Banking. Letter of credit form of payment: its essence and scope of application (the most important)

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Banking. Letter of credit form of payment: its essence and scope of application (the most important)

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Topic 48. Letter of credit form of payment: its essence and scope

Export-import operations can be complicated by a number of circumstances: time and risk of transportation, customs formalities, import-export restrictions, as well as the fact that the buyer and seller are separated from each other by borders; in addition, a situation is possible when the parties do not know anything about the business reputation and honesty of the partner.

Under these conditions, the buyer needs that he will receive exactly the goods that were ordered; it is in the interests of the seller to receive payment for the goods as soon as possible.

To ensure the observance of the interests of both parties in international banking practice, documentary letters of credit are widely used.

Letter of credit - an obligation taken by the bank on behalf of the buyer to pay the entire cost of the goods within a certain period of time upon presentation of predetermined documents. A letter of credit gives the seller a guarantee to receive payment from the buyer.

Documentary Credit Scheme.

1. The importer and exporter enter into a contract that specifies that payments for the delivered goods will be made in the form of a letter of credit. Letters of credit are issued by banks on the basis of receipt of an application from the importer (applicant under the letter of credit), which actually repeats all the conditions of the section of the contract relating to the procedure for payments.

2. After the conclusion of the contract, the exporter prepares the goods for shipment, of which he notifies the importer.

3. Having received such notice, the buyer sends to his bank an application for opening a letter of credit, in which he indicates all the necessary conditions. The bank that opens the letter of credit (issuing bank) acts on the basis of the orderer's instructions.

4. After the opening of the letter of credit, in which the issuing bank indicates how the funds will be credited, the letter of credit is sent to the exporter (beneficiary) in whose favor it is opened. In this case, the issuing bank sends a letter of credit to the beneficiary, as a rule, through the bank that serves it and whose tasks include advising the letter of credit to the exporter (advising bank).

5. Having received a letter of credit from the issuer, the advising bank, by external signs, checks its authenticity and transfers it to the beneficiary. The advising bank also receives a copy of the letter of credit or telex, since it is authorized to receive the documents under the letter of credit from the beneficiary, check them and send them to the issuing bank.

6. Having received a letter of credit, the beneficiary checks it for compliance with the terms of the contract. If the beneficiary agrees with the terms of the letter of credit opened in his favor, he will ship the goods within the established time limits.

7. The exporter receives the transport documents from the carrier.

8. The exporter submits them together with other documents required by the letter of credit (invoices, specifications, certificates, etc.) to his bank within no more than 21 days.

9. After verification, the exporter's bank sends the documents to the issuing bank for payment, indicating in its cover letter how the proceeds should be credited.

10. Having received the documents, the issuer checks them and then transfers the payment amount to the exporter's bank.

11. At the same time, the issuing bank collects funds from the importer by debiting his account.

12. The exporter's bank credits the proceeds to the beneficiary.

13. The importer, having received documents from the issuing bank, takes possession of the goods.

A feature of the letter of credit form of payment is that the seller does not care about the solvency and desire of the buyer to make a payment. The seller insures his claim by the fact that the bank gives him a payment obligation, which depends only on the provision of certain documents and the fulfillment of the conditions of the letter of credit.

After the conclusion of the contract, the exporter prepares the goods for shipment, which he notifies the importer, as a rule, by telex.

Having agreed to pay for the imported goods using a letter of credit, the buyer applies to his bank with a request to issue such a letter of credit. The buyer fills out an application and submits it to the bank.

Application. A letter of credit is a reliable and most convenient method, primarily for the exporter, compared to all other means of payment (collection, payment by check, advance payment, net payment). A letter of credit most fully ensures the timely receipt of export proceeds. Payments in the form of a documentary letter of credit are more typical for transactions involving payment against the presentation of documents by the exporter (cash payment) or the provision of a short-term (up to 1 year) commercial loan to the buyer. The use of a documentary letter of credit to pay the full cost of goods when paying for a medium-term commercial loan is extremely insignificant.

Types of letters of credit: A REVOCIABLE L/C may be changed or canceled by the issuing bank at any time without prior notice to the beneficiary. IRREVOCABLE CONFIRMED LETTER OF CREDIT provides an additional guarantee of payment from another bank that is not the issuing bank. The bank that confirmed the letter of credit assumes the obligation to pay for the documents that comply with the terms of the letter of credit if the issuing bank refuses to make payment. A TRANSFERABLE letter of credit focuses on the needs of international trade and allows a reseller to transfer its right to receive funds from a client's letter of credit to a supplier. A REVOLVING letter of credit is issued for an amount that remains unchanged for a specified period of time. With a letter of credit WITH "RED CLAIMS", the seller may demand from the correspondent bank an advance payment for the agreed amount, which is intended to finance the production or purchase of goods supplied under the letter of credit.

In a letter of credit WITH INSTALLMENT PAYMENT, the beneficiary receives payment not upon handing over the documents, but at a later date stipulated in the letter of credit.

Authors: Shevchuk D.A., Shevchuk V.A.

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