Letter of credit is, definition
Letter of credit is a conditional monetary obligation accepted by the bank (issuing bank) on behalf of the ordering party (payer for letter of credit), make a payment in favor of the beneficiary (recipient of funds for letter of credit) the amount indicated in the letter of credit upon presentation by the latter in bank documents in accordance with the terms of the letter of credit within the terms specified in the text of the letter of credit, or pay, accept or take into account a bill of exchange, or authorize another bank(to the nominated bank) to make such payments or pay, accept or record bill of exchange.
Letter of credit is type of bank account. Opens on behalf of the payer in the bank serving the counterparty, shipping goods, providing services, etc. Opening A. creates for counterparty the opportunity to receive on the terms specified in the letter of credit, payment per product, work, services immediately upon the performance of the obligation. A. as a form of non-cash payments is used when making payments socialist organizations and in international settlements for commercial transactions.
Letter of credit is registered, certifying the right of the person in whose name it is issued, to receive from a credit institution (bank or savings bank) the amount indicated in A. A. is paid by the credit institution at the place of its presentation at the expense of the amount of money deposited in the savings bank or debited from the account of its owner, or in accordance with an agreement between banks (if international payments).
Letter of credit is conditional pecuniary obligation accepted by the bank (issuing bank) on behalf of the ordering party (payer under the letter of credit).
Letter of credit is document, registered security, giving the right to a specific individual or legal entity. the person in whose name it was issued to receive the amount indicated in the letter of credit in whole or in part from a credit institution (bank, in particular, a savings bank) within a certain term.
Letter of credit is a form of settlements between companies and organizations, the meaning of which is that the payer gives an order to his bank so that, serving the payee, pay the required amount within the agreed period based on the conditions recorded in the payer's letter of credit.
Letter of credit is the order of the bank to one or several banks to make payments by the order and at the expense of the client to an individual or legal entity within the specified amount on the terms specified in the letter of credit.
Letter of credit is type of bank account enabling counterparty receive, on the terms specified in the letter of credit, payment for product, work, services immediately upon the performance of the obligation.
Letter of credit is the obligation of the bank to make, at the request and in accordance with the instructions of the importer, payment to the exporter.
Designation
Types of letters of credit
Schematic diagram of the use of a letter of credit
Forms of letters of credit
Post-financing letters of credit
Scheme of the operation with a letter of credit
Documentary credit
Letters of credit for settlements on the territory of the Russian Federation
Letter of credit is conditional pecuniary obligation accepted by the bank (issuing bank) on behalf of the ordering party (payer under the letter of credit), make a payment in favor of the beneficiary (recipient of funds under the letter of credit) of the amount specified in the letter of credit upon submission of the documents by the latter to the bank in accordance with the terms of the letter of credit to the amount specified in the text of the letter of credit timing, or pay, accept or account bill of exchange, or authorize another bank (nominated bank) to make such payments or pay, accept or post a bill of exchange
Letter of credit is
Letter of credit is the safest form of settlements between clients. When establishing new partnerships between enterprises and organizations, the question often arises: How to avoid losing money or product when concluding a deal and settlements with a still unfamiliar company? How to insure your business from unobtrusive and dishonest partners, especially if the contract is concluded for a significant amount? The answer is simple - letters of credit. Of course, it's hard enough to learn all the subtleties. work with letters of credit and use them in calculations, but a feeling of security appears. And having studied the letter of credit form of payment once, clients rarely refuse it. Calculation by letters of credit is, as it were, under the control of banks and excludes non-fulfillment of the conditions under the concluded contracts, both by the product supplier and the buyer. So, a letter of credit is an order of the payer's bank, the recipient's bank, to make payments to an individual or legal entity face within the specified amount and on the conditions specified in the order. Settlement under one letter of credit is carried out with only one recipient of funds. Letter of credit is the safest and most popular form of settlements between the seller and by the buyer... Letter of credit is a method of non-cash settlements between counterparties, in which the payer's bank (issuing bank), on behalf of the ordering party (payer under the letter of credit), undertakes to settle with the beneficiary (recipient of funds under the letter of credit) the amount indicated in the letter of credit upon presentation by the beneficiary in bank of documents in accordance with the terms of the letter of credit within the terms specified in the text of the letter of credit, or pay, accept or account for the bill of exchange, or authorize another bank (nominated bank) to make payments or pay, accept or take into account the bill of exchange.
