Letter of Credit

Introduction
Banks, as we know, lend money to the public, for various purposes. Like purchase of a home, a car, or other consumer durables etc. They also extend loans to Industries that manufacture various goods, and machineries, and also to service industries that provide various services, like a salon, internet kiosk, etc., to the community.

Banks play a vital role in the development process of any nation, by providing finance for different activities related to trade and commerce. This includes both domestic and international trade and commerce.

One of the ways in which commercial banks facilitate international trade and commerce, is by way of extending a non funded financing facility or mechanism called the Documentary Credit (DC), or the Letter of Credit (LC).

This mechanism to facilitate international trade was developed under the auspices of the International Chamber of Commerce, Paris. The rules and regulations etc., governing the Documentary Credits, and the transactions there under, are contained in what is known as the Uniform Customs and Practices for Documentary Credits.

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Meaning
Documentary Credit is an International trade procedure in which the credit worthiness of an importer is substituted by the guarantee of a bank for specific transaction. Under documentary credit arrangement (also called as letter of credit arrangement) a bank (usually in the importers country) undertakes to pay for a shipment, provided the exporter submits the required documents (such as clean bill of lading, certificate of insurance, certificate of origin) within a specific period.

Definition
A Documentary Credit (DC), or Letter of Credit (LC), (they are one and the same), is a legally binding undertaking given by a Bank on behalf of its customer, in favor of a third party, to make payment to him (the third party), the stated sum of money against submission of the required documents, as per the terms of the Documentary Credit.

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Mechanism of Letter of Credit

Letter of Credit is usually subject to the Uniform Customs and Practice for Documentary Credits, International Chamber of Commerce Publication No. 600 (UCP 600).The mechanism of letter of credit is as follows :

1.

Availability of Letter of Credit

Under UCP 600, an LC can be made available with:

a.

Payment

Payment at sight against compliant documents.

b.

Negotiation

Payment with or without recourse to the beneficiary or bona fide holder against compliant documents presented under the credit.

c.

Acceptance by a Drawee Bank

Payment at a future determinable date against compliant documents. A tenor draft is normally required for presentation under an acceptance credit and is drawn on the acceptance bank rather than the issuing bank.

d.

Usance Credit

Payment at a future determinable date against compliant documents. A tenor draft is normally required (but not mandatory) for presentation under a usance credit and is drawn on the Issuing Bank. Usance credit is available by Negotiation, Acceptance and Deferred

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Payment. A tenor draft is not required for presentation under a deferred payment credit.

2.

Parties in Letter of Credit Transaction

a.

LC Applicant:

LC Applicant is normally the buyer under the sales contract and the party that initiates the request to the Issuing Bank to issue an LC on its behalf. The LC Applicant normally maintains banking facilities with the Issuing Bank.

b.

LC Beneficiary:

LC Beneficiary is normally the seller under the sales contract and the party who will receivepayment under the LC if it can fulfill all the terms and conditions of the credit.

c.

Issuing Bank:

An Issuing Bank (or LC opening bank) is the bank that issues the LC in favour of a seller at the request of the LC applicant. The Issuing Bank is normally located in the applicants country with established banking relationship with the applicant.

By issuing an LC, the Issuing Bank undertakes to pay the beneficiary the value of the draft and/or other documents if all the terms and conditions of the LC are complied with.

d.

Advising Bank

An Advising Bank (or sometimes known as notifying bank) is the bank that advises the LC beneficiary that there is an LC issued in his favour. Advising Bank is normally located in the sellers country
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and is either appointed by the Issuing Bank or LC applicant. Its primary responsibility is to authenticate the LC to ensure that the LC comes from genuine source.

e.

Confirming Bank:

A Confirming Bank (normally also the Advising Bank) is the bank that adds its own undertaking to pay the LC beneficiary if all terms and conditions of the credit are complied with. Such undertaking is in addition to that given by the Issuing Bank at the request of the Issuing Bank.

The Confirming Bank will only confirm an LC upon satisfactory evaluation on the conditions of the Issuing Bank and its domicile country.

f.

Nominated Bank:

A Nominated Bank is a bank authorised by the Issuing bank in the credit to pay, negotiate, issue a deferred payment undertaking or accept drafts under the LC. If the LC does not specify a Nominated Bank, the LC is deemed as freely negotiable and any banks that receive documents from the LC beneficiary are qualified to be a Nominated Bank.

A Nominated Bank is not responsible to pay under the credit unless it has added its confirmation to the credit. In such a case, it will become a Confirming Bank.

g.

