PRESENTATION

ON
DOCUMENTARY CREDITS

PROF. D.TANDON
12/08/2021 1
“LIFE BLOOD OF INTERNATIONAL
COMMERCE”

• A WRITTEN CONDITIONAL UNDERTAKING

ISSUED ON BEHALF OF
IMPORTER(APPLICANT) BY THE ISSUING
BANK TO THE EXPORTER (BENEFICIARY)
TO PAY FOR THE GOODS AND SERVICES
PROVIDED THE TERMS AND CONDITIONS
OF THE CREDIT ARE COMPLIED WITH.
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 IMPORTANT CHARACTERISTICS OF LCs

• IT IS AN UNDERTAKING OF A BANK
• IT IS AN UNDERTAKING TO MAKE PAYMENT
• IT IS AN UNDERTAKING ON BEHALF OF A
PERSON
• IT IS AN UNDERTAKING GIVEN TO A THIRD
PERSON
• IT IS A CONDITIONAL UNDERTAKING. PAYMENT
BEING SUBJECT TO COMPLIANCE WITH CERTAIN
CONDITIONS.
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 GRAPHIC FLOW OF L.Cs

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 GRAPHIC FLOW OF…..

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 GRAPHIC FLOW OF…

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 GRAPHIC FLOW OF….

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 PARTIES TO A L.C.
• COMMERCIAL • APPLICANT
• FIRST BENEFICIARY
PARTIES
• SECOND BENEFICIARY

• ISSUING BANK
• BANKERS • ADVISING BANK
• CONFIRMING BANK
• NOMINATED BANK
• RE-IMBURSING BANK

• INSURER
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• CARRIER 8
 TEN COMMANDMENTS

• 01. THE IMPORTER AND EXPORTER AGREE ON THE

AMOUNT, PRICE, METHOD OF PAYMENT AND ALL
OTHER CONTRACT DETAILS FOR THE GOODS
• 02. THE IMPORTER APPLIES TO THEIR BANK FOR A
L.C. IN FAVOUR OF EXPORTER
• 03. THE BANK PREPARES THE L.C. AND FORWARDS
IT TO THE EXPORTER(BENEFICIARY) THROUGH AN
ADVISING BANK
• 04. THE ADVISING BANK FORWARDS THE CREDIT
TO THE EXPORTER
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 TEN………. CONTD….

• 05. THE EXPORTER PREPARES THE SHIPMENTAND

DOCUMENTATION. THE GOODS ARE DELIVERED
TO THE SHIPPING COMPANY
• 06. THE ORIGINAL L.C. DRAFT AND DOCUMENTS
ARE PRESENTED TO THE NEGOTIATING OR PAYING
BANK
• 07. DRAFT AND DOCUMENTS ARE SENT TO THE
ISSUING BANK
• 08. THE ISSUING BANK EXAMINES THE
DOCUMENTS FOR COMPLIANCE WITH CREDIT
TERMS. DRAWING IS PAID OR ACCEPTED AS
APPRORIATE
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 TEN… CONTD…..

• 09. DOCUMENTS ARE DELIVERED TO THE

IMPORTER

• 10. THE IMPORTER OBTAINS THE GOODS

FROM THE SHIPPING COMPANY

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 TYPES OF CREDIT
• REVOCABLE : • RISKS TO
BENEFICIARY.
BUYER HAS
MAXIMUM
FLEXIBILITY
• IRREVOCABLE :

• SELLER GETS
GREATER
ASSURANCE OF
PAYMENT
• CONFIRMED
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 TYPES OF CREDIT CONTD...