Letters of credit used in domestic Russian settlements have not yet received proper distribution, however, as the regulatory framework improves, primarily the Regulations on Cashless Payments in the Russian Federation, and the approach to international standards, the practice of using these letters of credit will expand. But on foreign trade contracts, letters of credit are used much more often. After all, this form of settlement offers participants in a foreign trade transaction the widest opportunities for choosing payment instruments: immediate payment for the provision of documents, payment by installments, bills of exchange, negotiation of documents, as well as the use of a letter of credit: transfer of a letter of credit to another or other beneficiaries, transfer of proceeds under a letter of credit.
Rules and customs for documentary credits, publication of the International Chamber of Commerce No. 500 ", approved in 1993 by the International Chamber of Commerce in Paris. This set of rules allows you to create a clear instrument for ensuring international transactions, free from dependence on frequent contradictions arising from the interaction of the laws of the two, or several countries behind the parties to the transaction. These rules clearly stipulate the list and type of contract documentation, standardizing it. The procedure for controlling the transaction, thus, becomes quite simple and "transparent".
A detailed definition of the provisions for working with letters of credit in the Russian Federation is given in Articles Nos. 867 - 873 with comments to them [Ch. 3] "Settlements under a letter of credit" of the Civil Code RF.
In the event of disputes in this matter, for their resolution, you should refer to the section "On the practice of considering disputes related to the use of a letter of credit" of the letter of the Presidium of the Supreme Arbitration Court RF No. 39 dated January 15, 1999
In no case did I set myself the goal of telling about all the nuances of using a letter of credit in international settlements. Because their detailed description took more than one thick tutorial. I have summarized only the most general principles of working with letters of credit. As one very experienced middle-level employee of a large Moscow bank once told me: "The longer I deal with letters of credit, the more I understand how broad and capacious this topic is." Therefore, it is imperative that regarding the development of schemes for the use of letters of credit, it is in your specific case, boldly, without hesitation, ask questions to the employees of the banks in which you plan to issue a letter of credit. Good banks are known to have good customer service departments that are always ready to provide useful professional advice on services. In addition, based on the analysis of the answers to your questions, based on the professionalism of the consultations provided to you, you will be able to make a decision about working / not working with any bank in each specific case. One of the instruments of international trade is a letter of credit - the obligation of a bank to make payment upon presentation of certain documents to it, corresponding to pre-agreed conditions. Most often, when making transactions between residents of different countries, the classic letter of credit scheme is used, in which five participants are involved: the applicant ( customer on whose behalf the letter of credit is opened), the issuing bank (opening the letter of credit), the confirming bank (the credit institution adding its obligation to make a payment to the obligation of the issuing bank), ( salesman, payee) and advising bank (beneficiary's bank).
According to UCP 600 (international unified rules and customs for documentary letters of credit, adopted by the banking commission of the International Chamber of Commerce in 2003), an executing bank is also present in the transaction, which decides whether the documents comply with the terms of the letter of credit. However, in accordance with international practice, this function is usually carried out by the confirming bank. If an unconfirmed letter of credit is opened, then this role falls either on the issuer or on the advising credit organization.
After opening a letter of credit, two banks (the issuer and the confirming one) have an obligation to supplier make a payment under the contract in the case of providing correctly executed documents certifying the shipment of the product. As a rule, the set is standard: invoice, packing list, etc. They are submitted to the advising bank, which in some cases, agreed with the beneficiary, takes over the function of checking the documents. When errors are found - for example, typos in an invoice - provider receives a recommendation to correct them, which increases the chances of timely payment of the letter of credit.
