After the issue and the notification of a documentary credit, the next step is its actual processing. As we saw in a previous post – Documentary credit – Definition, main actors, how it works – the exporter’s bank can play two roles: 1) It may just notify the exporter that there is a documentary credit in his favor, in which case it plays the role of a notifying bank or 2) It can confirm the documentary credit and therefore plays the role of a confirming bank.
In this post, we look at what happens after the exporter receives the documentary credit from a bank which confirmed it beforehand. We assume in the following that the confirming bank is the exporter’s bank, but that might not always be the case. The different steps of the documentary credit process with a confirming bank are highlighted in the following diagram.
Each step is detailed below.
5. Shipment of goods
The documentary credit is an order confirmation. The exporter ships the goods as agreed in the contract. He receives from the carrier the certificate of acceptance and the proof of shipping.
the goods that can be incorporated into another that will be used for the manufacture of another product
industrial machinery
etc.
The shipping conditions and times depend on the types of goods. Furthermore, it is important to clarify the responsibilities between the parties. This prompted the International Chamber of Commerce to create the Incoterms (International Commercial Terms) in 1936. These are international rules that facilitate communication and clearly define the responsibilities between the parties involved in international trade. We will come back to Incoterms in a future article.
6. Delivery of documents
Once the goods have been dispatched, the exporter collects all the documents mentioned in the contract and hands them over to his bank. There are among others:
Commercial documents: invoice, packing list, certificate of origin, asn.
Technical documents: certificates of analysis, sanitary or phytosanitary certificates issued by public authorities; supervision, control and quality certifications issued by specialized companies (Bureau Veritas, SGS, Lloyds), asn.
Transport documents: bill of lading (B/L), air waybill (AWB), sea waybill (SWB), asn.
Financial documents: commercial paper and other instruments used to obtain the payment of a sum of money.
And so on.
All documents listed in the documentary credit agreement must be returned to the bank. Otherwise, the exporter runs the risk of not being paid because of non-compliance.
7. Payment (by the confirming bank)
After receiving the documents, the confirming bank (exporter’s bank in our simplified model) checks them thoroughly. If they are complete (all documents are present) and compliant (There is nothing suspicious), it proceeds to the payment right away:
Payment at sight: the confirming bank credits the beneficiary with the amount indicated in the confirmed documentary credit.
Deferred payment: the confirming bank indicates its intention to pay at maturity.
Payment by acceptance: the confirming bank accepts a bill drawn on itself by the exporter. The confirming bank may discount the draft to the exporter before the due date. Otherwise the payment is made at term.
Here is the main difference with the process involving a notifying bank. The notifying bank pays the exporter after receiving the funds from the importer’s bank. So the exporter has to wait until the notifying bank receives the payment. The confirming bank on the other hand pays the exporter right after receiving the documents and collects the payment from the importer’s bank. The exporter receives the payment faster. But this service implies additional costs.
8. Sending of documents
The confirming bank sends all documents and, where applicable the proof of payment or bill acceptance, to the issuing bank. The issuing bank checks that the documents are compliant and correspond to those stated in the documentary credit. It is not responsible for verifying its authenticity, even if it can report any defect or problem. In case of missing document, the bank informs its correspondent, the confirming bank.
9. Payment (by the issuing bank)
After verifying that the documents are complete and compliant, the issuing bank pays its correspondent at sight or at maturity according to the agreed terms. The fact that the payment is at sight, deferred or by acceptance, therefore determines when the issuing bank pays the documentary credit. Most of the time, payment is made by issuing a SWIFT MT202 message. The payment instrument used for the settle the transaction is a credit transfer in this case.
10. Delivery of documents
The importer’s bank hands over the complete and correct documents to the importer. Now the importer can take possession of the goods and perform their customs clearance.
11. Payment
The importer can immediately repay the sums paid by his bank to the exporter. But that is not what happens in the majority of cases. In the usual case, the importer makes the expenses for the payment and clearance of the goods. But he does not have enough money to pay his bank in return for the documents received. The bank grants him a credit that he repays with the money earned by selling the goods if all goes well. This explains why the bank must study his client’s activities before accepting the opening of a documentary credit.
