SOK CHANNY FINANCIAL SERVICE LTD FINANCIAL INSTRUMENTS PROVIDERS
Letter of credit (Documentary Letter Of Credit (L/C, DLC) is the
bank’s obligation to pay the seller of goods or services a certain
amount of money in the timely submission of documents confirming
shipment of goods or performance of contractual services.
Documentary Letter Of Credit is one of the most important means of
financing in the international trade, as the letter of credit is a tool
that removes most of risks as from the buyer (importer) and from the
seller (exporter).
Documentary Letter Of Credit is very flexible and
convenient tool of calculations, which have the widest recognition and
acceptance in the world because of the following advantages:
For the
seller, the letter of credit is convenient because it removes the risk
of insolvency of the buyer, because the letter of credit is the
unconditional obligation of the bank to pay, regardless of the presence
or absence of the bank of the applicant credit. Thus, the letter of
credit provides a higher degree of protection of the seller’s interests
with payment upon delivery or by collection.
For the seller of
credit is convenient because it removes the risk of insolvency of the
buyer, because the letter of credit – the unconditional obligation of
the bank to pay, regardless of the presence or absence of the bank of
the applicant credit. Thus, the letter of credit provides a higher
degree of protection than the interests of the seller with payment upon
delivery or by collection.
For the customer the letter of credit is
convenient because it provides greater protection of the buyer’s
interests compared to the down payment, and eliminates the risk of
unscrupulous sellers, because the letter of credit may be required,
among other documents, the documents, issued by independent third
parties (Chamber of Commerce, the insurance company, the independent
inspector).
Availability of “Uniform Rules and Practice for
Documentary Letter of Credit”, which are internationally recognized,
clearly defining and delimiting the obligations of the parties of the
letter of credit, allows advancing the interests of the applicant or
beneficiary. Thus, the letter of credit is the bank’s obligation as an
independent arbitrator who shall be subject to payment of the letter of
credit, regardless of the possible litigation between the parties to the
contract.
The principle of autonomy and independence of the letter of credit from the contract is fundamental.
What should be important during choosing a letter of credit:
It is important to define clearly the conditions of the letter of
credit: type of the letter of credit, payment conditions of the letter
of credit, a list and description of the documents submitted by the
payee and the requirements for such documents, the closing date of the
letter of credit and the period of submission of documents.
There are the following forms of letter of credit:
Revocable Letters of Credit, which can be changed or canceled by the
issuing bank without prior notice to the recipient of funds. Revoke of
letter of credit does not create any obligation of the issuing bank to
the payee (Article 1094 Civil Code). Nominated bank is obligated to make
a payment or other operations on a revocable letter of credit, if at
the time of their commission they have not received notice of the change
of conditions or canceling credit. A letter of credit is revocable if
its text does not explicitly state otherwise.
Irrevocable letter of
credit is a firm obligation of the issuing bank to pay money in order
and the terms defined by the conditions of the letter of credit, if the
documents provided for by it, submitted to the bank specified in the
credit, or the issuing bank, and observe the terms and conditions of the
letter of credit.
Irrevocable letter of credit guarantees that the
exporter will make payment to the performance of its obligations, even
if an importer wants to abandon the deal. Therefore, exporter,
performing a special order, for which most likely will not be another
buyer, chooses exactly this kind of letter of credit.
Irrevocable
unconfirmed letter of credit. When making an unconfirmed letter of
credit issuing bank, providing a letter of credit, is only party that is
responsible for the disbursement to seller. Nominated bank has to pay
only after receiving the money from the issuing bank. Nominated bank
simply acts on behalf of the bank providing credit, so it does not take
any risk.
Irrevocable confirmed letter of credit – the obligation of
the issuing bank is confirmed by another bank. Confirmation is an
additional guarantee of payment from another bank (Bank of the exporter
or prime bank).
Bank, confirming letter of credit is committed to
pay for documents according to the conditions of the letter of credit if
the issuing bank fails to make the payment.
According to the method of payment letters of credit can be divided into the following types of letters of credit:
1.Transferable Letter of Credit (Transferable LC) is a letter of
credit, the beneficiary of which is entitled to instruct the advising
bank to transfer the letter in full or in part to another person with
the preservation of the conditions of the letter of credit. Transferable
letter of credit may be transferred only once (if in the Credit
otherwise is stated). Prohibition on transfer of letter of credit is not
a prohibition on assignment of revenue on it. Letter of credit can be
transferred only if it is clearly defined by the issuing bank as a
transferable. The term “divisible”, “fractional”, “assignable”, “passed”
and others do not give the right to consider the letter of credit as
transferable. This type of letter of credit is applied when in the
transaction between the seller and buyer the intermediary participates
who has a letter of credit opened in his favor and transferred into its
own provider. The letter of credit can be transferred only under the
conditions specified in the original letter of credit, with the
exception of the amount of the credit, the unit price, which can be
reduced, as well as the expiry date, the last date for submission of
documents after the date of shipment, shipment period, which may be
reduced. During transferable letter of credit the documents should be
requested so that they could be used for the initial credit. The use of
this type of credit requires caution and a good knowledge of technology.