• TRANSFERABLE • BENEFICIARY
VESTED WITH
RIGHT TO MAKE
CREDIT
AVAILABLE IN
WHOLE OR IN
PART TO ONE OR
MORE PARTIES
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 TYPES OF CREDIT CONTD….
• HAS TO BE EXPRESSLY DESIGNED SO BY THE
ISSUING BANK
• GENERALLY TRANSFER FROM ONE
BENEFICIARY TO OTHER ON SAME TERMS AND
CONDITIONS OF ORIGINAL CREDIT - EXCEPT :
• AMOUNT OF CREDIT MAY BE REDUCED
• UNIT PRICE MAY BE REDUCED
• VALIDITY MAY BE CURTAILED
• LATEST SHIPMENT DATE MAY BE CURTAILED
• NAME OF FIRST BENEFICIARY MAY BE
SUBSTITUTED
• INSURANCE COVER CAN BE INCREASED
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 TYPES OF CREDIT CONTD….
• FIXED CREDIT • AVAILABLE FOR
FIXED AMOUNT AND
PERIOD. GETS
EXHAUSTED ONCE
UTILISED FOR
STIPULATED
AMOUNT OR AFTER
THE VALIDITY DATE.
• INSTALMENT
CREDIT • SHIPMENTS MADE
IN SPECIFIC
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QUANTITIES AND
 TYPES OF CREDIT CONTD….
• DEFERRED • ISSUER UNDERTAKES
CREDIT TO PAY THE
BENEFICIARY WITHIN
A FIXED PERIOD OF
TIME FOLLOWING A
SPECIFIED DATE.
• 60/90 DAYS AFTER THE
DATE OF BILL OF
LADING.
• THERE IS NO DRAFT IN
12/08/2021 DEFERRED CREDIT16
 TYPES OF CREDIT CONTD...
• BACK-TO-BACK• CAN BE DESCRIBED AS
CREDIT AND COUNTER-
CREDIT. IT IS A METHOD
OF FINANCING BOTH
SIDES OF A
TRANSACTION IN WHICH
A MIDDLEMAN BUYS
GOODS FROM ONE
CUSTOMER AND SELLS
THEM TO ANOTHER,
BOTH SETTLEMENTS
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BEING MADE UNDER
 TYPES OF CREDIT CONTD….
• REVOLVING • DRAWINGS MADE UNDER THIS
CREDIT CAN BE RE-AVAILABLE TO
THE BENEFICIARY, UPON
RECEIPT OF INSTRUCTIONS
FROM THE OPENING BANK TO
THE EFFECT THAT THE AMOUNT
HAS BEEN REINSTATED IN THE
CREDIT.
• THIS CREDIT IS AUTOMATIC AND
DOES NOT NEED RENEWAL
WITHIN SPECIFIED PERIOD OF
TIME.
• IN INTERNATIONAL TRADE,
REVOLVING LCs ARE
12/08/2021 DISCOURAGED. 18
 TYPES OF CREDIT CONTD…..

ANTICIPATORY

• RED CLAUSE : ENABLES THE BENEFICIARY TO

OBTAIN PRE-SHIPMENT FINANCE FROM A
BANK IN HIS COUNTRY.

• GREEN CLAUSE : ONE THAT ENVISAGES THE

GRANTING OF STORAGE FACILITIES AT THE
PORT IN ADDITION TO PRE-SHIPMENT
PAYMENT TO THE BENEFICIARY.
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 TYPES OF CREDIT CONTD….
STANDBY:
• ISSUED IN LIEU OF PERFORMANCE GUARANTEES OR
BID BONDS. INTENDED TO COVER A NON-
PERFORMANCE (DEFAULT) SITUATION INSTEAD OF A
PERFORMANCE.
CIRCULAR:
• WIDELY USED IN DEVELOPED COUNTRIES. ISSUING
BANK ISSUES THE CREDIT ADDRESSED
GENERALLY,SAY,TO WHOMSOEVER IT MAY CONCERN
IN THE BENEFICIARY FIELD, INSTEAD OF DIRECTLY
ADDRESSING TO THE BENEFICIARY. DELIVERED
DIRECTLY BY ISSUING BANK/BUYER TO BENEFICIARY.
BANK IN CIRCULAR CREDIT NEGOTIATES
BENEFICIARY’S DRAFT AND DOES NOT EXAMINE THE
DOCUMENTS. CREDITS WITHOUT ENGAGING AN
ADVISING
12/08/2021 BANK ARE SUSCEPTIBLE TO FRAUDS. 20
 DOCUMENTARY CREDITS ARE AVAILABLE FOR
SETTLEMENT BY
• ACCEPTANCE
• NEGOTIATION PAYMENT
• DEFERRED PAYMENT

