Documentary Credits in International Trade

Introduction:

In the complex world of international trade, mitigating risks for both buyers and sellers is crucial. One financial instrument that plays a pivotal role in facilitating secure transactions is the Letter of Credit (LC), also known as a documentary credit. This article delves into the intricacies of documentary credits, exploring the various parties involved, the LC process, different types of LCs, and the regulatory requirements governing these transactions.

Parties Involved in Documentary Credits:

1.?Applicant (Opener): The importer or buyer.

2.?Beneficiary: The exporter or seller.

3. Issuing Bank (Opening Bank):

a. Issues the LC on behalf of the importer.

b. Undertakes to make payment to the exporter on behalf of the importer.

4.?Confirming Bank:

a.?Adds its undertaking to the LC for payment in case the issuing bank fails.

b. Typically involved when the exporter is not satisfied with the issuing bank's undertaking.

5. Advising Bank:

a. Informs the beneficiary about the opened LC.

b. Confirms the authenticity and credibility of the LC.

6. Negotiating Bank/Nominated Bank:

a. Claims payment from the issuing bank on behalf of the exporter.

b. Verifies documents and confirms terms and conditions to avoid discrepancies.

7. Reimbursing Bank:

a.?Pays the claim received from the negotiating bank against presented documents.

b. Normally the bank with whom the issuing bank holds an account.

LC Process:

1. The buyer and seller enter into an agreement.
2. The buyer opens an LC in Favor of the seller.
3. The issuing bank transmits the LC to the advising bank in the seller's country.
4. The advising bank checks the authenticity and forwards the LC to the seller.
5. Once LC terms are agreed, the seller ships the goods.
6. Documents are sent to the negotiating bank, which raises a reimbursement claim.
7. The reimbursing bank pays the negotiating bank.
8. The negotiating bank makes payment to the beneficiary.
9. The issuing bank, upon receiving compliant documents, notifies the buyer and makes payments.

Types of Letters of Credit:

1. Revocable: Can be revoked without notice.
2. Irrevocable: Cannot be amended or cancelled without consent.
3. Confirmed: Another bank adds confirmation or guarantee of payment.
4. Sight: Payment is made upon presentation.
5. Usance: Payment at a specified usance period.
6. Back-to-Back: Opened against the security of another LC.
7. Standby LC (SBLC): Used as a substitute for performance guarantees or securing loans.

Banks in India and Charges:

Banks in India generally open LCs under various circumstances, including resident Indians importing goods or doing merchanting trade. Charges under import LCs include opening charges/commitment fees and retirement charges.

Export Operations Under LC:

LCs in Favor of Indian residents by non-Indian residents can be for export of goods and services, execution of projects outside India, and deemed exports. Banks perform various functions, including LC advising, LC amendment advising, LC confirmation, discounting/negotiation, and LC reimbursement.

Regulatory Requirements:

Regulatory requirements for documentary credits include trade control requirements, exchange control requirements, and adherence to guidelines such as UCPDC (Uniform Customs and Practice for Documentary Credits) - UCP-600.

Conclusion:

Documentary credits are indispensable tools in international trade, providing a secure framework for transactions between buyers and sellers. Understanding the roles of various parties, the LC process, types of LCs, and regulatory requirements is essential for businesses engaged in cross-border trade, ensuring smoother and risk-mitigated transactions in the global marketplace.