Negotiating Bank:

A Negotiating Bank is the bank that examines the drafts and/or documents presented by the LC beneficiary and gives values to such drafts and/or documents. Negotiation could be in the form of
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Purchasing or agreeing to purchase the drafts and/or documents presented.

h.

Reimbursing Bank:

A Reimbursing Bank is the paying agent appointed by the Issuing Bank to honour claims submitted by the nominated or negotiating bank.

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The Flow of Letter of Credit

Stage 1: Letter of Credit Issuance and Advising/Confirmation

Step 1: Buyer and seller conclude the sales contract and agreed to use an LC as the method of payment.

Step 2: Buyer approaches the Issuing Bank to issue an LC on his behalf in favour of the seller with all the terms and conditions specified.

Step 3: Issuing Bank issues the LC and requests the advising bank to advise or confirm the credit to the LC beneficiary (seller).

Step 4: Advising/confirming bank authenticates the LC and sends the LC to the LC beneficiary.

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Stage 2: Presentation of Documents and Settlement (Sight LC with Reimbursing Bank)

Step 5: Seller prepares and dispatches the goods to the buyers country.

Step 6: Seller presents the drafts and/or documents to the nominated bank.

Step 7: Nominated (nominated as the negotiating bank) Bank checks documents presented against the LC terms and conditions and seeks instructions from seller on documentary discrepancies.

Step 8a: Nominated Bank forwards the drafts and/or documents to the Issuing Bank.

Step 8b: If documents are free from discrepancies or discrepancies are supported by sellers indemnity, nominated bank claims reimbursement from the appointed reimbursing bank.
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Step 8c: Reimbursing Bank pays the nominated bank against a valid reimbursement authority received from the Issuing Bank and statement from negotiating bank that the documents complied with LC terms. Step 9: Nominated Bank credits the net proceeds into the sellers account.

Step 10: Issuing Bank checks documents presented against the LC terms and conditions. If documents are free from discrepancies, Issuing Bank reimburses the reimbursing bank.

Step 11: Issuing Bank presents documents to the buyer for payment.

Step 12: Once payment is received from the buyer, Issuing Bank releases documents to the buyer for the latter to collect his goods.

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Essentials of Letters of Credit

1. Inexpensive means of payment in domestic and international trade

Letters of credit (L/C) have long served as a convenient, inexpensive means of payment in domestic and international trade. L/Cs may serve as guaranties, securing performance obligations with a bank,s commitment to pay upon presentation of a draft, default notice or other documents specified by the L/C. L/Cs have long been governed by Article 5 of the Uniform Commercial Code. The L/C is intended to assure the vendor of payment before the goods leave its warehouse.

2.

What is a Letter of Credit?

An L/C may be broadly defined as an undertaking by an issuer, the bank, to pay a third party, the vendor who is the beneficiary for the account of the banks customer, the debtor, when the vendor submits documents specified by the L/C. If the vendor submits proper documents before the credit expires, the bank will pay the L/C, and the debtor must reimburse the bank. An L/C may be either revocable or irrevocable. An irrevocable L/C can be modified only with the consent of the vendor. A revocable L/C can be modified by the bank without the vendors consent. L/C s come in two varieties: commercial L/Cs, commonly used to pay for goods, and "standby L/Cs, which secure performance by assuring payment after default. Under either type, the credit of the bank is substituted for the credit of the debtor in favor of the vendor.

3.

Essential Principles Governing Law

Within the United States, Article 5 of the Uniform Commercial Code (UCC) governs L/Cs. Article 5 is founded on two principles: (1) the L/C,s independence from the underlying business transaction, and (2) strict compliance with documentary requirements.

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4.

The Independence Doctrine

L/Cs are purely documentary transactions, separate and independent from the underlying contract between the debtor and the vendor. The bank honoring the L/C is concerned only to see that the documents conform with the requirements in the L/C. If the documents conform, the bank will pay, and obtain reimbursement from the debtor. The bank need not look past the documents to examine the underlying sale of merchandise. The letter of credit is independent from the underlying transaction and, except in rare cases of fraud or forgery, the issuing bank must honor conforming documents. Thus, vendors are given protections that the issuing bank must honor its demand for payment (which complies with the terms of the L/C) regardless of whether the goods conform with the underlying sale contract.

5.