• THE NEGOTIATION UNDER A CONFIRMED

CREDIT IS WITHOUT RECOURSE WHILE ONE
UNDER AN UNCONFIRMED CREDIT IS WITH
RECOURSE TO DRAWER UNLESS SPECIFIED
OTHERWISE.
• A LETTER OF CREDIT NOMINATED IN ANY
OTHER CURRENCY OTHER THAN THAT OF THE
BENEFICIARY WILL BE AVAILABLE BY
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NEGOTIATION
ADVANTAGES AND DISADVANTAGES OF
L.C.s
ADVANTAGE DISADVANTAGE
BUYER PAYMENTS ARE HE MAY HAVE TO
MADE ON HIS PROVIDE A
BEHALF IN DEPOSIT
RETURN FOR “MARGIN” WHEN
DOCUMENTS THE DOCY.
THAT CREDIT IS
REPRESENT THE OPENED
GOODS AND
GIVE HIM
OWNERSHIP OF
THE SAME

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 ADVANTAGES…… CONTD….
ADVANTAGE DISADVANTAGE
SELLER HE CAN LOOK HE CANNOT
TO THE OBTAIN
ISSUING BANK PAYMENT
FOR PAYMENT UNLESS HE
INSTEAD OF COMPLIES WITH
RELYING ON ALL TERMS AND
THE ABILITY/ CONDITIONS OF
WILLINGNESS THE CREDIT
OF BUYER

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 VALUE OF L.Cs TO EXPORTER

• AS THE BENEFICIARY OF A L.C., THE

EXPORTER HAS THE ASSURANCE THAT
PROVODING HE PRESENTS THE DOCUMENTS
IN ACCORDANCE WITH THE TERMS AND
CONDITIONS OF THE L.C., HE WILL RECEIVE
PROCEEDS FROM THE CORRECTLY TENDERED
DOCUMENTS
• THE FINANCIAL STANDING IS REPLACED BY
THAT OF THE ISSUING BANK WHO
UNDERTAKES TO PAY, ACCEPT OR NEGOTIATE
AGAINST PRESENTATION OF DOCUMENTS
DRAWN
12/08/2021
IN CONFORMITY TO THE LC TERMS24
 VALUE TO EXPORTER…..
CONTD….

• A CONFIRMED L.C. WILL PLACE THE ONUS ON

THE NOMINATED BANK AND PROVIDES THE
BEST SECURITY FOR THE EXPORTER. THUS,
WITH A CONFIRMED CREDIT THE
PAYING/NEGOTIATING/ACCEPTING
BANK/OTHER BANK ACTING AS THE
CONFIRMING BANK GIVES A DEFINITE
UNDERTAKING THAT THE PROVISIONS FOR
PAYMENT/NEGOTIATION/ACCEPTANCE WILL BE
FULFILLED WITHOUT RECOURSE TO THE
DRAWER
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 VALUE OF LCs TO IMPORTER

• THE IMPORTER RECEIVES THE DOCUMENTS

THAT WERE SPECIFIED BY HIM AND EMBODIED
IN THE LC BY THE ISSUING BANK.
• HE IS ASSURED THAT HE WILL BE DEBITED
WITH THE VALUE OF THE LC PROVIDING ALL
THE LC TERMS HAVE BEEN COMPLIED WITH.
• HE IS ABLE TO CONSERVE CAPITAL, AS HE
DOES NOT HAVE TO PAY CASH IN ADVANCE.
• HIS ABILITY TO DO BUSINESS ABROAD IS
INCREASED AS THE LC ASSURES THE
SUPPLIER OF PAYMENT.
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 VALUE TO IMPORTER… CONTD...

• BECAUSE OF ASSURANCE OF PAYMENT,

HE CAN NEGOTIATE BETTER PRICE AND
TERMS.

