Unit 4.
Documentary Letters of Credit
1. In
international trade, where buyers and sellers are far apart in two different
countries, or even continents, the Letter of Credit acts as a most convenient
instrument, giving assurance to the sellers of goods for payment and to the
buyers for shipping documents, as called for under the Credit.
2. In order to
bring a uniformity in matters pertains to LC Documents and Transactions,
International
Chamber of
Commerce formed rules and procedures. Those are called as Uniform Customs and Practices
for Documentary Credits (UCPDC).
3. The
International Chamber of Commerce (ICC)was established in 1919 headquartered at
Paris.
4. The first
UCPDC published in 1933 and has been revised from time to time in 1951, 1962, 1974,
1983, 1993 and recently in 2007.
5. The updated
UCPDC in 2007 is called as UCPDC 600.And it has been implemented w.e.f 1-7-2007
6. Documentary
Credit/Letter of Credit: LC/DC cane be defined as a signed or an authenticated instrument
issued by the buyer’s Banker, embodying an undertaking to pay to the seller a
certain amount of money, upon presentation of documents, evidencing shipment of
goods, as specified, and compliance of other terms and conditions..
7. IN an LC
Parties are as follows:
a. The
buyers/Importers or the applicant – on whose behalf LC is opened.
b. The
Sellers/Exporters or the Beneficary of the LC
c. The opening
Bank (Buyer’s Bank), who establishes the LC
d. The advising
bank (Bank in sellers country), who acts as an agent of the issuing bank and
8. Types of
Letters of Credit
a. Revocable LC
b. Irrevocable LC c. Irrevocable Confirmed LC d. Transferable LC e. Red Clause
LC
f.
Sight/Acceptance, Deferred Payment, or Negotiation LC g. Back to Back LC
9. Revocable LC
can be amended or cancelled at any moment by the issuing bank without the consent
of any other party, as long as the LC has not been drawn or documents taken up.
10. In case the
Negotiating Bank has taken up the documents under revocable LC, prior to
receipt of cancellation notice, issuing bank is liable to compensate/reimburse the
same to the negotiating bank.
11. Irrevocable
LC which holds a commitment by the issuing bank to pay or reimburse the negotiating
bank, provided conditions of the LC are complied with.
12. Irrevocable
LC cannot be amended or cancelled without the consent of all parties concerned.
13. The
irrevocable LC is an unconditional undertaking by the issuing bank to make
payment on submission of documents conforming to the terms and conditions of
the LC
14. All LCs
issued, unless and otherwise specified, are irrevocable Letter of Credits.
15. Irrevocable
confirmed LC is an L/c which has been confirmed by a bank, other than the
issuing a bank, usually situated in the country of the exporter, thereby taking
an additional undertaking to pay on receipt of documents conforming to the
terms & conditions of the LC
16. The
Conforming Bank can be advising Bank, which on receipt of request from the
issuing bank takes this additional responsibility.
17. The
conforming bank steps into the shoes of the issuing bank and performs all
functions of the
18.
Transferrable LC is available for transfer in full or in part, in favour of any
party other than beneficiary, by the advising bank at the request of the
issuing bank.
19. Red Clause
LC enables the beneficiary to avail pre-shipment credit from the
nominated/advising bank. The LC bears a clause in “RED Letter” authorizing the
nominated bank to grant advance to the beneficiary, prior to shipment of goods,
payment of which is guaranteed by the Opening Bank, in case of nay default or
failure of the beneficiary to submit shipment documents.
20. Under a
Sight LC, the beneficiary is able to get the payment on presentation of
documents conforming to the terms and conditions of the LC at the nominated
bank’s countries.
21. Under the
Acceptance Credit, the bill of exchange or drafts are drawn with certain Usance
period and are payable upon acceptance, at a future date, subject to receipt of
documents conforming to the terms and condition of the LC.
22. A Deferred
Payment Credit is similar to Acceptance Credit, except that there is no bill of
exchange or draft drawn and is payable on certain future date, subject to
submission of credit confirmed documents. The due date is generally mentioned
in the LC
23. A
Negotiation Credit, the issuing Bank undertakes to make payment to the Bank,
which has
24. In a
Negotiation LC, LC may be freely negotiable or may be restricted to any bank
nominated by
25. Back to Back
LC: when an exporter arranges to issue an LC in favour of Local supplier to procure
goods on the strength of export LC received in his favour, it is known as Back
to Back LC.
26. UCP 600 come
into force w.e.f. 01/07/2007.
27. Main features
of UCP 500 Vs UCP 600:
28. Important
Changes in the Articles of UCP 600 and their implication for the Banks:-
- A reduction in
the number of articles from 49 to 39
- New articles
on "Definitions" and "Interpretations" providing more
clarity & precision in the rules
- A definitive
description of negotiation as "purchase" of drafts of documents
- The
replacement of the phrase "reasonable time" for acceptance or refusal
of documents by a maximum period of five banking days
- New provisions
allow for the discounting of deferred payment credits
- Banks can now
accept an insurance document that contains reference to any exclusion clause
29. UCP 600 does
not apply by default to letters of credit issued after July 1st 2007. A
statement needs to be incorporated into the credit (LC), and preferably also
into the sales contract that expressly states it is subject to these rules.
30. Revocable
Credits (Article 2): One of the most important changes in UCP 600 is the
exclusion of any verbiage regarding revocable letters of credit, which can be
amended or canceled at any time without notice to the seller. .Actually,
Article 2 explicitly defines a credit as "any arrangement, however named
or described, that is irrevocable and thereby constitutes a definite
undertaking of the issuing bank to honour a complying presentation."
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