Strict Compliance

The bank may insist upon strict compliance with the requirements of the L/C. In the absence of conformity with the L/C, the vendor cannot force payment and the bank pays at its peril. The question remains, how strict compliance? Some courts insist upon literal compliance, so that a misspelled name or typographical error dooms the vendors demand for payment. Other courts require payment upon substantial compliance with documentary requirements. Careful vendors should remember that the bank may insist upon strict compliance with all documentary requirements. If the documents do not conform, the bank should give the vendor prompt, detailed notice, specifying all deficiencies.

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Letter of Credit

Forms of Letters of Credit

1. Commercial Letters of Credit

This form of L/C is commonly used when the contract involves sale of goods. Many exporters require payment by letter of credit. Typically, the buyer applies to his bank, which opens a letter of credit in favor of the exporter, payable upon presentation of the sellers draft, bill of lading and other shipping documents specified in the credit. When the goods are shipped, the seller delivers those documents to the bank and collects full payment. The bank holds the documents and usually takes a security interest, pending reimbursement by its customer, the buyer. The transaction involves three relationships: (1) the letter of credit, which obligates the bank to pay the beneficiary upon presentation of the documents; (2) the reimbursement agreement between the bank and its customer, which obligates the beneficiary to reimburse the bank and pay a fee; and (3) the underlying contract for the sale of goods.

2.

Standby Letters of Credit

A standby L/C is customarily used in non-sales transactions. This form of L/C assures payment in case of nonperformance. Under the commercial L/C, the vendors right to payment is conditioned upon submitting certain documents; with standby L/Cs, a vendor draws down on the L/C only when the vendor establishes that the debtor has defaulted. For the commercial L/C, payment is expected; for the standby L/C, payment should be the exception.

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The Parties, Rights and Obligations

1.

Issuing Bank

When an issuer receives a draft and demand for payment, it must decide to honor or dishonor within three banking days under the UCC. The bank must examine the documents with reasonable care. If the documents conform, the bank must pay, and be reimbursed by its customer, the debtor. Failure to honor within three banking days constitutes dishonor. If the documents do not conform, the bank should give the beneficiary prompt, detailed notice, specifying all deficiencies.

2.

Vendor

The vendor is entitled to payment upon submission of proper documents. By presenting its draft and demand for payment, the vendor represents that all conditions of the L/C have been complied with.

3.

Debtor

The debtor must reimburse the bank when the bank honors conforming drafts and demands, i.e. the debtor unconditionally agrees to reimburse the bank.

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Letter of Credit

Types of Letter of Credit

Import/export Letter of Credit

It is said to the credit which buyer assigns i so that he imports a product to his own country and in general this credit is in another country and its value is export value. Revocable Letter of Credit

In this type of credit buyer and the bank which has established the LC, are able to manipulate the letter of credits or make any kinds of corrections without informing the seller and getting permissions from him. This type of LC is not used a lot. Irrevocable LC

In this type of LC, any kinds of change and manipulations from the buyer part and the establisher bank require the permission and satisfaction of seller part. According to the last rules of international business room, return ability or none return ability, the credit will be none returnable. Confirmed LC

They are the guaranties that buyer will be given so that, the buyer will give the guaranty from his own bank to any other valid bank that the seller will desire it. Unconfirmed LC

This type of letter of credit, does not acquire the other bank's confirmation.

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Transferrable LC

It is said to the credit that the seller can give a part or parts of credit (Completely) to the person or persons he decides. This type of credit is a benefit for seller. Untransferable LC

It is said to the credit that seller cannot give a part or completely right of assigned credit to somebody or to the persons he wants. In international commerce, it is required that the credit will be untransferable. Usance LC

It is kind of credit that won't be paid and assigned immediately after checking the valid documents but paying and assigning it requires an indicated duration which is accepted by both of the buyer and seller. In reality, buyer will give an opportunity to the seller to pay the required money after taking the related goods and selling them. At Sight LC

It is a kind of credit that the announcer bank after observing the carriage documents from the seller and checking all the documents immediately pays the required money. Red Clause LC

In this kind of credit assignment seller before sending the products can take the pre-paid and parts of the money from the bank. The first part of the credit is to attract the attention acceptor bank. The reason why it named so, is that the first time this credit is established by the assigner bank, to take the attention of the offered bank, the terms and conditions were written by red ink, from that time it became famous with that name.
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Back to Back LC

In this type of LC consisted of two separated and different types of LC. First one is established in the benefit of the seller that is not able to provide the corresponding goods for any reasons. Because of that reason according to the credit which is opened for him, neither credit will be opened for another seller to provide the desired goods and sends it.

