Documentary L / C

There are several key problems in international trade. One of the tasks is to reduce the risk of non-payments for goods or non-deliveries. As early as the 17th century, a rather reliable instrument of this reduction appeared - a credit letter. Over time, this letter has become a modern "documentary letter of credit" ( accredo - lat., I trust ).

Theoretically, calculations in accordance with the "trust" scheme can be carried out within the framework of domestic trade. However, in practice such a payment by a letter of credit is very rare.

This scheme gives both the supplier and the buyer a one hundred percent guarantee of securing the transaction reliability. At the same time, the documentary credit is complicated with complex document circulation. In this connection, the cost of the entire procedure is increased. Therefore, a documentary credit is most often used in large transactions, rather than in small transactions . In addition, such a system is used to establish relationships with a new or under-reliable partner. In some countries, for any transactions in the external market, it is necessary to open a documentary letter of credit in accordance with tradition (for example, in India) or with legislation (for example, in Uzbekistan).

Recently, as analysts say, interest in this system is growing continuously.

A documentary letter of credit is a contract. It contains an obligation from the issuing bank. Under this agreement, the bank, on its own behalf or on a client's behalf, against documents that comply with the terms of the letter of credit, undertakes to make a payment in favor of the beneficiary (beneficiary) or instruct another executing (bank) to make this payment.

Carrying out operations in accordance with the above system provides for the presence of the following participants:

1. Advising bank-beneficiary. In accordance with the order of the issuing bank, he notifies (announces) the beneficiary about the opening of the letter of credit and its terms. The advising bank does not bear any responsibility for the implementation of the provisions of the agreement.
2. The issuing bank that opened the letter of credit.
3. The beneficiary is the beneficiary. This person is destined for payment or in his favor a letter of credit is opened.
4. Executing bank. He, in accordance with the commission of the issuing bank, makes payment against the documents specified in the contract. Often the executor is an adviser at the same time.
5. The applicant of the letter of credit - the payer, who applied for the opening of the contract to the servicing bank.

Thus, five subjects participate in the procedure. However, as a rule, there are four of them in practice. And in some cases the number of participants can be reduced to three. In this case, the advising bank acts in the role of not only the executor, but also the issuer.

A letter of credit is a certain means of payment, but is not at the same time a form of calculation. Experts often point to a difference in the concepts of "method of payment" and "form of calculation." The first was formed in the conditions of international trade, and is more complex and broader than the second definition, which is applied in Russian financial law.

Each letter of credit, strictly speaking, is unique. For each one, a contract is formed. Along with this, there are general criteria, according to which all letters of credit are divided into several groups.

Thus, uncovered and covered, irrevocable and recall contracts are distinguished.

Uncovered L / C is called in the event that the issuing bank guarantees payment even if there are no funds in the applicant's account (a loan is provided). The operation is called covered in the case if immediately after the application by the bank the hundred percent of the funds necessary for payment are booked on the applicant's account.

A recall letter of credit is called in the event that the issuing bank at any time can change or even cancel it without warning the beneficiary. Irrevocable agreement can be changed or canceled only after the consent of the beneficiary.