Red clause Letter of credit. The essence of red clause letter of credit
is that letter of credit requires the terms and conditions of a special
clause, according to which the issuing bank authorizes the nominated
bank to make an advance payment of a specified amount to the beneficiary
before submitting all the documents under the Credit (prior to shipment
of the goods or services). Such clause is included in the letter of
credit at the request of applicant. Down payment on red clause letter of
credit made by the executing bank under a written obligation of the
beneficiary to submit documents in accordance with the terms of the
letter of credit. After the submission of all documents executed in
full. A letter of credit is named in such way because special clause was
done with a red stripe.
3.The letter of credit with Payment at
Sight. Beneficiary receives payment upon presentation and verification
of documents corresponding to all the conditions of the letter of
credit. It is provided a reasonable time for a document check before
paying to the issuing bank, confirming bank or an authorized bank.
4.The letter of credit with Deferred payment. Letter of credit with
Deferred payment is based on an irrevocable commitment of the issuing
bank and / or confirming bank to make payment against presentation of
the relevant documents not at the time of presentation of the documents
and in the corresponding period of payment, determined by the conditions
of the letter of credit. Letters of credit (with Deferred payment and
payment by acceptance) may be a more attractive financial instruments to
customers prior to the date of payment the buyer can sell the goods and
pay the letter of credit, generated profit.
Revolving Letter of
Credit (Revolving LC) put up on a certain amount, after which it will be
used for some time, again exposed for the payment of claims of the
beneficiary as many times as is reached set the maximum aggregate limit.
The advantage for the importer is that it can order the product in
quantities greater than it needs at the moment, and thus to secure a
better purchase price. In this case, the delivery of goods will be
divided into certain parties and must be performed at specified
intervals. For exporter to ship on a schedule convenient for the
importer, usually under the revolving credit indicating the dates of the
respective amounts which represent the proportion of the aggregate
limit.
Such statement about the date of the equity amounts forces
an exporter to ship goods in time in accordance with the agreed
schedule, otherwise unused equity amounts simply void, unless otherwise
isn’t stipulated in the letter of credit, that is for a further letter
of credit they will be impossible to use. In this case we are talking
about the “non-cumulative Revolving Letter of Credit.”
If the
amounts that were not used in fixed terms for them, however, are allowed
to use in the future, in which case we are dealing with a “cumulative
Revolving Letter of Credit.”
Revolving Letters of Credit are useful
only for transactions in which the same type of product will be
delivered at regular intervals to the same counterparty.
6.Stand-by
Letter of Credit (Stand-by LC) was developed by the American banking
system and performs the same functions as a bank guarantee. Using a
Stand-by Letter of Credit is regulated by the ISP98, and UCP 600.
Stand-by Letter of Credit is a bank’s obligation to make payment in the
event of default on the part of the Applicant, and is a bank guarantee.
Typically, this letter of credit is opened in cases where the contract
provides for payment for goods by bank transfer or otherwise, not giving
an absolute guarantee of payment, and the exporter wants to protect
himself, but the bank guarantee is forbidden, then in the contract the
parties stipulate that as security the letter of credit will be Stand-by
by the importer. Payment under this letter of credit will be made in
the event of non-payment by bank transfer or otherwise, in unintended
ways, on presentation of documents by the beneficiary and the special
statement indicating that the counterparty (applicant for the credit)
has not fulfilled its obligations in respect of payment.
The use of
the term “stand-by letter of credit” is explicated in such way that the
law of some states in the U.S. prohibits banks to provide guarantees,
and the International Chamber of Commerce Uniform Rules for Documentary
Credits under the influence of U.S. banks recognizes the application of
these rules for stand-by letters of credit (Article 1). From this
position, their use is preferable to a bank guarantee, which are subject
to national legislation.
In recent years, access to the banks to
provide credit guarantee becomes frequent, which would support the
borrower’s obligation to pay to a third party or a promise to fulfill
certain contractual obligations. This can be done with the help of
letter of credit.
Beneficiary under a stand-by letter of credit is
drawn firstly to the applicants for payment and then asks the bank to
make a payment. For commercial letter of credit situation is reversed,
“the beneficiary receives payment from the issuing bank, without
resorting to the buyer for payment.”
Thus, as well as a guarantee,
stand-by letter of credit is irrevocable obligation of the bank to pay a
specified amount of stand-by letters of credit in the first written
demand of the beneficiary in the event of default by a party under the
Contract, subject to all conditions of the credit.
7.Back-to-back
letter of credit. The letter of credit is opened by the issuing bank at
the request of the client-applicant in the event of another open letter
of credit in favor of the client, in which he is a beneficiary. In
contrast to the transferable letter of credit, basic and back-to-back
letter of credit are two legally independent from each other letters of
credit, even though both are designed for the same commodity
transactions.
