Arun Kumar Trivedi

Documentary Letters of Credit

There is always an underlying agreement between the principal parties to a trade transaction, often a buyer and a seller. The agreement may be verbal or written in a formal or informal language. Its terms may be simple or complex, as the parties may feel necessary. Such an underlying agreement is referred to as a “sale contract”.

Methods of Payment Settlement

There are different methods of payment settlement. The following statement if made by the issuing bank, “We hereby engage that payment will be duly made against documents presented in conformity with the terms of this credit”.

Negotiation of Documents

The seller may sometimes present documents that do not meet the letter of credit requirements. In such a case, the bank may act in one of the following ways:

Services Offered by Commercial Banks

The finance of international trade forms an important part of any major bank’s services package. Many banks have specialised departments to handle the various aspects involved, comprising experienced staff able to cope with the demands of customers with overseas business to transact.

SWIFT and Letters of Credit

SWIFT is a global member-owned cooperative, headquartered in Belgium. SWIFT’s international governance and oversight reinforces the neutral, global character of its cooperative structure. SWIFT’s global office network ensures an active presence in all the major financial centres.

Letters of Credit –Types

Let us understand letter of credit and its various types with the help of a grid as in Fig. 7.1.

Common Irregularities in Documents

It is essential that documents called for in a documentary letter of credit comply correctly and are in accordance with the terms of the credit. However, mistakes do occur and these cause extra work for the exporter and the bank(s) involved. This extra work causes delay in receiving payment from the importer/bank, and may involve extra cost for the exporter. The irregularities/discrepancies can be avoided by paying due attention.

Export Risks Insurance and ECGD

In the case of normal trade, a small seller/exporter may be able to protect him or herself against non-payment by his local buyers for whatever reason provided that it cannot be shown that the seller was responsible for the nonpayment, i.e. by not fulfilling his side of the contract. Non-payment is not the only risk faced in the selling of goods and/or services overseas. These risks may be beyond the control of the overseas buyer. Therefore, exporters and service providers do not wish to take such risks in selling their goods and services overseas. To protect exporters from these types of risks cover can be provided by the ECGD.

Methods of Trade

In international markets the situation is often more complex than in local markets. In local markets it is possible that the parties may have known each other for some time and have built a certain level of trust. Trading risk in local markets is much less than in international markets. There are a number of methods of trade and settlement of trade accounts. Details of various methods of trade that are available to buyers and sellers for trading indicating the risks involved and the benefits are discussed in the following pages. Before importers and exporters decide to do business with each other they need to understand and adopt a method suitable to meet their specific needs.

Guarantees and International Bonds

Guarantees and international bonds are two separate subjects. A guarantee is usually an undertaking given by a person/guarantor as security for a credit facility offered by a creditor/bank to a borrower. An international bond is an undertaking given by a bank or issuer at the request of its customer (contractor/supplier) in favour of a project owner or beneficiary/buyer in another country.