When are documents to be presented?
Answer
They must be presented before the date of expiry at the place stipulated for presentation.
Question 43
Can all credits be transferred?
Answer
No, only credit that are expressly designated as transferable by the issuing bank can be transferred.
Question 44
Can a client who has received payment under reserve under a credit from a negotiating / confirming bank refuse to return the monies if the issuing bank rejects the documents.
Answer
No. This issue was settled in Banque De LIndochine et de Suez SA vs. J.U. Rayner (Mening Lane) Ltd. The court held in its judgement that
o Payment under reserve means that the bank reserves its right to recover the money if it was later established that the documents do not comply with the terms of the credit.
o Banks were not bound to accept any document.
Question 45
If documents are very similar to that required by the credit, can payment be made to the beneficiary?
Answer
Banks deal in documents and for documents to be acceptable, they must be exactly as stipulated in the credit. As Lord Sumner stated in Equitable Trust Co. of New York - V. Dawson Partners Ltd. There is no room for documents which are almost the same, or which will do just as well. A similar stand was taken in Bank Melli Iran V Barclays Bank.
Question 46
If the document in which the discrepancy exists of no concern, can the documents be negotiated and paid?
Answer
As was stated earlier, Banks are not interested in the goods but in the documents and it is not upto them to interpret the documents. Banks are not qualified to arrive at a conclusion on whether a discrepancy is acceptable or not.
As Lord Diplock mentioned in the case of Commercial Bank Co. of Sydney Ltd. v Jalsard Pty Ltd, The banker is not concerned as to whether the documents for which the buyer has stipulated serve any useful commercial purpose or as to why the customer called for tender of a document of a particular description. Both the issuing banker and his correspondent bank have to make a quick decision as to whether a document which has been tendered by the seller complies with the requirements of a credit...
Question 47
What would occur if the issuing bank goes into liquidation? Can the applicant be stopped from paying the negotiating / confirming bank directly?
Answer
It was held in Sale Continuation Ltd. v Austin Taylor & Co. Ltd. that if there was an intention for the issuing bank not to fulfil its obligations, then the applicant cannot be estopped.
Question 48
What would the applicants position be if the goods purchased are not (on inspection) what he had contracted for?
Answer
The applicant will not, if the documents comply fully with their terms of the credit, be able to reject the documents and refuse payment. Banks deal only in documents.
He will however be able to file a criminal suit against the beneficiary. A similar incident occurred in Discount Records Ltd. v Barclays Bank Ltd and another.
Question 49
Can the buyer stop the issuing bank from paying the beneficiary on account of a debt that is totally unrelated to the debt?
Answer
The buyer cannot as credits, by their nature, are separate transactions from the sales or other contracts on which they may be based and banks are in no way concerned with or bound by such contracts. The bank is bound to pay the beneficiary.
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