Documentary Credit Flashcards
Issuing bank honour a presentation of documents in three ways
Pay at sight if the credit is available by sight payment
Incur a deferred payment undertaking and pay at maturity if the credit is available by deferred payment. There is no requirement for a bill of exchange or draft with this type of documentary credit
Accept a draft for payment on a maturity date if the credit is available by acceptance
Confirmation in L/C
A bank adding an additional undertaking to that of the issuing bank and thereby to honour or negotiate a complying presentation made to it by the beneficiary
Standards for the examination of documents
Presentation period- documents should be presented within 21 calender days after the date of shipment by default
Examination period- has maximum of 5 banking days following the day of presentation to determine whether the presentation complies
Discrepancies with L/C
Once discrepancies is noticed
Bank officer will notice beneficiary of the discrepancies in the documents and chance to address the issue. So it dosent occur again in the future
If beneficiary cant address the issue then they may contact applicant to arrange for an amendment or to seek the applicants agreement to accept the documents
Nominated bank could send documents to issuing bank and ask for acceptance despite identified discrepancies. Or approach applicant for a waiver
Make settlement to the beneficiary against a specific indemnity from the beneficiary
Contingent liability
Possible obligations whose existence will be confirmed by uncertain future events that are wholly within the control of the entity. A contingent liability is not recognised in the statement of financial position
Issuing bank conducting risk assessment
Security provided through the documents
Original bills of lading issued to order of the bank or endorsed by the shipper to their order or in bank. Giving the bank the ability to take possession of the goods.
Non-negotiable transport documents that consign the goods to the bank, giving the bank control over them
Security independent of the transaction
Presentation of documents against payment
Sight payment
Beneficiary assembles required documents and if compliance then the nominated bank(who have confirmed) will make immediate payment. If nominated bank havent confirmed then will pass on the documents to issuing bank and then they will inform the applicant and debit its account
Presentation of documents for acceptance
Beneficiary assembles required documents and draft is drawn on the nominated bank(if they have confirmed) and draft(bill of exchange) will be accepted to mature on the determinable due date. If nominated havent confirmed then it will pass the documents to issuing bank
At the request of beneficiary the nominated bank can purchase the draft and advance finds WITHOUT RECOURSE to the beneficiary otherwise paid on the due date
Presentation of documents payable by deferred payment
Similar to the procedure used for L/C by acceptance except that no draft(bill of exchange) is required. Payment is made at the future date, or the nominated bank can agree to prepay its deferred payment undertaking and advance funds to the beneficiary
Presentation of documents where the L/C is available by negotiation
If a credit is available with nominated bank by negotiation and it agrees to act. It will either advance funds to the beneficiary on the basis of a complying presentation made. Interest charges will incur.
Such advances are made WITH RECOURSE
Transferable credit L/C
UCP600 states credit is transferable
May be made available in whole or in part to another beneficiary(second beneficiary) at the request of the beneficiary(first beneficiary)
Can be more than one second beneficiary provided credit allows for partial shipment
Onwards transfer from second to third is not permitted by UCP600
Amount of credit, unit prices, expiry date, latest shipment date, last date for presentation may be reduced when transferred to second beneficiary(this is because first beneficiary will be intermediary and profit margin will be needed)
However required insurance cover to second beneficiary may be increases
Before shipment to applicant, first beneficiary will be wanting to change documents as they wouldnt want applicant to know the existence of second beneficiary
Back to back credits
Used by intermediaries similar to transferable credit, however difference is that they consist of two entirely separate credits. One credit acts as part or full security for the issuance of the other
If an intermediaries supplier insists on a L/C, the intermediaries bank may insist that it obtains a documentary credit in its favour from the ultimate buyer as a security for the L/C in favour of its supplier
Banks usually only allows experienced and creditworthy traders to have back to back credits as there are considerable challenges
Red clause credit
Includes a clause that permits the Advising bank to make an advance payment to the beneficiary as issuing bank and the applicant are liable to reimburse a nominated bank or advising bank for any advance made and not repaid through the presentation of compliant documents
Usually when beneficiary needs finance to gather the goods or services.
Not used commonly these days as use of SWIFT MT 700, today most advances are covered by guarantees issued by the bank of the beneficiary
Revolving credit
Used for regular shipments and they avoid the need for repetitive opening formalities for repeat shipment over a period of time
Documentary Instrument Dispute Resolution Expertise (DOCDEX)
Designed to expedite the resolution of disputes by providing impartial solutions recommended by experts
Is not an immediate service, decisions are generally given within 30days of submission of all paperwork
