Doc Credits Brochure

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Documentary

credits


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Documentarycredits

A documentary credit, (also known

as a letter of credit, L/C and DC),

is a written undertaking by a bank

(the issuing bank), at the request of

an importer/buyer (the applicant),in favour of an exporter/seller

(the beneficiary), whereby the

bank agrees to pay against bills

of exchange (drafts) and/or

commercial documents that comply

with the terms and conditions of

the documentary credit.

Types ofdocumentary

creditsTo accommodate the diverse

needs of the various business

sectors, different types of

documentary credits have evolved:

Revocable credit

A revocable credit (rarely used

today) can be modified or revoked

by the issuing bank without the

prior consent of the exporter.

The instrument is used between a

parent company and subsidiaries

where, for example, company

policy states that all orders must

be covered by documentary

credits. Banks do not favour this

type of credit.

Irrevocable credit

It is the most common form of documentary credit, used when the

exporter is concerned with or is unable to determine the financial standing

or reliability of the importer. It is a firm undertaking by the issuing bank

to pay the beneficiary at sight or at a fixed or determinable future date.

Payment is subject to all the terms and conditions being adhered to and

any modification or cancellation can be effected only with the consent of allparties to the credit.

Confirmed credit

It is used where the exporter knows little about the importer and is

concerned with the credentials of the issuing bank and importing country.

The beneficiarys bank or a bank in a third country usually confirms the

documentary credit. The beneficiary has two independent payment

undertakings one on the part of the issuing bank and the other on the

part of the confirming bank.

Revolving creditIt is suited to importers who purchase goods on a recurrent basis

where delivery of goods takes place in instalments. Upon payment, the

issuing bank reinstates the amount of each shipment drawn under the

documentary credit. Revolving credits must be worded carefully to avoid

mistimed shipments and payments.

Transferable credit

Middlemen/agents use transferable credits as they cannot supply all

or part of the order and are dependent on outside parties. It allows the

middleman/agent to transfer all or part of his rights under the credit to

one or more parties (second beneficiaries). He can amend specific details,such as the date of shipment, the expiry date and the amount, as well as

substitute certain documentation, to meet the requirements of the original

credit. Usually the buyer is aware of the situation and authorises the

transferability of the credit.

Back-to-back credit

It is used when a middleman/agent can source goods from a party to fulfil

the order of the buyer, but he wants to conceal the identity of the buyer

from the seller and screen his commission earnings. The procedure adopted

involves the buyer issuing a documentary credit in favour of the agent who,

in turn, uses the document as security to obtain an independent (counter)

A documentary credit is a written undertaking by a bank at the request of animporter/buyer in favour of an exporter/seller whereby the bank agrees topay against bills of exchange.


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documentary credit in favour of theseller. Certain key requirements

are changed to facilitate the

transaction.

Standby credit

The wording conforms to that of

other documentary credits but

it has the qualities of a demand

guarantee.

The beneficiary triggers the

standby credit by submitting a

draft or demand for payment,

accompanied by a statement

claiming non-performance

(default) in terms of the

commercial contract on the part

of the buyer.

As it provides the seller with

security of payment, he can allow

the buyer to operate on an open

account basis.

Assignment ofproceeds

Middlemen, distributors or agents

use an assignment of proceeds

because they cannot supply

all or part of an order and are

dependent on outside parties to

assist them. Often their financial

position makes it difficult for them

to pay for goods before they have

received the proceeds from selling

them.

It allows a beneficiary to allocate

a part, or all of the proceeds,

generated under a documentary

credit, to a third party. Unlike a

transferable documentary credit,

where the right to perform

under the documentary credit is

transferred, an assignment relates

to the proceeds only.

This is not a type of documentary credit, but an alternative to transferring acredit. The facility eliminates the need to issue a contra documentary credit

or bank guarantee.

Red clause letter of credit

It is an advanced documentary credit which allows the beneficiary to

receive all or part of the funds before shipping the goods.

The clause was originally written in red ink to draw attention to the unique

nature of the credit.

Payment termsThe payment instructions under documentary credits vary depending on the

arrangements made between the applicant and beneficiary.

Payment can be:

At sight (on demand) that is the beneficiary obtains payment on

presentation and acceptance by the paying bank of documents that

conform to the terms and conditions of the documentary credit; or

At a usance (for example, 60 days from date of shipment) that is,

payment will be made at some future date.