Back-to-back letter of credit is effective in cases
where the seller does not want the proxy provider to know the end
customer, and vice versa. In this case, the terms of a letter of credit
opened in the name of the broker, may be moved to credit, which will
open in the name of an intermediary third party transactions, both
credit will be run independently of each other, and the terms of a
letter of credit may differ if it is necessary.
This type of credit is usually used by middlemen.
In the CIS countries to open such credit, the banks generally require collateral or broker deposits to lower the risks.
Payment mechanism
Importer (buyer) has a guarantee that the bank will not pay for his
account as long as he doesn’t receive documents in accordance with the
terms of the letter of credit and is satisfied that received documents
by the external signs meet the requirements of the importer.
Banks
will deny payment of documents by the importer, if the documents on the
goods do not meet the letter of credit, thereby protecting the interests
of the importer.
Customer can be sure of receiving payment as soon as he provides the documents to the bank according with the letter of credit.
Customer receives against the shipping documents, specified in the
letter of credit, prompt payment (if the letter of credit provides for
payment terms – on demand).
Required documents usually include
shipping documents such as bills of lading (receipt of shipmaster) goods
and transport waybill, duplicate w / a bill showing that the goods have
been shipped in accordance with the needs and specification of the
buyer.
Letter of credit in most cases is as follows:
Exporter and importer agree to the release of LC (Letter of credit).
Importer (the buyer) with the consent of the exporter (seller) asks his
bank to issue a letter of credit. The importer’s bank (the issuing
bank) in such case assumes an obligation to pay a fixed amount to the
exporter with the condition that the exporter will provide the documents
that match the letter of credit for a specified period of time.
Bank issuing informs the bank of the exporter of the credit.
Bank of the exporter (advising bank informs the exporter that, the letter of credit is issued on his advantage).
Exporter ships the goods, prepares the necessary documents and send them to the bank for providing in the designated bank.
Designated bank verifies the documents and if the documents are in
compliance with the terms and conditions of letter of credit, this bank
will pay the amount of the documents, but not exceeding the total amount
of the letter of credit.
Designated bank sends the documents to the
importer’s bank for onward transmission to the importer, who can use
them to get the goods.
General advantages of the letter of credit
1.Letter of credit is very flexible computational tool that can be used for payment transactions on a variety deals of clients.
2.Letter of credit is a tool, the rules of using of which are defined
in the authoritative international organization, are common and are
recognized all around the world. This is beneficial to both customers
and banks, as each party of the transaction has a clear understanding of
rights, responsibilities, and standard requirements to all participants
in the operation.
3.Letter of credit is useful as a tool for short-term financing.
Advantages of the letter of credit for importers
1.Letter of credit may open by own expense of the client, by funds
provided by the bank on credit, as well as by providing support by
customer to fulfill its obligations (mortgage, deposit).
2.Payment is performed after shipment of goods and delivery of documents.
3.Importer determines a list of the documents against which will be issued payment.
4.Limit the period of providing of the documents and shipment of goods.
Advantages of the letter of credit for exporters
1.To the obligation of the buyer to pay, it is added an obligation of
the issuing bank, this liability does not depend on the relationship
between the seller and the buyer.
2.If the letter of credit is confirmed, so there is a guarantee of payment from the second bank.
3.Performance of the letter of credit is a guarantee of payment.
The similarities between the letters of credit and guarantees
1.Letter of credit and guarantee are due to the existence and the need to secure the obligations of partners in a transaction.
2.Letter of credit and guarantee are the bank’s obligation to make payment to the beneficiary against certain documents;
3.Letter of credit and guarantee are paid during the provision to the
bank well-defined and clearly understood terms of those instruments of
documents.
4.Commercial banks offer guarantees and letters of credit
on the base of written confirmation of the presence of obligations in
the applicant that are provided by such guarantees or letters of credit
(the contract, etc.).
The differences between the letters of credit and guarantees
Letter of credit is opened with the intention of using it, that is,
payment by letter of credit is a phenomenon that occurs during the
normal course of events (method of payment). Guarantee is used as a way
to ensure obligations and is used if in the process of the
implementation of one of the parties of the transaction is not able to
meet its own obligations.
Letter of credit is used as a method of
payment in one form or another. The guarantee can cover almost any kind
of obligations (the advance payment guarantee, performance of
contractual obligations, tender obligations, repayment, payment of
customs duty, payment of a fine or compensation fixed by the court, the
observance of the guarantee period of equipment, guarantee of the
payment of court collateral, guarantee of payment of the transfer a
football player and many others.) Area of application of guarantee, thus
much wider than in credit.
Letter of credit is a transferable tool,
as it allows to optimize the calculations between the partners.
Guarantee in rare cases can be transferable as all that is required to
receive funding under the guarantee is the requirement of payment, which
makes it a ground for abuse of this tool.
NOTICE TO INTENDING
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#455, Monivong Blvd, Phnom Penh Tower,
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WEBSITE:
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