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ASM - DOCUMENTARY CREDIT SYSTEM Q. Explain the operation of a “Documentary Credit System” using a suitable example.

(Also set in First Mate Phase II paper). Documentary credits are an essential part of international trade. The seller always wishes to receive payment before he parts with his goods whereas the buyer always wishes to receive the goods before he pays for them. To resolve this dilemma, the banking system has devised the “Documentary Credit System”. The Letter of Credit is a part of this system. In this system, the buyer opens a Letter of Credit in favour of the seller. Definition of a Documentary Credit : It is a conditional bank undertaking of payment. It is a written undertaking by a Bank given to a seller at the request and in accordance with the instructions of the buyer to effect payment, by making a payment or by accepting or negotiating bills of exchange, up to a stated sum of money, within a prescribed time limit and against stipulated documents. The flowchart shows the steps in a simple documentary letter of credit process as an example:

1. The exporter and importer sign a bill of sale contract. 2. The importer applies to his bank, the issuing bank, to open a letter of credit. 3. The issuing bank sends the advice of the credit to the advising bank. 4. The exporter is advised of the credit. 5. Following shipment of the goods, the exporter presents the documents to the advising bank (the paying agent). 6. After checking the documents and confirming that they agree with the letter of credit terms, payment is made to the exporter. At the same time, the advising bank sends the documents to the issuing bank and requests reimbursement for the letter of credit amount plus the advising bank's fees and expenses. 7. The issuing bank sends the documents to the importer and debits his account for the letter of credit amount plus the fees and expenses of the banks involved. *abstract: All those involved deal only with documents, not with goods, services and/or other activities.

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