• HE CAN BROADEN HIS SOURCES OF

SUPPLY.

• IT ENABLES HIM TO MEET A SUPPLIER’S

REQUEST
12/08/2021 FOR PAYMENT BY WAY OF LC.
27
 BANKS’ ROLE IN DOCY. CREDITS

• ASSIST IN THE SETTLEMENT OF

INTERNATIONAL TRANSACTIONS.
• PROVIDE SAFEGUARDS FOR THE PARTIES
INVOLVED.
• ENSURE PAYMENT, PROVIDED TERMS ARE
COMPLIED WITH.
• DEAL IN DOCUMENTS, AND NOT IN GOODS
OR
• SERVICES, AND PAYMENTS ARE MADE ON THIS
BASIS.
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CHECKLIST DOCY. CREDITS FOR BANK’S
PARTIES AND DESK OFFICERS

• EVALUATE THE CREDIT IMMEDIATELY AND IF

ANY TERM AND CONDITION CANNOT BE
COMPLIED WITH REQUEST THE BUYER TO
AMEND.
• IS IT SUBJECT TO UNIFORM CUSTOMS AND
PRACTICE ?
• IS IT IRREVOCABLE AND CONFIRMED BY YOUR
BANKER AS REQUESTED ?
• IS COMPANY PROPERLY LISTED AS
BENEFICIARY?
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 CHECKLIST…. CONTD….

• IF NOT CONFIRMED, CHECK WHETHER IT IS

AVAILABLE IN YOUR COUNTRY. IF NOT,
PAYMENT FOR THE GOODS WILL BE DELAYED
AND YOUR SECURITY OF PAYMENT REDUCED.
• DOES ANY DOCUMENT REQUIRE SPECIAL
DECLARATIONS, ENDORSEMENTS OR
CERTIFICATE?
• DOES IT CALL FOR THE CORRECT TRANSPORT
DOCUMENT FOR METHOD OF CARRIAGE?
• CHECK CAREFULLY PRESENTATION TIME
LIMITS
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 CHECKLIST…. CONTD….

• DOES IT STATE WHAT INSURANCE RISKS ARE

COVERED.

• PREPARE AND SUBMIT ONLY DOCUMENTS

CALLED FOR IN THE CREDIT.

• IF POSSIBLE, PARTY SHOULD DESIGNATE ONE

PERSON IN THE COMPANY TO CONTROL, CO-
ORDINATE AND VERIFY THE PROGRESS OF THE
LETTER OF CREDIT.
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 CHECKLIST…. OPERATIONAL
• ENSURE THAT THE IMPORTER IS YOUR
CUSTOMER WHO MAINTAINS REGULAR
ACCOUNT AND IS KNOWN TO BE IN THE
TRADE.
• THE IMPORTER SHOULD HOLD IMPORTER-
EXPORTER CODE NO. ALLOTTED BY DGFT.
• THE IMPORTER WILL BE IN A POSITION TO
RETIRE THE BILL RECEIVED UNDER L.C. AND
BE ABLE TO CLEAR GOODS BY PAYING
NECESSARY CUSTOMS DUTIES.
• THE VALUE OF IMPORTS SHOULD
COMMENSURATE WITH HIS BUSINESS
REQUIREMENTS.
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 CHECKLIST…. OPERATIONAL….

• IF LC IS FOR A LARGE VALUE, A

SATISFACTORY CREDIT REPORT ON THE
OVERSEAS SUPPLIER SHOULD BE OBTAINED.

• THE IMPORT IS COVERED BY VALID IMPORT

LICENCE OR IS PERMISSIBLE WITHOUT A
LICENCE.