Back-to-back L/C is a type of L/C issued in case of intermediary trade. Intermediate companies such as trading houses are sometimes required to open L/Cs by supplier and receive Export L/Cs from buyer. SMBC will issue a L/C for the intermediary company which is secured by the Export L/C (Master L/C). This L/C is called "Back-to-back L/C".

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Letter of Credit

ICCs New Rules on Documentary Credits

ICCs new rules on documentary credits, which are used for letter of credit transactions worldwide, were approved by the ICC Commission on Banking Technique and Practice on 25 October 2006. UCP 600 is the first revision of the rules since 1993 and represents more than three years of work by the commission. The implementation date is 1 July 2007.

UCP 600 contains significant changes to the existing rules, including: A reduction in the number of articles from 49 to 39; New articles on Definitions and Interpretations providing more clarity and 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. UCP 600 also includes the 12 Articles of the eUCP, ICCs supplement to the UCP governing presentation of documents in electronic or part-electronic form.

The UCP were first published by ICC in 1933. Revised versions were issued by the ICC in 1951, 1962, 1974, 1983 and 1993. Written into virtually every letter of credit, the UCP are accepted worldwide. They are the most successful private rules for trade ever developed and illustrate the importance ICC attaches to self-regulation.

Following the sell-out event in October this year, Understanding the UCP 600, presented by Chair of the UCP 600 Drafting Group Gary Collyer, will take place on 26 January, at the Prince de Galles hotel, Paris.

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Role of UPC 600 for Documentary Credits

UCP 600 is the latest version of the rules that govern letters of credit transactions worldwide. UCP 600 is prepared by International Chamber of Commerces (ICC) Commission on Banking Technique and Practice. Its full name is 2007 Revision of Uniform Customs and Practice for Documentary Credits, UCP 600, and (ICC Publication No. 600). The ICC Commission on Banking Technique and Practice approved UCP 600 on 25 October 2006. The rules have been effective since 1 July 2007.

UCP 500 was the rules that had been in implementation before UCP 600. There are several significant differences exist between UCP 600 and UCP 500. Some of these differences are as follows;

The number of articles reduced from 49 to 39 in UCP 600; In order to reach a standard meaning of terms used in the rules and prevent unnecessary repetitions two new articles have been added to the UCP 600. These newly added articles are Article 2 Definitions and Article 3 Interpretations. These articles bring more clarity and precision in the rules;

A definitive description of negotiation as purchase of drafts of documents; New provisions, which allow for the discounting of deferred payment credits; The replacement of the phrase reasonable time for acceptance or refusal of documents by a maximum period of five banking days.

The Uniform Customs and Practice for Documentary Credits (UCP 600) establishes an international standard of letter of credit practice. This set of rules for the issuance and use of Letters of Credit for bankers went into effect July 1, 2007 in consultation with bankers, the International Chamber of Commerce and other interested parties from around the world. In other words, UCP 600 are the latest revision of the Uniform Customs and Practice that govern the operation of letters of credit. Historically, the UCP have been revised about every ten years to keep up with changing business and banking practices as well as changes in technology.

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Although the UCP defines rights and obligations of the various parties in a letter of credit transaction, it is not law and any given letter of credit is subject to the UCP only to the extent indicated in the letter of credit itself. The latest revision of UCP is the sixth revision of the rules since they were first promulgated in 1933. The current version is the result of year of effort by the International Chamber of Commerce's Commission on Banking Techniques and Practices. History of UCP

First uniform rules published by ICC in 1933. Revised versions were issued in 1951, 1962, 1974, 1983 and 1993. 1933 Uniform Customs and Practice for Commercial Documentary Credits 1951 Revision - Uniform Customs and Practice for Commercial Documentary Credits 1962 Revision - Uniform Customs and Practice for Documentary Credits 1974 Revision Uniform Customs and Practice for Documentary Credits 1983 Revision Uniform Customs and Practice for Documentary Credits 1993 Revision Uniform Customs and Practice for Documentary Credits

Currently majority of letters of credit issued everyday is subject to latest version of the UCP. This widely acceptance is the key sign that shows the importance of the UCP, which are the most successful private rules for trade ever developed.

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Legal Acts Regulating the Payment by Documentary Credit

The advantage of payment by documentary credit over other forms of payment on the basis of an analysis of its main features and some issues that surround it. The success of the application of payment by credit is directly linked to the level of the development of its respective legal framework. International payment relations areregulated both by normative acts of certain states as well as customs and practices in business dealings. Moreover, the universality of banking operations causes the unification of international payment. To this end the International Chamber of Commerce elaborated The Uniform Customs and Practice for Documentary Credits (hereinafter referred as Uniform Customs and Practice). This entered into force on 1 January 1994. It is a reflection of the progressive achievements made in the payment relations of the banking sector. The latter caused the wide application of this form of payment in export-import operations.

