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Chapter 1.

Documentary Credits-An overview

1. What is the instrument to which the letter of credit can be historically related? Travellers letter of credit which were used by the banks in the western world to provide their clients with the means of obtaining cash from overseas bank during the course of their foreign travel. 2. What is the key element that acts as a prerequisite to trigger a payment in a usual documentary credit transaction? Complying presentation, which means the presentation that is in accordance with the terms and conditions of the credit, the applicable provisions of UCP 600 and ISBP. 3. Name the 3 ICC publication that acts as support to the UCP 600? a. Uniform rules for Bank to bank reimbursement under Documentary credit (RR 725) b. Uniform customs and practices for documentary credits for electronic presentation(EUCP) c. International standard banking practise for examination of documents under documentary credit subject to UCP 600 (ISBP) 4. Can you detail the procedural steps in documentary credit issued in standard or common form? a. Contract between buyer and seller b. Application for issuance of Letter of credit from Buyer(Applicant) to his bank (Issuing bank) c. Documentary credit issued and forwarded to Advising/Confirming Bank d. Advising Bank/Confirming Bank advises the Credit to Seller (Beneficiary) e. Seller on satisfaction of Terms and condition of the Credit Dispatches the goods as per LC terms f. Sellers prepares all the documents as per LC terms and submits them to the Nominated bank g. Nominated Checks for the documents if they are credit compliant and if clean, bank acts upon its nomination and honours or negotiates as agreed upon and forwards them to Issuing bank/Confirming bank if any h. Issuing bank/Confirming bank if any checks the Documents and if compliant reimburses the nominated bank and issuing bank forwards the Docs to Applicant i. Applicant presents the documents to Customs and collects the goods

Chapter 2. The Sales Agreement

1. What are the Essential Issues upon which the buyer and seller should agree in sales agreement? The two most essential terms of sales contact are: i. Sellers undertaking to provide the goods to buyer ii. Buyers Undertaking to Pay the seller in return b. Apart from these two issues they should also agree upon: i. The terms of delivery of goods ii. The point at which the risk in respect to goods passes from seller to buyer iii. Who should clear the goods through customs and up to what point iv. What precise risks to the goods need to be covered in insurance and by whom v. What commercial documents are needed and what should be shown on them vi. Whether any other documents (e.g. Inspection certificate) are needed and those are to be issued by whom The Most common method to minimize the risk of dispute arising in sales contract is to understand Incoterms and to incorporate the same in contract. 2. Why is it important that both the buyer and seller understands the 3 letter incoterm abbreviations used in the sale agreement? a. Incoterms are the 3 letter standard trade term most commonly used in international contract for the sale of goods. First Published in 1936, they provide internationally accepted definitions and rules of interpretation for most common commercial terms. They define the respective obligation, Cost and risk involved in the delivery of the goods from seller to buyer It does not: i. Constitute a contract ii. Supersede the law governing the contract iii. Define where the title transfers iv. Address the price payable, currency or credit terms Hence, it is important to both the buyer and seller to understand the risk, cost and responsibilities one has to fulfil by including the term in the contract. Understanding these terms will help both buyer and seller to: 1. Specifically identify the most suitable incoterm for both 2. Recognize when the risk of loss transfers 3. Understanding who has the responsibility of loading and unloading (and its charges) 4. Understanding who has the responsibility of custom clearance 5. Determine the importance of supply chain visibility 6. The correct Inco term to be used and avoid attracting unnecessary trouble 3. If they do not understand them where and how would you direct them? I would suggest them to enrol for the Training provided by ICC along with providing the training from the experts from our bank as well.

4. Who is not involved in Sales Agreement? Banks 5. Can you recall the 4 methods of payments? List the basic features of each payment methods. a. Open Account
In open account method the importer is trusted to pay the exporter after receipt of goods. The main drawback of open account method is that exporter assumes all the risks while the importer get the advantage over the delay use of company's cash resources and is also not responsible for the risk associated with goods.

b. Payment Collection of Bills in International Trade

The Payment Collection of Bills also called Uniform Rules for Collections is published by International Chamber of Commerce (ICC) under the document number 522 (URC522) and is followed by more than 90% of the world's banks. In this method of payment in international trade the exporter entrusts the handling of commercial and often financial documents to banks and gives the banks necessary instructions concerning the release of these documents to the Importer. It is considered to be one of the cost effective methods of evidencing a transaction for buyers, where documents are manipulated via the banking system.
There are two methods of collections of bill:

Documents against Payment D/P

In this case documents are released to the importer only when the payment has been done.

Documents against Acceptance D/A

In this case documents are released to the importer only against acceptance of a draft.


Letter of Credit L/c

Letter of Credit also known as Documentary Credit is a written undertaking by the importers bank known as the issuing bank on behalf of its customer, the importer (applicant) or on its own, promising to effect payment in favour of the exporter (beneficiary) up to a stated sum of money, within a prescribed time limit and against stipulated documents. It is generally issued subject to the provision of Uniform Custom and Practices (UCP) brochure number 600. It provides the seller an independent bank undertaking of payment. The buyer on other hand knows that the payment will not be made unless the seller documentary evidence covering the goods and its shipment.


Who are the parties to bill of exchange?

a. Drawer It is the person who is the maker of the bill of exchange. It is the person who has sold the goods and for receiving the payment from the debtor he draws a bill of exchange.

b. Drawee or Acceptor It is the person on whom the bill of exchange is drawn and he has to make the payment to the supplier of goods. c. Payee It is the person to whom the payment has to be made. It may be the drawer himself if he has not discounted the bill with any third party. 8. What is an Aval? A guarantee added to a debt obligation by a third party who is not the payee the holder but who ensures payment, should the issuing party defaults. The debt obligation may be Note, Bond, Promissory note, bill of exchange. The aval is usually provided by bank or other lending institutions 9. What is forfaiting? Forfaiting is a method of trade finance whereby Lender purchases, on a without recourse basis debt obligations arising from the supply of goods and/or services. In a forfaiting transaction, the exporter agrees to assign its rights to claim for payment of goods or services delivered to an importer under a contract of sale, in return for a cash payment from Lender. In exchange for the payment, Lender takes over the exporter's debt instruments and assumes the full risk of payment by the importer. The exporter is thereby freed from any financial risk in the transaction and is liable only for the quality and reliability of the goods and/or services provided. 10. Why Documentary credit is preferred method of payment compared to other 3? In all the other payment methods (Open account payment- Seller has the risk of not receiving money. Advance Payment- Buyer have the risk of not receiving goods at all. Collections- Risk of buyer rejecting Docs or Seller sending inconsistent or false documents) either the buyer or the seller has to depend upon the good faith and performance of the other for the smooth exchange of the goods for payment. However, DC provides the buyer and seller with an independent assurance in the exchange of goods for payment: 1. The Seller has the undertaking of the issuing bank that it will receive payment if complying presentation is made. 2. Buyer has the undertaking that no payment will be made unless stipulated documents are provided and the LC terms and conditions are met. 11. Can you quote the relevant UCP article to Beneficiaries/Applicants that will show that you as bank are not concerned with contracts/goods/service performance? Article 5 Documents v. Goods, Services or Performance Banks deal with documents and not with goods, services or performance to which the documents may relate.

12. What is the possibly the only ground upon which the court should uphold an application for an injunction?