An indispensable condition of any letter of credit is a certain period of its validity, that is, the date is set until which the obligation of the banks (the issuer and the confirming one) is valid. Prior to this date, the supplier is obliged to provide all the necessary documents confirming the fulfillment of the terms of the contract. Typically, the validity period of a letter of credit is calculated as the date of the last shipment plus the number of days required to submit the documents to the confirming bank (usually 15-21 days).
When opening a letter of credit, the method of execution must be indicated in it. Most often this happens by payment on presentation of documents (available by payment at sight) - a classic letter of credit. It is followed by the most popular letter of credit with a deferred payment (available by deferred payment). Much more rare for Russian participants international trade are the execution of the letter of credit by acceptance bills of exchange (available by acceptance) - draft, as well as execution by negotiation (available by negotiation) - accounting for promissory notes.
In the case of using a post-financing scheme, the confirming bank notifies the issuing bank of the receipt from the beneficiary of the package of documents necessary for the execution of the letter of credit, but the payment to the advising bank is made at the expense of its own resources. The calculation of the applicant with the credit financing the transaction organization occurs upon expiry of the deferred payment.
In some cases, together with a letter of credit with a deferred payment (the execution of the transaction in this case falls entirely on the beneficiary-supplier), discounting is applied, in which the confirming bank acquires documents from the beneficiary that give the right to receive payment within the period specified in the letter of credit. If the discounting commission is paid by the beneficiary, then there is virtually no difference for the applicant in the post-financing or discounted L / C.
As for the supplier, when discounting, he must draw up an additional document - a request to the confirming bank to redeem the documents. In addition, in order for a letter of credit to be discounted, an appropriate condition must be specified in its text.
In some countries, in particular in the United States, there is no concept of a bank payment guarantee. Instead, the so-called standby or standby letter of credit is used. The main idea is that there is no transfer through the bank chain of documents confirming the shipment, and, accordingly, no equivalent payments. That is, in due time, stipulated in the letter of credit, the applicant-recipient pays the due amount to the beneficiary-supplier. And only if this event did not happen, beneficiary submits documents to the advising bank and receives payment from the confirming bank. Thus, a standby is a letter of credit that, ideally, should not be executed. Requirements for it are set only in case of violation by the buyer of the terms of the contract and entail a loss of image for him.
In some cases, the application of a letter of credit allows the supplier to receive an advance payment. Under the letter of credit scheme "with a red clause" beneficiary provides the bank with preliminary documents for shipment (as a rule, this is a proforma invoice and a letter of commitment to ship within the contractual terms). Against these documents, the supplier receives an advance payment before the actual shipment of the product (in the amount of 5-100%). After the shipment has been dispatched, the documents are sent directly to the applicant. In the case of partial prepayment, the parties may agree that copies of documents are also sent to the confirming bank in order to receive the remaining portion of the payment. In this case, he must make two iterations of providing documents - first, preliminary documents for the upcoming shipment, and then the actual shipment.
Foreign trade finance transactions are different from conventional loans. The main purpose of using trade finance instruments is not only to provide credit resources, but also to reduce risks the parties involved in the transaction. Guarantees provide for ensuring the return of paid advances (advance guarantees), and also make it possible to participate in auctions (tender guarantees), to receive orders for the production of equipment and construction (performance bonds), to carry out other settlements in foreign trade (for example, customs guarantees). For importers, letters of credit exclude risk non-delivery or poor-quality delivery of goods, exporters are given a guarantee of payment after the submission of documents.
With the optimal formulation of the terms of the letter of credit, you can be sure that payment for the products will be made only after delivery (if the contract does not provide for advance payments) and only if the terms of the agreement are met.
The popularity of trade finance instruments in international practice is due precisely to the fact that they allow companies to improve the efficiency of using their own funds without diverting resources from their working capital.
