INTERNATIONAL TRADE Mrs.

Veronika Siklósi
D R . K ATA L I N C S E K Ő P H D
5 T H L E C T U R E : D O C U M E N TA RY C R E D I T Banking expert
 DOCUMENTARY CREDIT 1.

Usage set up by the International Chamber of Commerce;

The latest The predecessor is the Commercial letter of credit (CL/C); That is the reason why the
documentary credit is frequently called today as „letter of credit” although they are not of the same.
version: UCP 600;
The electronic form has already been introduced;
Term: An irrevocable promise of payment or undertaking issued by a
bank (issuing bank=buyer’s bank) on behalf of her own as to the terms and conditions of her own to
a named beneficiary (seller);
Payment will be effected by the bank, provided that the stipulated documents are submitted without
any discrepancy: that is to say in full compliance with each other and with terms of documentary
credit itself within the expiry date, at the nominated or at the issuing bank;
 DOCUMENTARY CREDIT 2. THE
PRINCIPLES

1. Principle of independence = the payment under the documentary credit is completely

separated from the underlying transactions;
The involved banks deal only with documents and never with the good itself;
2. Principle of strict compliance= the issuing and confirming bank is obliged to pay if
there is no discrepancy in the documents=when they are letter by letter of the same and
identical with the terms & conditions of the documentary credit;
3. Principle of fraud exemption=the issuing and the confirming bank can reject the
payment only in case of fraud, fraudulency in the transaction, or of forged documents,
BUT in the possession of a valid decision of a court in competence;
DOCUMENTARY (OR LETTER OF )
CREDIT FLOWCHART 3.
 DOCUMENTARY CREDIT 4. THE ISSUANCE

1. The Buyer= The applicant gives order to

his bank= issuing bank to issue a documentary credit= to undertake an irrevocable
promise to pay to the seller=beneficiary;
2. The buyer concludes a contract of reimbursement and lays a coverage for the value of the
goods + banking charges;
3. The Buyer’s bank= issuer issues the doc. credit, which is a contract including the promise
of payment and send it as a SWIFT message to the seller’s bank =advising bank;
4. Advising bank= a bank which has been nominated by the issuer to give a notice upon the
issuance towards the seller;
5. Involved banks can be nominated to other functions such as: confirmation, negotiation,
paying;
 DOCUMENTARY CREDIT 5. DETAILS OF AN APPLICATION
Types of the documentary credit:
irrevocable or revocable; confirmed; negotiable or freely negotiable;
It must contain:
Name, and address of the beneficiary;
Name and address of the applicant, buyer;
The total amount of the documentary credit;
Unit price;
The quantity of goods;
Delivery term as to Incoterms 2020;
Delivery time;
Expiry date and place;
The (brief) description of the goods;
The specific type and the required copies of documents;
 Transhipment; Partial shipment allowed or not.
 DOCUMENTARY CREDIT 6. THE HONORING=PAYMENT

1. Seller = the beneficiary performs = delivers the goods, and acquires all documents of
the performance such as commercial invoice, weight list, ocean bill of lading, certificate
of origin;
2. Seller forwards the documents stipulated by the doc. credit to the advising bank in
order to present them to the issuing bank for payment;
3. The issuing bank receives the documents check them word by word (or letter by letter)
in 5 banking working days and declares whether or not they are in the best order

If the presentation is in full compliance with the terms and condition of the doc. credit and
within the expiry and honors:
Pay at sight;
Pays at deferred time e.g. at 60 days on board;
Accepts a bill of exchange drawn upon the issuer;
 DOCUMENTARY CREDIT 7. FUNCTIONS=
NOMINATIONS OF INVOLVED BANKS

Advising bank has a „postman” function, but must check the authenticity of the Documentary
Credit and must take over and forwards the seller’s document. It act in the name of the issuing bank
as its agent.
Confirming bank adds the confirmation of its own to the original documentary credit, on issuing
bank’s request. It means the confirming bank undertakes to pay in its own name against the
documents in full conformity with the original documentary credit. The beneficiary (the seller) must
submit the documents first to the confirming bank.
Negotiating bank „purchases” as nominated bank drafts, (drawn on a bank other than the
nominated bank, commonly on the issuer and the confirmer) and gives money in advance for
complying documents, discounting interests + banking charges due from the date of payment until
the negotiating bank receives reimbursement from the issuing bank;
Paying bank is a nominated bank for making the payment, a bank with which the credit is
available.