Documentary credit

DOCUMENTARY
Mode of Payment:
CREDIT
GROUP 6
OUTLINE
Documentary Credit
Denition
1
Procedure
2
Components
3
Main types
4
Advantages
5
Disadvantages
6
1. Denition
Thoại Lam
Letter of credit
A letter issued by a bank upon request of the bank’s
client, the importer, in which the banks promises to pay certain amount
of money within a certain period of time to a beneciary on the
condition that he presents a set of document in strict
compliance with the terms and conditions set in that letter
1. Denition
Participating parties:
Participating parties:
Thoại Lam
Applicant

Beneciary
$
Issuing bank
$
Advising bank
who requests or instructs a
bank to issue a L/C
which issues a L/C upon the request
of applicant
in whose favour a L/C is issued
Which advises/ authorized to advise a
bene*ciary of the availibility of a credit
& its terms
$
Conrming bank
$
Paying bank
2. Procedure
Quang Huy
Applicant
Beneciary
$
Issuing bank
$
Advising bank
(Buyer)
(Buyer’s)
(Seller)
(Seller’s)
 Apply for L/C

 L/C is issued
 L/C is advised to
beneciary
 Beneciary ships
goods
 Assemble documents against L/C
 Forward documents
 Pay
 Ask for payment & release
documents
 Pay
Huỳnh Như
3. Components of an L/C
Huỳnh Như
Name, address of
relevant parties to
L/C
L/C amount
Huỳnh Như
Goods description
Huỳnh Như
Documents to be presented
Huỳnh Như
Documents to be presented
Minh Nguyệt
4. Main types of L/C
Basing on the nature of the L/C
Basing on time of payment
Special L/C
Minh Nguyệt

4. Main types of L/C
Basing on the nature of the L/C
Revocable L/C
can be modi*ed or canceled anytime before it has been
performed without seeking the bene*ciary's consent
 limited security payment method to the beneciaries
 not frequently used in international trade
Minh Nguyệt
4. Main types of L/C
The issuing bank undertakes not to revoke the credit before a speci*c
time or event. Every amendment at least requires bene*ciary's
acceptance in order to be e8ective
Basing on the nature of the L/C
Irrevocable L/C
Minh Nguyệt
4. Main types of L/C
Con*rming bank adds its con*rmation to undertake the responsibility in
case of non-payment
Basing on the nature of the L/C
Conrmed Irrevocable L/C
Minh Nguyệt
4. Main types of L/C
Sight Payment L/C
The bene*ciary will get immediate payment on presenting a
perfect set of document
Basing on time of payment
Minh Nguyệt
4. Main types of L/C
Deferred Payment L/C
The bene*ciary will get a con*rmation to get payment at a

de*nite time in the future on presenting a perfect set of
document
Basing on time of payment
Thanh Huyền
4. Main types of L/C
Special L/C

Transferable L/C

Standby L/C

Revolving L/C

Back to back L/C

Red clause L/C
Thanh Huyền
4. Main types of L/C
Special L/C
Transferable L/C
permits the bene*ciary of the letter to make some or all of the credit
available to another party
Applicant
Beneciary
Beneciary 2Beneciary 1
Thanh Huyền
4. Main types of L/C
Special L/C
Standby L/C
a bank issues on behalf of its customer to serve as a guarantee

to the bene*ciary of the letter of credit that the bank's customer
will perform a speci*ed contract with the bene*ciary
Thanh Huyền
4. Main types of L/C
Special L/C
Revolving L/C
indicates the obligation of an issuing bank to restore a credit to
the original amount after it has been used without amendment
Thanh Huyền
4. Main types of L/C
Special L/C
Back to back L/C
opened on the basis of an already existing, nontransferable credit,
used by traders to make payment to the *nal supplier
Applicant
Beneciary
Final supplierTrader
Thanh Huyền
4. Main types of L/C
Special L/C
Red clause L/C
indicates the obligation of an issuing bank to authorize the paying
bank to pay the bene*ciary in advance of presentation of document
Phương Hằng
5. Advantages
Benets to
seller/exporter
buyer/importer
bank
Phương Hằng

5. Advantages
To seller/exporter

Guaranteed payment

Exporter can avoid the political risk of the importer’s country

Reducing the production risk

Stability in exchange rate
Phương Hằng
5. Advantages

Seller can determine when payment will be satis*ed and ship
the goods accordingly

The buyer cannot refuse to pay due to a complaint about the
goods

Provides seller easier access to *nancing once the letter of
credit has been issued
To seller/exporter