Usance creditsThe beneficiary has several options available under a usance payment:

Acceptance credit

The beneficiary draws a usance bill of exchange (draft), in accordance

with the documentary credit terms. Upon presentation of compliant

documents, the bank accepts the draft for payment at some fixed future

date. The draft can then be discounted in the market.

Deferred payment credit

A deferred payment credit is similar to an acceptance credit except that

no bill of exchange (draft) is drawn. Upon presentation of the commercial

documents, either the issuing or confirming bank undertakes to makepayment on a determinable future date as prescribed in the documentary

credit.

Negotiation credit

A negotiation credit allows a bank to purchase (discount) the drafts

and/or commercial documents drawn under and in compliance with the

documentary credit.

The negotiating bank pays the beneficiary, upon presentation, the face

amount of the drawing, less interest calculated from date of negotiation,

to date of receipt of reimbursement by the issuing bank.


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Mixed payment creditsSome documentary credits

contain mixed payment

instructions, such as 30% at

time of receipt of the credit,

60% on presentation of

documents and 10% sixty days

after bill of lading date. This form

of settlement is used in cases

such as the purchase of capital

equipment where a deposit

(30%) is paid immediately;

a portion (60%) is paid onpresentation of confirming

documents and the remainder

(10%) on commissioning of the

machine.

Governing rules

The documentary credit is

governed by the Uniform Customs

and Practice for Documentary

Credits (UCP 500) and eUCP

Supplement to the UniformCustoms and Practice for

Documentary Credits for Electronic

Presentation drafted and

distributed by the International

Chamber of Commerce.

The brochures describe the

approved procedures to be

followed and explain the rights

and obligations of all the

affected parties.

Benefits

Security

Documentary credits are

designed to protect the interests

of both the exporter and the

importer.

Documentary credits are

irrevocable and cannot be

amended or cancelled without

the consent of all parties.

The importer pays only onproduction of documents of title

conforming to the documentary

credit terms.

Guaranteed payment

The issuing bank guarantees

payment independently of

the importer if all terms and

conditions have been met.

The confirming bank adds its

guarantee of payment to that ofthe issuing bank and importer in

terms of bank and country risk.

Financial benefits

Delays in the receipt of

proceeds, as experienced under

open account or documentary

collections, are avoided.

The bill of exchange (draft)

accepted by a bank under an

acceptance credit can be readilydiscounted in the market place.

A confirmed documentary credit

allows a beneficiary to finance

usance drawings on a without

recourse basis (off balance

sheet finance).

Under a documentary credit,

importers obtain rebates and

discounts more easily as the

exporter is assured of payment

upon presentation of compliant

documents. Use of an assignment of

proceeds does not affect

the agents credit facilities

and eliminates the need for

collateral.

The agents cash flow is

unaffected as payment to the

supplier is made on receipt

of the proceeds under the

documentary credit.

Flexibility Both suppliers and receivers of

goods or services can make use

of documentary credits.

The importer can call for a

variety of documents, some

produced by third parties, to

ensure that he receives what he

has ordered.

Versatility

It caters for diverse types of

commercial and financial

transactions.

Risks

In the complex world of

international trade, traders face a

number of risks that need to be

addressed to ensure the success of

the cross-border transactions. See

Risks in International Trade.


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Procedures A. Documentary credit

application

1. The buyer and the seller set

out the terms and conditions

of the transaction in a contract

of sale. The issuance of a

documentary credit will be one

of the requirements.

2. The importer requests his bank

to establish the documentarycredit and must ensure that:

The bank has granted

sufficient facilities to cover

it. If the bank feels that the

financial exposure is too high,

it may require additional

security in the form of

sureties; and

The transaction complies with

the relevant exchange control

rulings or has a Reserve Bank

approval reference number.

3. The bank issues the

documentary credit in

conformity with the applicants

instructions and sends it to its

overseas correspondent (the

advising bank).

4. The advising bank hands the

documentary credit to the

beneficiary.

B. Documentary credits payments

5. The beneficiary ships goods and

prepares the documentation.Payment under documentary

credits is called for when

the beneficiary submits the

documents, which conform to

the terms and conditions of the

credit, to the negotiating bank.

6. On receipt of a drawing that

meets the requirements of

the documentary credit, the

negotiating bank pays the

beneficiary.

7. The negotiating bank

submits the documents tothe issuing bank and claims

reimbursement.

8. The issuing bank will check

and confirm the compliance

of the documents against the

documentary credit.

The documents, if in order,

will be forwarded to the

applicant against payment

of the amount claimed by onenegotiating bank.

