Text III. THE DOCUMENTARY LETTER OF CREDIT

    This is usually the most secure and prompt method of payment but it can involve the most headaches.

    A Documentary Credit can be defined in simple terms as a written undertaking given by a bank on behalf of a buyer to pay the seller an amount of money within a specific time, provided the seller presents documents to the bank, strictly in accordance with the terms and conditions laid down in the Letter of Credit. In other words, the buyer effectively provides the seller with a guarantee of payment, in return for an assurance from a bank that the required documentation has been delivered to that bank’s satisfaction. It is important to note that banks deal only in documents and not in goods. They cannot be concerned with the underlying sales contract, but determine whether the terms and conditions of a credit have been met on the basis of documents alone.

There are three types of Documentary Credit – the Revocable Credit, the Irrevocably Credit, and the Irrevocably Confirmed Credit.

1. Revocable Credits are, as the name implies, credits which can be cancelled or amended by an importer (or an exporter) up to the point where the goods are shipped and documents presented to the paying bank. As such, they should be avoided and in fact are rarely used.

2. An Irrevocably Credit means that the obligations of both parties to the credit cannot be altered in any way, without the agreement of both the buyer and the seller.

When contract terms are negotiated for settlement by Letter of Credit, the buyer requests his bank (the opening bank) to open a credit in favour of the buyer (the beneficiary). If his bank is prepared to extend a facility for this purpose, then it will instruct a bank in the exporter’s country to advise the exporter that the credit has been established and will incorporate details of the terms and conditions which must be fulfilled in order to obtain payment. What this means is that the opening bank stands between the buyer and seller, guaranteeing payment subject to the necessary conditions being fulfilled.

This is perfectly acceptable and quite normal when dealing with a reputable bank in a politically and economically sound country. However, you may not have heard of the bank and the country involved may well have debt problems, or there may be concern over its political stability. What you would really like is someone you can trust standing between you and the overseas bank taking on responsibility for guaranteeing the credit. In these circumstances you could ask for the credit to be confirmed by a UK clearing bank.

3. Irrevocably Confirmed Credit. Should the UK bank be in a position to add its confirmation to the credit (and this is not necessarily a foregone conclusion) then the exporter has that bank’s guarantee that, provided all conditions of the credit are fulfilled, payment will be made irrespective of what might happen to the opening bank or indeed the originating country. Maximum security of payment is gained by having a credit confirmed in this way, but the ability to confirm depends on the credit line the advising banks is prepared to extend to the opening bank. In some instances, in Iran a UK bank would be precluded from adding its confirmation by the Iranian authorities themselves.

These then are the basic types of credit available to you. As you become involved in exporting you will hear of other variations designed to meet specific purposes and which include Transferable Credits, Revolving Credits, Standby Credits, and so on. Any of these may be appropriate to your particular needs, and you should make early contract with your own bank for further details. Along with their other publications on exporting, most banks supply comprehensive booklets on documentary credits. These are highly recommended as a sound source of reference.

    Whatever form of credit you encounter the general rules are the same. The first point to appreciate is that the paying bank has a mandate to pay, if the documents are in order and the terms and conditions are complied with precisely. Regrettably, over 50 per cent of credit cannot be paid on first presentation due to discrepancies. Many of these could easily be avoided by the beneficiary adopting a disciplined approach to his presentation procedure.

 

Vocabulary notes

headaches – головные боли

prompt – быстрый

provided – при условии

strictly in accordance – в строгом соответствии

to imply – иметь в виду

to cancel - отменять

to amend - исправлять

to appreciate – оценивать

beneficiary – владелец фонда, собственник

reputable bank – надёжный банк

involved – заинтересованный

forgone conclusion – заранее принятое решение

irrespective - независимо

instances - случаи

to preclude – предотвращать

discrepancies – разногласия

regrettably – к сожалению

 

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