DOCUMENTARY CREDIT OVERVIEW 1.1 DEFINITION The letter of credit L/C method is an agreement wherein a bank - the issuing bank of the credit - at the request of the customer - the applican
UNIVERSITY OF FINANCE – MARKETING FACULTY OF COMMERCE ASSIGNMENT INTERNATIONAL TRADE DOCUMENTARY CREDIT METHOD Lecturer: Dr NONG THI NHU MAI Group members: Nguyen Hong Nhu Binh 2121011668 Nguyen Lai Thu Binh 2121010706 Le Thanh Huy 2121002777 Trac Ngoc Tuyet 2121008111 HO CHI MINH CITY – JULY, 2023 JOB ALTERNATIVE TABLE Contents CHAPTER DOCUMENTARY CREDIT OVERVIEW 1.1 DEFINITION 1.2 PAYMENT PROCESS 1.3 TYPES OF DOCUMENTARY CREDIT CHAPTER BENEFITS, SHORTCOMINGS, AND RISKS OF DOCUMENTARY CREDIT FOR STAKEHOLDERS 2.1 BENEFITS 2.1.1 To the Importers 2.1.2 To the Exporters 2.2 SHORTCOMINGS 2.2.1 To the Importers 2.2.2 To the Exporters CHAPTER PRACTICAL USAGE SITUATION OF USING DOCUMENTARY CREDIT IN VIETNAM 3.1 THE PRACTICAL PROCESS OF PAYMENT BY DOCUMENTARY CREDIT METHOD AT A BANK 3.2 PRACTICAL CASES OF RISKS IN PAYMENT BY DOCUMENTARY CREDIT METHOD CHAPTER SOLUTIONS TO MAKE FULL USE OF DOCUMENTARY CREDIT 10 4.1 TO THE BUSINESSES (APPLICANT AND BENEFICIARY) 10 4.2 TO THE BANK (ADVISING BANK AND ISSUING BANK) 11 4.3 TO THE STATE BANK 12 CHAPTER DOCUMENTARY CREDIT OVERVIEW 1.1 DEFINITION The letter of credit (L/C) method is an agreement wherein a bank - the issuing bank of the credit - at the request of the customer - the applicant for the opening of the letter of credit will undertake to pay a certain amount of money to another person - the beneficiary of the letter of credit or accept a bill of exchange signed by this person within the specified amount when this person presents a complying set of payment documents to the bank that are in accordance with the conditions of the letter of credit (L/C) 1.2 PAYMENT PROCESS Image 1-1 The payment process of the Documentary Credit method Source: OCBC Bank The payment process of the Documentary Credit method (1) Based on the sales contract signed between the exporter and the importer (or proforma invoice), the importer writes and sends an application for credit to his bank to request credit for the beneficiary The importer in this case is Applicant (2) After receipt of the credit application, the bank will check carefully all its conditions and related documents, then require the importer to make a deposit A deposit for the credit is to guarantee the solvency of the importer However, the amount on deposit depends on the relation between the issuing bank and the importer and is different in each case (3) After receipt of the credit, the advising bank will examine its superficial veracity, and then advise and send the original credit to the beneficiary (4) The exporter delivers the goods to the delivery point if he agrees on the credit’s contents Or else, the exporter can request the issuing bank to amend the credit to make it suitable with the contract (5) After the delivery of goods, the exporter will make and present a set of payment documents under the credit to the advising bank (6) The advising bank will examine the documents' faces carefully and reasonably (7) The issuing bank examines a presentation to determine, based on the documents alone, whether or not the documents appear on their face to constitute a complying presentation If a presentation is complying, it must honor, or else it may refuse to honor and return the documents to the exporter (8) The issuing bank forwards the documents to the importer The importer then examines the documents to determine whether or not the documents are complying If the documents are complying, the importer shall honor them and vice versa (9) The advising bank credits the exporter's account or forwards the accepted bill of exchange to the exporter or gives notice of refusal 1.3 TYPES OF DOCUMENTARY CREDIT As international trade steadily grows over the world, the issue of securing payments from traders arises Among other payment methods, a Letter of Credit is a more commonly used medium than before The document serves as an assurance between the parties that payments will be made There are several types such as: Revocable L/C Irrevocable L/C Confirm Irrevocable L/C Irrevocable without resource L/C Revolving L/C Back-to-back L/C Reciprocal L/C Red clause L/C (Advance L/C, Anticipatory L/C) Stand-by L/C Irrevocable Transferable L/C Deferred payment L/C UPAS L/C (Usance L/C payable at sight) Document continues below Discover more