• IF UNDER LICENCE, IMPORTER SHOULD BE IN

POSSESSION OF EXCHANGE CONTROL COPY
OF12/08/2021
LICENCE. 33
 CHECKLIST … OPERATIONAL...
• LC APPLICATION SHOULD BE ACCOMPANIED
BY THE IMPORTER’S CONCURRENCE FOR
CRYSTALLISATION OF FOREIGN CURRENCY
LIABILITY ON UNPAID BILLS INTO RUPEE
LIABILITY ON THE 10TH DAY FROM THE DATE
OF RECEIPT OF DOCUMENTS.
• LC APPLICATION IS ACCOMPANIED BY
UNDERLYING SALE CONTRACT ETC. AND
ESSENTIAL DETAILS IN APPLICATION SHOULD
CORRESPOND TO THE SALE CONTRACT.
• BILL OF LADING / AWB SHOULD INDICATE
NAME AND ADDRESS OF IMPORTER / AD.
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 CHECKLIST… OPERATIONAL...

• LAST DTAE FOR SHIPMENT IS WITHIN THE

VALIDITY OF LICENCE AND PERIOD ALLOWED
FOR PRESENTATION OF DOCUMENTS -SHOULD
NOT EXCEED 21 DAYS FROM DATE OF
SHIPMENT.

• IF INTEREST PAYMENT IS INVOLVED UNDER

“NORMAL INTEREST CLAUSE” THE RATE OF
INTEREST PAYABLE DOES NOT EXCEED THE
PRIME RATE OF THE COUNTRY OF THE
CURRENCY
12/08/2021 IN WHICH GOODS ARE INVOICED.
35
 CHECKLIST… OPERATIONAL...
• L.C. SHOULD CLEARLY INDICTAE TERMS OF
SALE SUCH AS FOB/C&F/CIF ETC.

• IF LC PROVIDES IMPORTS FROM MORE THAN

ONE COUNTRY, AND BENEFICIARY IS ONE,
AMOUNTS OF CREDIT AVAILABLE AGAINST
SHIPMENT FROM EACH COUNTRY SHOULD BE
SPECIFIED SEPARATELY.

• IF LC ON REVOLVING BASIS AGGREGATE

DRAWINGS DO NOT EXCEED THE VALUE OF
LICENCE AND SHIPMENT SHOULD BE WITHIN
THE VALIDITY OF LICENCE.
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 CHECKLIST… OPERATIONAL...

• FOLLOWING PARTICULARS SHOULD BE

ENTERED IN LC REGISTER:
• NUMBER OF LC AND DETAILS THEREOF IN
CHRONOLOGICAL ORDER
• DETAILS OF CHARGES COLLECTED FOR THE LC
• DETAILS OF ENDORSEMENTS MADE ON
VARIOUS LICENCES
• IRRESPECTIVE OF TERMS OF SALE FOR WHICH
LC OPENED, LICENCE IS ENDORSED FOR CIP
VALUE PLUS INTEREST AND AGENCY
COMMISION, IF ANY.
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 CHECKLIST… OPERATIONAL…
• ENDORSEMENTS ARE MADE IN THE
APPROPRIATE COLUMN OF LICENCE.
• ALL ENDORSEMENTS CARRIED OUT TO
SEPARATE SHEETS ATTACHED TO LICENCE
ARE PROPERLY AUTHENTICATED.
• IF LC OPENED WITH RBI APPROVAL,THEIR
REFERENCE NUMBER AND DATE ARE QUOTED
ALONGWITH THE ENDORSEMENTS.
• ENDORSEMENTS ARE MADE OVER THE LETTER
OF AUTHORITY/TRANSFER LETTER ALSO.
• WHILE OPENING LC WHEREVER NECESSARY,
REIMBURSEMENT INSTRUCTIONS ARE ISSUED
SIMULTANEOUSLY.
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 CHECKLIST… OPERATIONAL….

• IF LC IS FOR DEFERRED PAYMENT IMPORTS,

RBI APPROVAL IS OBTAINED BEFORE OPENING
LC AND PAYMENT TERMS ARE STRICTLY AS
PER SCHEDULE APPROVED BY RBI.

• DOCUMENTS RECEIVED UNDER LC ARE

DELIVERED TO THE IMPORTER AFTER
COMPLIANCE WITH REQUISITE FORMALITIES.

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