Documentary Credits (LC)
A Documentary Credit (LC) is a conditional undertaking by a bank (issuing bank). It is given to the seller (beneficiary of the LC) via seller’s bank (advising bank) and at the instruction of the buyer (applicant of the LC). The purpose is to settle at sight or after a prescribed number of days against in the LC stipulated documents and conditions. Provided that the terms and conditions as prescribed in the LC are met, the LC offers both seller and buyer security: seller is ensured for payment; buyer will receive the documents enabling him to pick up the goods.
Stipulated documentation is required for the transport and import of the goods. Common documents are: invoice, packing/weight list, certificate of origin, insurance policy and Bill of Lading or Air Waybill.
After receipt of the LC and upon instructions from the LC issuing bank, the advising bank could take over the payment obligations and country risk from the LC issuing bank upon receipt of credit-complying documents.
This obligation is without recourse.
Standby Letter of Credit
A Standby LC is a substitute for a demand guarantee. Payment will be effected upon receipt of copies of transport documents and/or other documents and a declaration from the beneficiary that the applicant did not pay as per contract terms. Further terms and conditions are prescribed in the LC.
Documentary Credits and Standby Letters of Credit are based on the Uniform Customs and Practice for Documentary Credits (UCP 600) issued by the International Chamber of Commerce in Paris.
Types of Documentary Credits
Issuing bank/confirming bank undertakes to effect immediate payment upon receipt of credit complying documents.
Issuing bank/confirming bank undertakes to effect payment on a specified later date upon receipt of credit complying documents.
Issuing bank accepts a Bill of Exchange for payment on a specified later date upon receipt of credit complying documents.
Beneficiary (exporter) receives advance payment from his bank/negotiating bank provided documents are credit-complying.