Thanh Toán from: Quốc Tế Trường Đại học Tài… 21 documents Go to course TNC3 - TNC3 None 10 Incoterms 2020 127 tieng viet full None ĐÁP ÁN Writing 53 SÁCH - Maybe yha triết học 100% (9) sumary video what is philosophy? thầy Đ… triết học 100% (1) Alice Savage, Patricia 160 Mayer - Effective… English course 91% (11) Unit - Writing Thảo Nguyên CHAPTER BENEFITS, SHORTCOMINGS, AND RISKS OF DOCUMENTARY CREDIT FOR STAKEHOLDERS English course 82% (11) 3.1 BENEFITS 3.1.1 To the Importers Proof of Creditworthiness: By issuing a letter of credit from a reputable bank, the importer proves that he is a financially reputable company More Favorable Payment Terms: The importer may be able to convince the exporter to work with deferred payment terms instead of an at-sight payment via a letter of credit As the exporter can discount the credit any time after the complying presentation, deferred payment should not be a big issue for him The most frequently used deferred payment options under the letters of credit are 30 days, 60 days, or 90 days after the bill of lading date Timely Shipments: Importers can determine the shipment period by using a letter of credit If the exporter can not ship the goods on time, he may face a late shipment discrepancy 3.1.2 To the Exporters Reach out to New Customers: It is difficult to find a new buyer who is ready to make an advance payment to an untested exporter By offering a letter of credit, the exporter can increase the chance of securing the order Widen Export Coverage: Exporters can increase their export coverage by regional means if they use letters of credit For example, a letter of credit is the main payment option for the majority of Middle East countries Mitigates Default Risk of the Importer: By using a letter of credit, the exporter can replace default risk from the importer to the importer’s bank, because the letter of credit is a conditional payment undertaking of the issuing bank Eliminates Importing Country’s Political Risks via Confirmation: By adding confirmation, the exporter can eliminate importing country’s political risks Discounting Possibilities: It is possible to discount letters of credit that are not payable at sight Once the issuing bank or confirming banks determines that the letter of credit documents are complying, the respected bank can discount the credit 3.2 SHORTCOMINGS 3.2.1 To the Importers Fraud Risks: While not common, it is possible that exporters can reach the funds under letters of credit by submitting fraudulent documents Higher Bank Fees: Importers must pay high letter of credit fees to the banks under letters of credit transactions Risks Associated with Shipment of Low-Quality Goods: It is not easy to stop payment under the letter of credit once the issuing or confirming bank determines compliance with the presentation The importer may have to pay for the goods not consistent with the sales contract 3.2.2 To the Exporters Higher Learning Costs: Letter of credit is one of the most complex fields of international trade Exporters acting with a lack of letter of credit expertise and experience may face unpleasant consequences Higher Bank Fees: Exporters may have to pay high letter of credit fees to the banks under different names compared to other payment methods Time-Consuming Procedures: A letter of credit is a conditional payment undertaking of the issuing bank CHAPTER PRACTICAL USAGE SITUATION OF USING DOCUMENTARY CREDIT IN VIETNAM 4.1 THE PRACTICAL PROCESS OF PAYMENT BY DOCUMENTARY CREDIT METHOD AT BANK Step Branch Receipt of applicant for issuance of L/C and amendment of L/C Transaction Office Submit to the management board with a record beyond authorization Judgement Approve, grant L/C issuance limit and amend L/C Related departments Customer departments of the head office approve or submit to the Board of Directors, Appraisal Council for approval to issue documentary credits exceeding the issuance authorization limit Receive documents for issuing L/C and amending L/C Register to issue L/C and amend L/C S Receiving documents from the negotiable bank W Checking documents I The documents have errors F Reject the set of Docs 10 Waiting for customer comments Deliver Docs to customer Return Docs when there is an instruction from transaction fear Payment of Docs/ Debit customer account 11 12 The valid documents Receive a set of Docs, tesst results of Docs and notify customers Print debt statement/ Tax invoice V.A.T Records Records T