DOCUMENTARY CREDITS

(Letter of Credit)

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 DOCUMENTARY CREDITS
• Documentary credit is as assurance of payment by the bank .
• It is an arrangement under which the bank , at the
request of the buyer or on its own , undertakes to
make payment to the seller provided specific
Documents are submitted .
• Documentary Credits are akin to bank guarantee.
• Documentary Credits in Popular Language are
Known as LETTER OF CREDIT (LC)

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 PARTIES TO DOCUMENTARY CREDITS

• 1 . Commercial Parties .
• There are two commercial parties. Applicant &
Beneficiary .

• A . Applicant
• The applicant is normally the buyer of the goods . i.e.
the importer who request his bank to issue a letter of
credit in favor of a named beneficiary against
tendering of certain specified documents .

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PARTIES TO DOCUMENTARY CREDITS

• The Role of Applicant .

• Supply the bank with complete instruction .

( To fill out standard application form )
• Issue instruction for amendments if any
• Decide on discrepancies reported by the issuing bank
to him
• Arrange for funds at the payment time .

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 PARTIES TO DOCUMENTARY CREDITS
• B. Beneficiary
• The beneficiary is normally the seller of goods who
receives payment under documentary credit if he has
complied with terms and conditions thereof .
• A credit issued in favor of the beneficiary to enable him
or his agent to obtain payment once he performed his
part of contract and submitted stipulated documents
showing compliance with the terms and conditions of
letter of credit .
• In case of a transferable letter of credit , the credit is
transferred to another party, the original beneficiary is
known as first beneficiary the person to whom the credit
is transferred is known as the second beneficiary .
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PARTIES TO DOCUMENTARY CREDITS
• The Role of Beneficiary
• Establish the terms of payment when sales contracts is
being Negotiated
• Assess the risk of non payment even when compliant
documents are presented in the case of unconfirmed LCs.
• Provide the draft wordings to buyer regarding LC Terms
• Scrutinize LC on receipt from the advising bank to check
whether it is in consonance with the sales contract and
whether it is otherwise workable and acceptable to him .
• Request for LC amendments from buyer
• Provide copy of the credit to dispatch department and
cargo agent to ensure correct documentation .

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 PARTIES TO DOCUMENTARY CREDITS
• 2. Bankers
• .Issuing Bank : -
• The issuing bank or the opening bank is one which issue the
credit , i.e. undertake , independent of the Undertaking of the
applicant, to make payment provided the terms and conditions
of the credit have been complied with
• .Advising Bank
• The advising bank advises the credit to the beneficiary thereby
authenticating the genuineness of the credit
• .Confirming Bank
• A confirming bank is the one which adds its guarantee to the
credit . It undertakes the responsibility of payments /
negotiation / acceptance under the credit in addition to that of
the issuing bank .

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PARTIES TO DOCUMENTARY CREDITS

• .Nominated Bank
• A Nominated bank is the bank nominated or
authorized by issuing bank to pay , to incur a
deferred payment liability , to accept drafts or to
negotiate the credit
• .Reimbursing Bank
• A reimbursing bank is the bank authorized to
honour the reimbursement claims in settlement
of negotiation with the paying or accepting
bank .

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 PARTIES TO DOCUMENTARY CREDITS
• 3. Related Parties
• .Insurer
• The insurer has the prime responsibility for
insuring the goods as provided for in the credit .
• .Carrier
• The carrier , i.e. the shipping company or airline
or road transport agency is responsible for safe
arrival of the goods at the destination .

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 STAGES IN PERFORMANCE OF
LETTER OF CREDIT

• Stage 1 Opening of Letter of Credit ( Application for LC )

• Stage 2 Mailing of LC to Beneficiaries bank

• Stage 3 Examination of LC by Exporter

• Stage 4 Amendments to LCs

• Stage 5 Confirmation

• Stage 6 Shipment

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 STAGES IN PERFORMANCE OF
LETTER OF CREDIT

• Stage 7 Collection of Documents

• Stage 8 Presentation of Documents

• Stage 9 Examination of Documents by Issuing Bank

• Stage 10 Handling of Discrepant Documents

• Stage 11 Settlement of Payment .

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 GENERAL DOCUMENTS UNDER
DOCUMENTARY CREDITS
• Commercial Invoice

• Packing List

• Bill of lading and other transport documents

• Certificate of Origin

• Inspection Certificate

• Bill of Exchange

• Insurance Documents

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