Post-financing letters of credit
The Eurasian Bank arranges financing for its clients-importers under foreign trade contracts with settlements by means of a confirmed documentary credit. Financing provided for the full amount of the letter of credit or for a part of it. At the same time, in order to reduce the client's costs, the bank uses cheaper financial resources of foreign banks.
With this scheme, a deferred payment under a letter of credit is also possible at a reduced rate.
Advantages of the letter of credit form of settlements with the attraction of financing from foreign banks:
When applying a credit line for letters of credit, credit resources of a foreign confirming bank are used, the credit rate of the confirming western bank is lower than in Kazakhstan
With this scheme, a deferred payment under a letter of credit or an advance payment also at a reduced rate is possible.
The terms of crediting a client of the Eurasian Bank under this scheme may vary;
The client should not divert funds from circulation at the time of opening a letter of credit;
The Western supplier receives funds under the letter of credit immediately after submitting the documents to the confirming bank; at the same time, funds under our client's letter of credit are written off by the Eurasian Bank only at the end of the post-financing period.
Scheme of work on confirmed letters of credit with the attraction of financing from foreign banks:
1. A Kazakhstani client-importer and a foreign supplier enter into a contract for the supply of products.
2. A Kazakhstani client-importer submits an application to the Eurasian Bank for opening a letter of credit with the attraction of financing from a foreign bank.
3. The Eurasian bank opens a letter of credit, transfers it to a foreign bank with a request for confirmation and financing without listing coverage.
4. The foreign bank advises the letter of credit to the supplier with the addition of its confirmation.
5. The supplier is shipping the product.
6. The supplier submits shipping documents to the confirming bank.
7. The confirming bank will pay for the shipping documents from its own funds.
8. Upon the expiry of the financing period, Eurasian Bank shall pay the confirming bank the financing amount and interest thereon.
9. The client-importer shall reimburse the Eurasian Bank for the amount of financing and percent.
Confirming bank - a bank that undertakes an obligation, in addition to the obligation of the issuing bank, to pay for documents that meet the terms of the letter of credit. The confirmation of the letter of credit added by the confirming bank implies an additional guarantee of payment from the confirming bank.
Typically, such a bank is used in settlements if the issuing bank and the bank the seller are not correspondents, as well as to reduce the impact of country risks, if one or both partners are located in countries with insufficient high rating of solvency and political stability.
The confirming bank performs the first document check and makes its expert decision. If, according to the confirming bank, the documents are presented without discrepancy with the terms of the letter of credit, then the confirming bank is obliged to pay on the terms of the letter of credit. In case of submission of documents with discrepancies, the confirming bank acts in accordance with the instructions of the party that submitted the documents and, accordingly, may:
request from the issuing bank the applicant's consent to pay for documents with discrepancies and, after receiving consent, make a payment on the terms of a letter of credit or send the documents to the issuing bank without obligations on its part on the basis of collection. In this case, the documents will be paid if the applicant agrees, i.e. not by letter of credit, but by collection or return the documents to the beneficiary. In this case, the issue of payment must be settled by the parties to the contract without the participation of the confirming bank.
Nominated bank - a bank that, on behalf of the issuing bank, checks the documents and, if the submitted documents meet the conditions of the letter of credit, requests payment from the issuing bank to transfer it to the beneficiary. The nominated bank, unlike the confirming bank, is not obliged at its own expense to make payment against documents or to accept bills of exchange (bills of exchange) promissory notes).
Advising bank - a bank that transfers the terms of the letter of credit and all additions to it directly to the beneficiary. The advising bank does not have any payment obligations under the letter of credit.
As a rule, this is the bank serving the beneficiary. For the advising bank, it is necessary to have telex keys with the issuing bank or with the confirming bank.
A transferable letter of credit provides for the possibility of using it in whole or in part by several persons, in addition to the beneficiary himself (the second beneficiaries). For this, the beneficiary instructs the bank to transfer a certain part (up to 100%) of the letter of credit to the second beneficiary.
