Documentary Credit

in

International Trade

Presented By: Anupam Gupta ICFAI Business School

International Trade

Trade a definition Export Contract Complexities under International trade General Risk of buyer and seller Letter of Credit Trade terms in foreign trade
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Export Contract

Most basic agreement in International Trade. Other essential contracts under export contract:

Issuing banks undertaking to pay seller. Contract with a carrier. Contract with a freight forwarder.

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Complexities under International Trade

Location of parties to contract. Currencies are different. Different trade and exchange regulations.

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Risk of buyer and seller

Major concerns under international trade:
Buyers

concern for goods.

Sellers

concern for payment.

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Documentary Credit in International Trade

Letter of Credit (LC)

A Definition Parties involved in LC Types of letter of Credits How a letter of credit operates?

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Parties in letter of credit

The Applicant (Importer / Buyer) The Issuing Bank (Bank which opens the LC) The Beneficiary (Exporter / Seller of goods
and/or Services)

Nominated bank The Advising Bank Confirming Bank Negotiating Bank (Paying, Accepting Bank) Reimbursing Bank.
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Types of Letter of credits

Revocable Letter of credit Irrevocable Letter of Credit Confirmed Letter of credit Sight Credit Usance Credit Revolving Credit Stand by Letter Of Credit Transferable Credit
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Operation of Letter of Credit

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Documents under Documentary Credit

Golden Rule: All parties under Documentary Credit deals
only with documents not with goods. These documents should be strictly in accordance with the terms and conditions of LC.

Types of Documents:
Payment

Documents Shipping Documents Other Documents

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Payment Documents
Commercial Invoice Drafts or Bills of Excahnge

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Shipping Documents
Transport Documents :

Marine/Ocean Bill of Lading. Multimodal Transport document. Air Transport document. Railway Conignment Note. Road Transport document. Courier Receipt.

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Other Documents

Insurance Documents Certificate of Origin Certificate of Inspection Packing List

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Documentary Collection Process

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International Commercial Terms (Incoterms)

Incoterms are a series of 13 trade terms, and were first introduced to prevent misunderstandings and disputes that may arise because of different trading practices among different countries.

EXW - Ex Works (named Place) FCA - Free Carriers (named Place) FAS - Free Alongside Ship (named port of shipment) FOB - Free on Board (named port of shipment) CFR - Cost and Freight (named port of destination) CIF - Cost, Insurance and Freight (named port of destination)
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Incoterms contd

CPT - Carriage paid to (named place of destination) CIP - Carriage and Insurance paid to (named place of destination) DAF - Delivered at frontier (named place) DES - Delivered Ex Ship (named port of destination) DEQ - Delivered Ex quay (named port of destination) DDU - Delivered duty unpaid (named place of destination) DDP - Delivered duty paid (named place of destination)

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Modes of Payment
By agreeing to buy the goods from the seller , the buyer undertakes to pay the seller on deliver, the methods of payment also form part of the sales agreement.
Methods of payment are as follows:

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Advance Payment Open Account Documentary Collections Documentary Credits

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Advance Payment
The buyer makes payment to seller in advance before the goods are shipped.
The reasons may be as follows:
Due to certain country risks. To encourage the seller into long term relationship. Inadequate finance with supplier. Good relationship with supplier.

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Open Account
Under open account terms, seller dispatches goods to the buyer, and at the same time sends the invoice for payment at an agreed date.
Advantages of Open account trading:
Opportunity

to examine. Less banking fee and other costs involved.

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Documentary Collections

Handing over the Documents:

1. 2.

By the seller to his bank. By sellers bank to Issuing bank.

Under this procedure banks give no payment undertaking. But the sellers interest is still served.
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Documentary Credits

Documentary Credit is the most preferred method of payment under International trade.
It provides both seller and buyer with independent assurance in the exchange of goods for payment.
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Types of Payment

Sight Payment By Acceptance Deferred Payment Negotiation

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Negotiation

Negotiation means giving value for drafts or documents. Mere examination of documents without giving value does not constitute a negotiation.
The phrase giving of value, here means either making immediate payment or undertaking an obligation to make payment.
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Reimbursement

Issuing bank should provide proper authorization to reimbursing bank to honor claims. Issuing bank is not relieved from its obligation in case, reimbursement is not claimed from reimbursing bank. Reimbursing banks charges are for the account of Issuing bank.
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Questions???

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