Despite the fact that Uniform Customs and Practice has a recommending nature and represents the unofficial codification of the rules for business, a majority of banks throughout the world carry out payment by documentary credit. It should also be noted that the Uniform Customs and Practice serves as a basis for relevant national legislation in many countries. The Uniform Customs and Practice provides the definition of the credit and determines its type, rules and means of its application, obligations and the liability of banks. It also lays down the requirements of the documents presented on the basis of credit as well as the rules on their presentation. If a bank applies the Uniform Customs and Practice then the provisions there from are considered binding both for the bank and the clients. The legal framework for payment by credit is Article 876 of the Civil Code. It provides only the definition of the documentary (commercial) credit, but it has been supplemented by the Rules of Georgia on Non-Cash Payment approved by Order No. 220 of the President of the National Bank of Georgia of 2 September, 1999.5 These rules stipulate the following forms of payment: payment orders, credits, payment-collection orders, cheques and collection order. Another legal act regulating payment relations is the Interim Instruction on Opening the Settlement, Correspondent, Currency, Budgetary, Current and other Accounts (Temporary, Cash Service) in the Banking Institutions of Georgia approved by Order No. 222 of the
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President of the National Bank of Georgia of 2 September 1999. We should distinguish between forms of payment and settlement documents. The latter can have the same designation as a respective form of payment (e.g. a payment order, credit or cheque), although they have an accounting and informational function.

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Legal Construction of Payment by the Credit

According to the Civil Code of Georgia, by opening a credit, the credit institution (issuing bank) undertakes, at the request and instruction of a customer (the purchaser of credit), to pay the money to a third person (the remittent8 ) under the order of this person against a said document, or pay drafts presented by a remittent, accept drafts, or assign another bank with this transaction, if the credit terms are fulfilled. The customer undertakes to pay the agreed commission. Thus, a documentary credit is a banks fixed obligation to pay to the buyer a definite sum of money within an agreed time frame (or authorise another bank (the nominated bank) to make such payment), in the case of the timely presentation of appropriate documents, certifying the shipment of cargo (the rendering of service) and the exact fulfilment of the terms of the credit. For making payments by credit it is not the movement of goods as such but more the documents that bear the principal importance. It is according to the documentation that the control over the movement of goods, works or services is carried out.

The payment operation on the basis of documentary credit can be described as follows:

1.

The form of payment for the supplied goods (rendered service) shall be defined in the contract between the exporter and the importer. If the payment is made on the basis of documentary credit, the parties determine the type of credit, the expiry date and the place of its fulfilment, the authorised banks etc.;

2.

At the request and instruction of a customer (creditor), the issuing bank shall open the credit. The application on opening the credit shall include information such as the name of a remittent and the amount of the credit; the place and means for its use; goods on paying of which the credit was opened; documentation to be presented to the bank; the expirydate for shipment and the presentation of documentation;

3.

The next stage is to notify the exporter by sending an advice that the credit is open. Further more the issuing bank sends the credit (advice, notification on
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the opening of the credit) to the exporter, usually through a service bank (advising bank) of an exporter, which in its turn carries out the notification procedure;

4.

The advising bank retains a copy of the advice because it is authorised to receive from the exporter documents stipulated by the credit and to carry out an examination of them. The advising bank at the same time may be categorized as a nominated bank, i.e. a bank, that is authorized to pay under the credit;

5.

Upon receipt of the credit (advice), the exporter examines its compliance with the terms of credit as settled in the concluded contract. If there is no evidence of non-compliance, it starts the fulfillment of obligations (e.g. the shipment of cargo);

6.

After receiving the transport documents from the carrier, the exporter presents them together with other documents listed in the credit to the nominated bank. The credit also stipulates a specified period of time, after the date of shipment, during which the presentation of documents must be made. If no such period is stipulated, banks will not accept documents presented to them twenty-one days after shipment.9 In any event, documents must be presented not later than the expiry date of the credit;

7.

Furthermore, the nominated bank examines the documents no later than seven banking days after receiving them; The issuing bank withdraws the amount from the importers account or (in accordance with the terms of the credit) and withdraws it from the special account on which the money was deposited in advance. After examination of the documents the issuing bank transfers the money to the nominated bank;

8.

