Definition of documentary credits in simple language: Letter of credit is a conditional commitment from one bank to another.
And in specialized language:
Written commitment letters of credit are an opening bank (Issuing Bank) that is provided to the seller / beneficiary through the Advising Bank upon the request of the buyer of the goods (Opener / Applicant) to be based on Instruction Payment on a due date due to full compliance with the orders, in the following ways against shipping documents
1- Order Cash Payment
2- Acceptance of documents received through the brokerage bank Acceptance of Documents
3- In exchange for the exchange of documents (Usance) and …. Negotiation of Documents in the name of the seller (In Favor of Beneficiary) for a certain amount and for a period of time through the system (SWIFT) works.
Letter of Credit From the Uniform Rules of Letter of Credit set forth in UCP600
(Uniform Customs and Practice for documentary), follows the International Chamber of Commerce and Incoterms, which stands for International Commercial Terms.
The word suite (s.w.i.f.t) is derived from the following words:
Society for world wide interbank Financial telecommunication
It means “global community of interbank financial communications”. Swift supports all the needs of financial institutions around the world in payments, financial markets, securities and financial exchanges by providing a variety of banking services. Among Swift’s advantages over other telecommunications devices (telex, telephone, and fax) are its 24-hour global accessibility, design based on standard procedures, and its speed and security.
Note: In Persian, all three terms Documentary Letter of Credit, Letter of Credit, Documentary Credit have been translated. Documentary, on the other hand, generally refers to any arrangements for opening credit and paying for the submission of documents.
Letter of Credit Documentary Letter of Credit and a form issued by the credit opening bank at the request of the credit applicant to open a letter of credit in favor of the beneficiary.
Minimum shipping documents required in documentary credits:
The minimum documents that are usually required during the exchange are as follows:
1 – Commercial Invoice.
2 – Bill of Lading
3- Certificate of Origin
4- Certificate of Insurance
Types of documentary credit
Letter of credit in terms of buyer options:
They are usually of two types: refundable and non-refundable.
A- Revocable Credit
This type of credit, after being notified to the brokerage bank, can be canceled and revoked at the request of the applicant from the buyer bank and without obtaining a license from the seller / producer of the goods.
It is clear that such loans do not carry any obligation or responsibility for the L / C issuing banks and will remain reversible until the documents are received and accepted by the issuing bank.
Obviously, the use of such credits is not recommended to sellers at all, and usually the banks involved in the credits will also refuse to accept and register the order of such credits.
B- Irrevocable Credit
This type of credit is exactly the opposite of the conditions of paragraph A and includes the irrevocable and irrevocable obligation of the bank opening the credit, and in a way, the payment of the credit in exchange for the exchange of documents without defects and defects at a certain maturity according to the terms and credit term he does.
Obviously, this type of credit can not be unilaterally canceled or amended without the consent of the seller and the beneficiary bank.
Banks usually explicitly state the above in the L / C text when opening letters of credit and notifying the brokerage bank. For example, the following text is mentioned:
Hereby we open an irrevocable unconfirmed and non transferable letter of credit in your favor…
Types of documentary credit in terms of double approval and guarantee:
A – Confirmed L / C
It is a credit that is approved by the issuing bank (beneficiary bank or brokerage bank) or any other reputable bank requested by the seller in addition to the credit opening bank. This type of credit is always requested by the seller when the obligation of the bank opening the credit is not accepted by the seller due to the political or economic situation of his country, or due to the trust of the buyer.
In this way, the two banks (the opening bank and the confirming bank) are jointly and severally liable to the beneficiary.
The cost of opening a certified documentary credit is higher than the cost of other credits. Now, considering the current situation in our country and as a result of the imposition of economic sanctions, etc., the sellers of goods, preferably, request the approved credits.
B- Unconfirmed L / C
Such credits can be opened only with the approval of the credit issuing bank and without the need for the approval of another bank.
Types of credits in terms of how to settle
A- Visual documentary credit (At Sight L / C)
In this type of credit, payment of the credit is made as soon as the documents of transportation / transaction of documents (Negotiation) are submitted, provided that the documents fully comply with the order contained in the text of L / C.
B- Defined Payment L / C:
In this type of credit, money is not paid when submitting documents, because the maturity is long-term and will be done in the future, so the obligation to pay at maturity is done through the bank that opened the credit, and in fact documents without receiving money in exchange for documents / other guarantees Enough at the discretion of the relevant operating bank to clear the goods to the applicant.