A transferable letter of credit can be transferred only once, i.e. The letter of credit cannot be transferred at the request of the second beneficiary in favor of the third beneficiary. In case of refusal to use his part of the letter of credit, the second beneficiary may again transfer this right to the first beneficiary.
However, taking into account the currency valid in the Russian Federation, when making settlements using a transferable letter of credit, it is necessary to consult with the specialists of FCRB in the field of currency control.
Also, the use of a transferable letter of credit in the Russian Federation is complicated by the fact that there are no norms for this type of transactions in domestic legislation.
It is used in settlements for constant deliveries in equal lots. It provides for the replenishment of the letter of credit by a certain amount (quota) or to the initial value as it is used. When opening a revolving letter of credit, as a rule, the total amount of the letter of credit, the size of one quota and their number, as well as the period of use of the quota are indicated.
Revolving L / C is not opened for the full amount of payments under the contract. However, for the issuing bank, the issuance of a revolving letter of credit means a clear commitment to renew the amounts in accordance with the original conditions, regardless of the developments in the supply goods... This is a significant risk.
The use of revolving letters of credit is very limited, since it requires the provision of collateral for the full amount of all renewals, as well as strict adherence to the terms and volumes of deliveries by the beneficiary for the effective use of this type of letter of credit. In this regard, FCRB does not recommend a revolving letter of credit for use in settlements.
contract, providing for settlements under a documentary credit.
The buyer gives an order (statement) to the issuing bank, on the basis of which he opens a letter of credit in favor of the supplier. In this case, the letter of credit is sent to the address of the supplier's bank.
The supplier's bank informs the supplier that the letter of credit is open.
The supplier submits the documents for the letter of credit to his bank. The supplier's bank sends the documents to the issuing bank. The supplier's bank preliminarily checks the documents for compliance with the terms of the letter of credit, if it is executing, otherwise it has the right not to check. The issuing bank must check the documents for compliance with the terms of the letter of credit.
The issuing bank pays the supplier and sends the documents to the buyer's address. If there are discrepancies in the documents with the terms of the letter of credit, payment is made only after receiving the buyer's consent to pay for the documents with discrepancies.
The confirming bank adds its confirmation to the letter of credit - a guarantee of payment if the terms of the letter of credit are met - and thus acts as between the supplier's bank and the issuing bank.
The scheme of work on a confirmed letter of credit is as follows:
The supplier and the buyer agree contract, providing for settlements under a confirmed documentary credit.
The buyer gives an order (statement) to the issuing bank, on the basis of which he opens a letter of credit in favor of the supplier. In this case, the letter of credit is sent to the address of the confirming bank to add confirmation to it.
The confirming bank adds its confirmation to the letter of credit and via SWIFT or telex sends the text of the letter of credit to the supplier's bank, indicating that the confirmation has been added to the letter of credit. The confirming bank also informs the issuing bank of the fact that its confirmation has been added to the letter of credit.
The supplier's bank informs the supplier that the letter of credit is open and a confirmation has been added to it.
After the supplier checks the letter of credit for compliance with the terms of the contract, the product is shipped / services rendered.
The supplier submits the documents for the letter of credit to his bank.
The supplier's bank sends the submitted documents to the address of the confirming bank.
The confirming bank verifies the submitted documents:
If the documents are submitted in accordance with the terms of the letter of credit, then the confirming bank independently makes the payment in favor of the supplier's bank, after which it sends the documents to the address of the issuing bank to receive a refund;
If discrepancies are found in the documents, the confirming bank:
immediately notifies the supplier's bank of the fact of revealing discrepancies in the documents
may return the documents to the supplier's bank with a refusal to pay for the submitted documents. In this case, the supplier and the buyer must independently resolve the issue of payment under the contract.
on behalf of the supplier's bank, it can request the issuing bank via the SWIFT system or by telex about the buyer's consent to pay according to documents with discrepancies. Upon receipt of a positive response, it acts in accordance with clause 8.1.
at the request of the bank, the supplier can send documents with discrepancies to the issuing bank for collection. In this case, there is no guarantee of payment, the buyer will independently decide on payment or refusal to pay against the received documents.