This completes the introduction to the documentary credit. The next article will be about the Stand By Letter of Credit (SBLC).
This confirming bank is an additional guarantee to confirm the conformity of the documents in the documentary credit process. Moreover, it is the bank that assumes the credit risk of the issuing bank in addition to the political or transfer risk of the importer's country.
The confirming bank is usually located in the beneficiary's country, is known to the beneficiary, and is usually nominated by the issuing bank as a convenience to the beneficiary. See Practice Note, Commercial Letters of Credit: Basic Structure of a Commercial Letter of Credit.
Documentary credits are a payment method that ensures that the exporter receives payment immediately after the goods have been sent. • Documentary credits can also be used as a financing method, and the terms of the individual documentary credit may stipulate that the importer be granted a credit.
In a Documentary Collections transaction, the exporter's and the importer's banks facilitate the export sale by exchanging shipping documents for payment. However, the banks do not verify that the documents are accurate and do not guarantee payment as they do with Letters of Credit.
At the time the amendment is issued, the issuing bank is bound both by the terms and conditions of the original documentary credit, as well as the terms and conditions of the documentary credit as amended.
Definition. a confirming bank refers to a financial institution that adds its guarantee to a letter of credit issued by the buyer's bank (the issuing bank). When the seller (beneficiary) receives a letter of credit with the confirmation of a bank, it provides an additional layer of security and assurance of payment.
The seller submits a collection order to his or her bank. The seller's bank then submits the collection order to the bank of the buyer. The buyer's bank presents a “presentation document” to the buyer, who then must make a payment or acceptance to his or her bank.
Such an undertaking is considered as irrevocable. In essence, this means that documentary credits can only be amended or cancelled with the agreement of the beneficiary and, if one is in place, the confirming bank. By default, a credit is irrevocable even if there is no indication to that effect.
These documents are tendered by the seller to the advising bank. These documents must agree strictly in accordance with the fundamental principle of strict compliance of the terms of the transaction. If the doctrine of strict compliance is fully observed then no issue arises.
In summary, SBLCs are standby guarantees used as a secondary payment method, LCs are standard financial instruments that guarantee payment upon fulfillment of conditions, and DLCs are LCs that require specific documentation to be presented by the seller for payment.
Documentary credit (or letter of credit) is a method of payment that facilitates and secures international transactions. In practical terms, a bank undertakes, on behalf of its client (the importer), to pay a beneficiary (the exporter) the price of goods or services within a specified time.
One of the main risks of using a documentary collection payment method is that it depends on the cooperation and efficiency of the banks involved. The exporter has to trust that the bank will handle the documents correctly and timely, and that it will follow the instructions given by the exporter.
In such circ*mstances, the issuing bank, at the time of issuing its documentary credit, should send a reimbursem*nt authorisation to the reimbursing bank instructing it to reimburse the claiming bank (a named nominated bank or any bank should the documentary credit be available with any bank).
The Uniform Customs & Practice for Documentary Credits (UCP 600) is a set of rules agreed by the International Chamber of Commerce, which apply to finance institutions which issue Letters of Credit – financial instruments helping companies finance trade.
It is issued by a bank (the issuing bank) at the request of the buyer of goods (the applicant) in favour of the seller of those goods (the beneficiary).
Prior to passing the credit into the hands of a beneficiary, the advising bank's responsibility is to determine that the credit is genuine and has originated from a bank that purportedly issued the credit and not from a post office. Scrutinization of a letter of credit.
A confirming bank is a bank other than the issuing bank that adds its confirmation to credit upon the issuing bank's authorization or request thus providing more security to the beneficiary.
a type of letter of credit that a bank promises to pay even if the bank that gave the original letter of credit does not pay it: In the case of a confirmed letter of credit, a second guarantee of payment is added to the first.
By adding its confirmation, the confirming bank is providing an additional guarantee that assures the beneficiary that payment will be made regardless of the issuing bank's ability to pay. In all cases, payments made under letters of credit are conditioned upon the terms described within the instrument.
Introduction: My name is Nicola Considine CPA, I am a determined, witty, powerful, brainy, open, smiling, proud person who loves writing and wants to share my knowledge and understanding with you.
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