It should be noted that this semester should not be confused with Usance credits, because in this type of credit, one / more items will be sent to you as an attachment to the documents, which will be payable upon receipt through the buyer. If the payment of these “bills / s” is approved and certified by the operating bank, the responsibility and risk of payment will be transferred to the bank opening the credit, known as Acceptance L / C.
C- L / C Usance:
Credit is that the credit amount is not paid immediately after the submission of documents by the beneficiary, but its payment, plus the relevant interest, after the specified period (30 days, 6 months, one year, etc.) specified in the credit , Takes place. Usenet trading is usually done in countries that have a shortage of currency.
Documentary validity in terms of portability:
A- Transfrable L / C
A credit is said to be the right of the principal beneficiary to transfer all or part of the credit opened to a person or persons. In fact, this type of credit is a privilege for the seller, and increases the risk of the buyer.
B- Untransfrable L / C
A credit is said to be that the beneficiary has no right to transfer all or part of it to another. In international trade, the custom is for credit to be non-transferable.
Types of documentary credit with special conditions:
A- Guaranteed documentary credits (Standby L / C):
Such transactions are more common in the United States and are known as guaranteed letters of credit, and have recently become common in European countries.
The performance of such credits is similar to foreign exchange guarantees (Letter of Guarantee) which are used to guarantee the payment of goods, guarantee the repayment of advances and goods shipped, and sometimes to guarantee the good performance of contracts for the installation of goods, etc.
B- Revolving L / C:
In such credits, the goods or services subject to this L / C are used many times at specific times and for a certain amount. Beneficiary uses part of the credit, which is reactivated for a certain period of time or amount in proportion to time / amount or cumulatively or non-cumulatively
C- Back to Back L / C:
This type of letter of credit consists of two separate credits. The first credit is opened in favor of the beneficiary who is not able to prepare and send the goods for any reason. Therefore, relying on the benefit of the beneficiary, another credit is opened for the second seller (second beneficiary) who can prepare and send the goods, by the first beneficiary.
The amount of the second credit is usually less than the first credit so that the primary beneficiary can receive it before maturity and the last shipping date of the second credit must be before the first credit so that the first beneficiary can receive the documents related to the goods before maturity and the last shipping date of the first credit. The notifying bank must provide the first credit.
In contracts where there are several intermediaries between the final buyer and the original supplier, such reliance credit is opened by the intermediaries. In such cases, the credit backed by other credits is called overriding.
D- Red Clause credits
In this type of credit, all or part of the credit is paid to the beneficiary before shipping and registering the order.
Sometimes sellers of goods receive certain amounts under the heading (Payment Advance-Down) in advance before fulfilling their obligations.
The mentioned amounts are usually requested for financing / production and processing of the export product in question. In case of inability to supply the custom product, they will return the received amount along with the relevant interest to the buyer of the goods.
Because in this type of overseas transactions, the sellers do not trust the buyer of the goods, so they make the condition of the transactions based on the pre-receipt of a part of the goods, before shipment. Cs have become common, in this method, the risk of non-repayment of the mentioned amount can be covered by obtaining a counter-guarantee item (Counter Guaranttee) from the seller of the goods.
The reason for this naming is that the first time this credit was opened, the credit-opening bank, in order to attract the attention of the notifying bank, wrote the terms of the credit, which pays a certain amount of credit as an advance to the beneficiary, in red ink. It became known as the Red Matter. In some cases, a normal credit requires that some advance be made to the creditor. This is done upon receipt of the advance payment guarantee and differs from the validity of the red matter.
“Import of goods in Iran through the opening of documentary credit”
Steps to take before opening a credit:
1- Full observance of the law and regulations of export and import and its executive regulations and obtaining legal permits from the relevant ministries and authorities according to the mentioned law.
2- Full observance of the law and regulations of the annual budget which is announced at the beginning of each year.
3- Carrying out tender formalities or obtaining and presenting a license to leave tender formalities for government purchases of more than one million dollars, if necessary.
4- Obtaining proforma from the seller and applying the proforma conditions according to the foreign exchange regulations of the country and completing the order registration form based on it.
5- Obtaining a license from the country’s transportation organization and terminals for goods that are transported and imported into the country by foreign fleets.
6- Carrying out order registration with the General Office of Order Registration and Supervision of Trade Exchanges of the Ministry of Commerce
7- Obtaining insurance policy
8- Securing documentary credit:
Opening a documentary credit is possible by receiving the Rial equivalent and selling the currency, or the applicant currency, or a combination of the two methods with any ratio in compliance with the relevant regulations.
