Letters of credit
Documentary credit is an agreement that obliges Bank (issuing bank) acting upon the request and instructions of the client to:
- Execute payment to the third party (beneficiary) upon its order or to repay/accept bills of exchange issued by beneficiary
- Authorise another bank to make payment or repay, accept or negotiate (buy or discount) bills of exchange against documentation if all terms and conditions of letter of credit are fulfilled
By working with letters of credit all interested parties deal only with documents but not goods, services and/or other kinds of obligations that may be related to the documents.
Legally LCs are regulated by Un³form Customs and Pract³ce for Documentary Cred³ts – UCP 600 of International Chamber of Commerce. UCP include all provisions and rules recognised by international community for documentary credit transactions.
Advantages:
- LC is used an a instrument for settlements and financing for transactions with practically all world companies (high level of legal protection is achieved by the use of uniform customs);
- LC gives an opportunity to work with any unknown foreign partner;
- LC is used as a short-term financing instrument;
- LC mitigates the risk of non-payment.
Advantages for exporters:
- A documentary credit is a bank’s obligation that provides high reliability for an exporter to receive payments in comparison with collection or payment against delivery ;
- A letter of credit can be confirmed and that way the guarantee of repayment of another (accepting) bank is extended.
Advantages for importers:
- Importer obtains consultancy and advisory service from the issuing bank by determining the set of necessary documentation that has to be provided under the terms and conditions of the letter of credit. Exporter is not to receive repayment until all documentation specified in the letter of credit is provided;
- Importer can insist on shipment of the goods for some fixed period of time by specifying the timing of goods supply in clauses of the letter of credit.
Basing on experience of work with first class world banks, the Bank offers the following types of letters of credit to its customers:
- revocable/irrevocable;
- confirmed/not confirmed;
- covered/uncovered ;
- in terms of type of utilisation:
- payment at sight;
- deferred payment;
- for acceptance;
- with negotiation;
- in terms of additional features:
- transferable;
- red clause LC;
- revolving LC;
- stand-by LCs.