If the documents comply with the terms of the letter of credit (8.1) or if the issuing bank agrees to pay for such documents based on the documents with discrepancies (clause 8.2), sends the documents to the issuing bank. The issuing bank must check the documents for compliance with the terms of the letter of credit. The confirming bank receives a refund from the issuing bank. In case of payment on documents with discrepancies, transfers the specified amount to the address of the supplier's bank. The issuing bank sends the documents to the buyer's address.
Have funds on the account in an amount sufficient to issue a letter of credit and cover those bank commissions that, according to the terms of the contract, must be paid by the client. Under the agreement, a letter of credit can also be opened against a credit line or a loan provided by FCRB.
Resident clients - to issue a passport of the transaction under the contract under which the letter of credit is being opened at FCRB.
Submit to FCRB an application for opening a documentary credit, completed using a typewriter or computer.
In case of opening a letter of credit against a credit line, it is necessary to provide a complete list of documents for making a decision by the bank's collegial bodies, as well as conclude the necessary agreements with the bank (for opening a letter of credit, security, etc.).
Type of letter of credit: with or without confirmation by another bank.
Name of the issuing bank (for the import of the FCRB, for the export - the importer's bank, preferably from among the correspondent banks of the FCRB).
The name of the nominated or confirming bank. It can be a correspondent bank of the FCRB or the FCRB itself.
If the nominating or confirming bank is not a bank serving the seller, then the name of the advising bank must be additionally indicated (by import- the name of the bank serving the seller, by exporting- PChRB)
Letter of credit amount
Method of realization of the letter of credit (payment against documents, deferred payment, etc.)
List of documents to be submitted by the beneficiary and their characteristics
Deadlines for submission of documents
Shipment time
Conditions of insurance, payment of freight, bank charges, etc.
Changes to the terms of a letter of credit are made similar to the procedure for opening a letter of credit.
In case of letter of credit operations, banks are not liable under the client's agreement. Banks are also not responsible for the authenticity of documents, their compliance with the main client agreement.
Thus, banks 'obligations under the letter of credit exist independently of the clients' obligations under the main contract.
The letter of credit is opened for a period within which it is planned to supply / provide services and submit documents to receive payment under the letter of credit.
Subject to payment upon presentation of documents - settlements are made immediately after the submission of the documents described in the letter of credit, if the conditions of the letter of credit are met.
In case of deferred payment - the beneficiary receives payment within the period specified in the letter of credit (for example, a certain number of days from the date of submission of documents to the bank or from the date of the transport document).
It should be borne in mind that banks have 5 working days to check documents (7 working days for ruble letters of credit in accordance with the legislation of the Russian Federation).
By agreement with the seller, the nominating or confirming bank
may return the documents to the seller for corrections to the documents. It makes sense to do this if there is enough time to correct the documents and resubmit them to the bank.
may ask the issuing bank for the buyer's consent to pay according to documents with detected discrepancies. In case of obtaining consent, sends documents to the address of the issuing bank with a request for payment
can send documents with discrepancies to the issuing bank for collection. In this case, there is no guarantee of payment, the buyer will independently make a decision on payment or refusal to pay against the received documents
Each bank sets its own commissions for carrying out letters of credit. However, as a rule, banks provide the following commissions in their tariffs.
commission for advising the forthcoming opening of a letter of credit
commission for advising a letter of credit / changes to a letter of credit
commission for opening, increasing, prolongation of a letter of credit
commission for amending the terms of a letter of credit
letter of credit confirmation commission
commission for receiving, checking and sending documents under a letter of credit
letter of credit payment commission
commission for requesting the consent of the issuing bank or the issuer of the letter of credit for payment of documents submitted by the beneficiary with discrepancies with the terms of the letter of credit
commission for acceptance bills of exchange
commission for the transfer of a letter of credit (transfer) or transfer for execution to another bank
commission for sending requests on behalf of the client, etc.
