International Trade Finance

Documentary Credit

Types of Credit
Sight Credit
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Payment to be made to the beneficiary immediately after presentation of compliant document. A credit can be paid either by the opening bank or a nominated bank. An opening bank is allowed maximum five working days following receipt of documents to examine documents and either to reject or pay. (Article 14 b)

Types of Credit
Deferred Payment Credit
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Payment to be made to the beneficiary at a later date specified in the credit. Eg: 90 days after BL date, 180 days from bill of exchange date, etc. In terms of economic effect, a deferred payment credit is equivalent to an acceptance credit except that there is no bill of exchange. On presenting compliant document, the beneficiary receives authorized banks (opening/nominated bank) undertaking to make payment at maturity. Banks payment undertaking can be used as collateral for an advance. Such advance will normally be available from the issuing or confirming bank. Importer gains possession of documents before his payment to the issuing bank.

Types of Credit
Acceptance Credit
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With an acceptance credit, payment is to be made in the form of a bill of exchange. Like in a deferred payment credit, the payment to be made at a later date. Once the beneficiary has submitted compliant document, they can demand the bill of exchange be accepted and return to them. The accepted bill of exchange takes the place of a cash payment. If the beneficiary needs immediate cash, he can present the accepted bill of exchange to a bank that is willing to discount and pay the value. If not, he will receive payment at maturity from the accepting bank. Purpose of an acceptance credit is to give importer time to make payment. He can sell the goods and use proceeds to make the payment under the LC.

Types of Credit
Negotiation Credit
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Negotiation means the purchase by the nominated bank of drafts (drawn on a bank other than the nominated bank) and/or documents under a complying presentation, by advancing or agreeing to advance funds to the beneficiary on or before the banking day on which reimbursement is due to the nominated bank. (Article 2 c) This type of credit gives the beneficiary to obtain payment from a bank, nominated by the issuing bank that is willing to give an advance or agreement for an advance before receiving payment from the bank that is required to pay. Payment to the negotiating bank is the obligation of the issuing/confirming bank. (Articles 7 c and 8 c)

Types of Credit
Red Clause Credit
In this type of credit, the seller (beneficiary) can obtain an advance for an agreed amount the from correspondent bank. Eg: 40% of the LC value to be paid against beneficiarys simple receipt. - The advance obtained is to be used to complete the shipment process and the balance to be obtained once the full shipment is made and the presentation of the compliant documents is made. - Issuing bank assumes liability to reimburse the bank that paid the advance - Issuing bank will recover the advance that was made to the beneficiary from the applicant and the balance will be paid to the beneficiary once the documents are received once the shipment is made. - The clause permitting the advance is typed in RED color, hence the credit is called a Red Clause Credit.
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Types of Credit
Revolving Credit
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Revolving credits can be used when goods are to be delivered in installments at specified intervals. Amount available at any one time is equivalent to the value of one partial delivery. Eg: Credit amount Sw.Fr 100,000.00, revolving eleven times up to a total of Sw.Fr 1,200,000.00 After utilization of the first Sw.Fr100,000.00 the next portion becomes available automatically, and so on up to the total of Sw.Fr 1,200,000/-. The revolving clause often specifies the intervals at which the credit may be utilized. A revolving credit can be cumulative or non-cumulative. Cumulative means that amount from unused portions can be carried forward to the next shipment. (Article 32 will not apply.) Non cumulative means, unused portion ceases to be available if not made during the specified period.

Types of Credit
Standby Credit
Credit functions as a guarantee. Under the laws of most US states, banks are prohibited from issuing guarantees. Standby credits are used instead. - Standby credits can be enforced by the beneficiary for non performance of the applicant under the agreement whereas a normal credit can be encashed once the beneficiary performs under the credit. - Types of payment and performance that can be guaranteed by standby credits are: payment of term bills of exchange repayment of bank advances payments of goods delivered execution of construction contracts, supply and install contracts etc, - To obtain payment, beneficiary merely presents a declaration stating that the applicant has failed to make payment as per the agreement, therefore the payment is due to him.
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Types of Credit
Transferable Credit
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These Credits are mostly used by traders (middlemen) who are not producers/shippers. The buyer (importer) opens a Credit in favor of the trader. When the trader receives the Credit, he can transfer the credit either in full or part to one or several suppliers. The supplier(s) will then use the transferred portion of the credit to ship the goods and present his documents to the traders bank to obtain payment against his Credit. The trader will then substitute the suppliers invoices with his own and claim his payment against the original Credit. Unless otherwise stated, transferrable credits are subject to Article 38 of the UCP 600.

Types of Credit
Back-to-back Credit
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A trader may wish to pay a supplier by transferring a sum owed to him under a Credit though its not transferable. A trader will receive a Credit from a buyer in his name. The trader will open a separate Credit to a third party for the value of the goods/services that he/she is receiving. Funds to make the payment for this Credit will be obtained from the first Credit fvg. Trader. Third party will perform against Credit and submit documents against his credit to obtain payment. Trader will then carefully have to prepare his documents as per the original Credit to get his payment. If the trader cannot supply compliant documents against his Credit, he runs the risk of losing his payment though he has already paid for the goods/services that he received from the third party.

Types of Credit
Back-to-back Credit (Contd..)
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Legally, the two Credits are completely separate even though it relates to same transaction but with two different parties. UCP contains no specific rules on back to back credit.

Assignment of proceeds (Article 39 of UCP 600)

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It is another mechanism to pay a third party against a Credit. Beneficiary of a Credit can assign all or part of proceeds of a Credit even though its not transferrable. Under a Transferable Credit, the original beneficiary transfers his right to perform to another party but under the assignment of proceeds, he does not transfer the right to perform but assigns funds to another party only. Bank that issues the assignment confirmation is liable to transfer the stated amount to the third party when the funds are received only.