9.

Finally, the nominated bank transfers the money to the exporter;

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10.

From the moment of receiving the documents from the issuing bank, the importer is deemed to be the owner of the goods. In this case, the credit is not only a form of payment but also it performs the function of being an instrument for securing the performance of the payment obligation. Here, it should also be noted that the above scheme of payment by credit is of a general nature and may vary according to the particular type of credit issued.

One of the principal advantages of documentary credit is its diversity. It enables the parties, by taking into account existing circumstances, to select the form that best meets their requirements.

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Risks in Letters of Credit

Although letters of credit are a balanced payment method in terms of risk issues for both exporters and importers, each letters of credit party bears some amount of risk. As we have explained before letters of credit transactions are handled by banks. This responsibility makes the banks one of the parties that bears risks in a letter of credit transaction.

Risks in letters of credit can be discussed under four groups; general risks in letters of credit, risks to the applicant, risks to the beneficiary and risks to the banks.

General Risks in Letters of Credit:

1.

Country Risk: (Political Risk)

The first risk factor that can be mentioned in the general risks group is the country risk or the political risk. Let us assume that we are an exporter located in a country X and we have a customer from the country Y. Our customer, which is from the country Y, opened a L/C in favor of us. We have checked the L/C conditions and they seem workable. We have produced and shipped the order as per the L/C and transmit the required documents to the issuing bank before the expiry date. The issuing bank found our presentation complying and informed us that they will be honoring our payment claim at the maturity date. However, before the maturity date due Country Y has changed its export regime, which makes it impossible for the issuing bank to honor our presentation. This illustrative is a good example of a country risks. Other examples of country risks are mass riots, civil war, boycott, sovereign risk and transfer risk.

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2.

Fraud Risk

As we have described before all conditions stated in a letter of credit must be connected to a document, otherwise banks will disregard such a condition. In addition, banks deal with only documents but not goods, services or performance to which the documents may relate. This feature of the letters of credit is the source of the fraud risk at the same time. As an example, a beneficiary of a certain letter of credit transaction can prepare fake documents, which looks complying on their face, to make the presentation to the issuing bank. As the documents are complying on their face, the issuing bank may honor the presentation and in this case, the applicant must pay to the issuing bank for the goods it will never be receiving. Beneficiaries of L/Cs bear also fraud risks. This happens if an applicant issues a counterfeit letter of credit. In this case, the beneficiary never receives its payment for the goods it has shipped.

3.

Risks to the Applicant

In a letter of credit transaction, main risk factors for the applicants are non-delivery, goods received with inferior quality, exchange rate risk and the issuing bank's bankruptcy risk.

4.

Risks to the Beneficiary

In a letter of credit transaction, main risk factors for the beneficiaries are unable to comply with letter of credit conditions, counterfeit L/C, issuing bank's failure risk and issuing bank's country risk.

5.

Risks to the Banks

Every bank in a L/C transaction bears risks more or less. The risk amount increases as responsibility of the bank increases.

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Conclusion
Banks, as facilitators of international trade and commerce have been served well by the mechanism of the Documentary Credit. The beauty of these credits is that they provide appropriate protection, as required, by the seller, buyer, the seller's Bank, and the buyer's Bank, while extracting their share of responsibility under the transaction.

The DCs have acted as a sort of bridge between buyers and sellers of goods and services, based in different countries, bringing them together, through the agency of the Banks. Since they came into being in 1933, DCs have no doubt played a significant role in cross border trade, overcoming the barriers of language, customs and practices, currencies, etc. And last, but not the least, they are an important source of business and revenues to the Commercial Banks, and are expected to grow even more in importance, in the coming years.

It could be concluded that documentary credit is a reliable and convenient instrument of international settlement. However, we have to agree with those views expressed in legal literature that this type of payment is complicated and expensive. The application of credit in export-import operations is complicated both in legal as well as economic terms. If several banks participate in a settlement by credit, ultimately the purchaser of the credit will have to reimburse the costs of all the authorized banks. Usually, the cost for each operation, such as the opening of credit, sending a letter of advice, confirmation, the examination of documents envisaged by the credit to name but some of the procedures is determined in the form of a fixed interest on the amount of credit for any operation.

It is also noteworthy that the advantage of credit is directly linked with the relevant experience of the participating banks in this field and with the existence of a wide network of correspondent banks. Under these circumstances operations are less complicated.

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Bibliography

Personal Notes of SYJC. Documentary Credit Operations Book.

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