Commissions can be levied as a fixed amount or set as a percentage of the amount of the letter of credit or a separate transaction on it. For a number of commissions, it is customary to establish commissions based on a quarter or part of it (for example, commissions for opening or confirming a letter of credit).
Banks commissions for a letter of credit are paid by the buyer or seller in accordance with the conditions specified in the letter of credit. Wherein expenses for import letters of credit (LLC “PChRB” - issuing bank) it is recommended to refer to the territory of the Russian Federation at the expense of the importer, outside the Russian Federation - at the expense of the exporter. When exporting, you should try to assign costs under a letter of credit at the expense of the importer, and in case of disagreement, include them in the contract price. Also, you should especially discuss the payment of commissions of the confirming bank.
The issuing bank must reject attempts by the originator of the letter of credit to insert parts of the text of the contract, invoices, etc. into the text of the letter of credit.
Uniform Rules and Practices for Documentary Credit, International Chamber of Commerce Publication No. 600 (UCP 600) 2007.
Uniform Rules for Interbank Reimbursement of Documentary Credit, ICC Publication No. 525 (revised 1996).
When making settlements on the territory of the Russian Federation under ruble letters of credit - regulatory documents of the Russian Federation: Regulation Bank of Russia dated October 3, 2002 N 2-P "On cashless payments in the Russian Federation" and Regulation Russian Central Bank dated April 01, 2003 No. 222-P "On the procedure for making non-cash settlements by individuals in the Russian Federation".
When opening a ruble letter of credit with execution in another bank, the FCRB must establish a credit one for the executing bank.
There is a requirement to provide, in addition to the main list of documents, 4 originals of the register of invoices, which may be subject to a requirement for mandatory acceptance by the buyer.
If the terms of the letter of credit provide for a person authorized by the Payer, the latter is obliged to submit to the bank or a power of attorney issued by the Payer (if the authorized person is physical face), or a copy of the agreement (if the authorized person is organization).
Individuals has the right to use letters of credit for non-cash payments in accordance with the legislation of Russia, for settlements not related to the implementation of entrepreneurial activities. A documentary credit is a form of payment that is very widespread in international trade to reduce the financial risks of the exporter and importer. A letter of credit is an obligation issued by a bank on behalf of the buyer to make payment in favor of the supplier against the submitted documents that strictly comply with the terms of the letter of credit.
The obligation to pay to the supplier is borne directly by the bank. Thus, the supplier is already insured against the risk of non-payment from its counterparty at the time of opening a letter of credit. In addition, the supplier is in no way dependent on the contractual relationship that exists between the buyer and the issuing bank.
In order to unify the conduct of operations on documentary credits, the Uniform Rules and Practices for Documentary credits were developed, edition 1993, publication of the International Chamber of Commerce No. 500. A reference to the application of the rules should be included in the text of the documentary credit. The rules are binding on all parties. The following parties can participate in settlements by means of a letter of credit (depending on its conditions):
Ordering agent - importer (buyer)
Issuing Bank - a bank that opens a letter of credit at the request of the Ordering Party.
Beneficiary - exporter, supplier.
Notifying bank is a bank that usually serves the Beneficiary, which verifies the authenticity of the message received from the Issuing Bank on opening a letter of credit and sends (notifies) this message to the Beneficiary.
Confirming bank - a bank that adds its confirmation to the letter of credit, that is, accepts additional joint and several obligations in relation to the obligation of the Issuing Bank to make payment under the letter of credit or perform other actions with the terms of the letter of credit.
Executing bank - the bank that directly makes payments under the letter of credit to the recipient of funds. The executing bank can be the issuing bank, the advising bank, and the confirming bank. It is also possible that the executing bank is any other bank.
To ensure the interests of the supplier, as a rule, an irrevocable letter of credit is used, which can neither be changed nor canceled without the consent of the issuing bank, the confirming bank (if any) and the beneficiary.
Settlement scheme for import through a documentary letter of credit opened by a bank (see figure), includes the following steps.