A. Documentary credit application

importer/applicant exporter/beneficiary

issuing bank advising bank

advise

advise

application to

open credit

contract of sale

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4

3

2

B. Documentary credits payments

importer/applicant exporter/beneficiary

issuing bank negotiating bank

payment

documents

debit

application

goods shipped

5

78

payment7

documents

8

5documents

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C. Documentary credit amendment

1. The applicant submits an

application to amend a

documentary credit in writing on

a company letterhead and must

ensure that:

The bank has granted

sufficient facilities if the

expiry date is extended or the

amount is increased; and

The transaction complies withthe relevant exchange control

rulings or has a Reserve Bank

approval reference number.

2. The bank issues the

amendment in conformity with

the applicants instructions

and sends it to its overseas

correspondent (the advising

bank).

3. The advising bank hands thedocumentary credit to the

beneficiary.

A documentary credit is irrevocable

and cannot be amended without

the consent of all parties.

An amendment only becomes

operative once the beneficiary

and confirming bank (if applicable)

accept the changes.

The confirming bank reserves the

right to review its commitment to

pay if the terms and conditions of

a documentary credit are altered.

D. Documentarycredit cancellation

1. The applicant submits an

application to cancel a

documentary credit in writing on

a company letterhead.

2. The bank requests its overseas

correspondent (the advising

bank) to cancel the documentary

credit.

3. The advising bank requests

the beneficiary to cancel the

documentary credit.

This is only possible if all parties

consent to cancelling the

documentary credit.

E. Documentary credit assignment

1. The beneficiary completes

and submits a notification of

assignment of rights under a

documentary credit.

2. Payment to the assignee

(supplier) will be made against:

Compliance with the terms

and conditions of the credit,

or

if not complied with,

acceptance of the documents

by the applicants mentioned

in the credit; and

Receipt of the funds from

the issuing or reimbursement

bank.

Important notes: Banks deal in financial and

commercial documents and not

in goods. Any defect in the

goods must be resolved between

the importer and exporter on the

basis of the contract of sale.

The bank is not concerned with

or liable for any breach of the

terms of the contract of sale

or purchase or any underlying

commercial contract relative tothe transaction.

The bank is not qualified to

express an opinion whether

the parties to a contract have

performed as agreed.

The bank is not liable for

errors, omissions or delays

in transmissions arising from

circumstances beyond its control.


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Costs The fees for processing

documentary credits include

local and foreign bank charges

and consist of establishment

charges, advising commission,

confirmation costs, negotiating

fees, deferred payment charges,

reimbursement fees and

discount charges.

Not all the costs mentioned

apply in every case. Charges vary from bank to bank

and the importer and exporter

must decide who will pay the

costs.

The charges for arranging an

assignment of proceeds include

handling fees and postage or

courier charges, if applicable.

The applicant is responsible

for all charges if the beneficiary

refuses to accept them.

Conclusion

For further information on any of

our products and services, please

contact your nearest International

Trade Services office, visit our

website at

www.standardbank.co.za

(select Corporate and Investment,

click on Banking/Finance

solutions and go to International

Trade Services), or call

0860iTrade/0860 487 233.

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Disclaimer:

The Standard Bank of South Africa Limited (SBSA) has made every effort to ensure the accuracy and completeness of the information contained in this document. The information is not intended as advice and no warranty express

or implied is made as to the accuracy, correctness or completeness of the information, which is subject to change at any time after publication without notice. Should the information lead you to consider entering into any transaction

in relation to a financial product (the product) you must take note of the following: There are intrinsic risks involved in transacting in any products. No guarantee is provided for the investment value in a product. Any forecasts

based on hypothetical data are not guaranteed and are for illustrative purposes only. Returns may vary as a result of their dependence on the performance of underlying assets and other variable market factors. Past performances

are not necessarily indicative of future performances. Unless a financial needs analysis has been conducted to assess the appropriateness of the product, investment or structure to your unique particular circumstances, SBSA cautions

you that there may be limitations on the appropriateness of the information for your purposes and you should take particular care to consider the implications of entering into the transaction, either on your own or with the assistance

of an investment professional. There may be various tax implications to consider when investing in the product and you must be aware of these implications before investing. SBSA does not accept liability for the tax treatment by

any court or by any authorities in any jurisdiction in relation to any transaction based on the information. It is strongly recommended that individual tax advice be sought before entering into any such transaction.

Authorised financial services provider

The Standard Bank of Soui th Africa Limited (RegisteredBank) Reg. No. 1962/000738/06 SBSA 804697-5/06


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Notes


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Notes

Documents

Doc Credits Brochure