Note: The down payment for ministries and government agencies that use the public budget is equal to one hundred percent (100?) Of the letter of credit on the day of credit opening. Unless they use the facilities of Article 62 of the General Accounting Law, which is necessary to obtain the relevant licenses before opening the documentary credit.
9- Submitting a letter of commitment based on presenting the original green leaf of customs final clearance of goods in accordance with the documents traded in terms of quantity and quality
10. In the case of goods subject to mandatory standards, a valid internationally authorized inspection company should be identified or an undertaking should be made to accept the responsibilities of eliminating the inspection of goods.
After submitting the mentioned documents to the credit issuing bank, the mentioned bank proceeds to notify the documentary credit.
Internal documentary credit – Rials
It is also possible for Iranian contractors to open Rial credit in domestic banks.
It should be noted that in this case, as in foreign currency letters of credit, the regulations of UCP600 and Incoterms are as an additional condition and an integral part of letters of credit.
In addition, the opening of domestic-Rial documentary credit is based on forged contracts and civil participation. The amount of advance payment will be proportional to the type of goods and the credit status of the applicant and will be at least ten percent of the amount of documentary credit that will remain in the bank accounts until the transaction of the documents.
In international trade, in addition to the method of documentary credit, the transaction of documents is also done through documentary credit. The ICC Uniform Rules for Collection (URC522) collection and existing guidelines apply.
Receipt of documents for you
In this case, the seller to send the goods according to the agreement made with the buyer and the shipping documents to the other documents required by the buyer to the foreign exchange branch of the bank and the bank of the documents attached to the attachment drawn by the buyer with their orders (Shajul) sends to one of the brokerage banks in the buyer’s country. At this stage, the applicant must pay the bank fees according to the tariff and the costs of canceling the stamps and custom post to the branch.
If the buyer’s order is to deliver the shipping documents in exchange for receiving the documents to the seller, the broker, after presenting the documents and accepting the receipt, will take action to receive the documents and deposit the received amount to the bank account. Or without the broker’s commitment, the broker, after accepting the broker, will provide the documents to the buyer and at maturity, if the broker’s bank pledges to receive the money and deposit it in the bank account, and if only the pledgee has requested, if not Payment will be processed upon receipt of your request.
Note: According to the Uniform Rules of Procedures (URC522) of the International Chamber of Commerce, the buyer is not allowed to issue a bill of lading in the name of the brokerage banks and must obtain the consent of the brokerage bank through its foreign exchange branch before sending to the bank.
– Banks have no responsibility for reviewing documents and are only responsible for controlling the copies of documents provided or receipts.
– Payment to the seller’s account is made only after receiving the money from the broker bank 0
– At the request of the seller, the status of the foreign broker bank will be informed to the seller before submitting the review documents and the result.
How to receive money for your documents
Visual payment: Delivery of documents against payment of “D / P” or cash against “C.A..D” by the buyer
Term payment: Delivery of documents upon acceptance of the buyer D / A.
Steps to do the job
– After concluding the contract and announcing the acceptance of the buyer, the seller sends his goods for shipment and delivers the required documents to the foreign exchange branch of Bank Saderat Iran.
– After ensuring the accuracy of the number of documents received, the seller shall enter the order to the broker bank by entering the seller’s receipt order and send the shipping documents to the broker bank in the destination country by registered mail.
– The buyer’s bank announces the receipt of the documents to the Bank of Iran and sends a copy of the list on the documents along with the receipt notice to the buyer of the goods and requests the buyer’s acceptance along with the acceptance or deposit of the documents.
– After receiving the documents from the brokerage bank, this bank will deposit the documents to the account requested by the seller / exporter.
– Document transaction fee
– The cost of sending documents to the buyer’s bank
– The face of stamps
Types of receipts
1- Simple collection for you: In cases where the customer has a specific demand from a foreign party, after agreeing with him, he will issue a simple item for you and will refer to the bank for acceptance and receipt at maturity. Sends for acceptance and approval to his broker in the desired country. If the money is paid to you on the due date, the bank will deposit the money to the customer’s account, and if you do not pay the money on the due date, at the request of the beneficiary, it will be requested and will be prosecuted through the beneficiary.
2- Receipt of documents for you: In this case, the issuer sends the goods to the buyer in accordance with the terms of the contract and submits the shipping documents and documents required by the buyer to one of the bank’s foreign exchange branches, and the bank Postage and cancellation of stamps, the documents are attached to you and your instructions are sent to your broker in the country of purchase. If the buyer orders the delivery of the documents against the acceptance of the broker, the broker will present the documents to the broker after the acceptance, and at the due date, if the broker’s commitment, the broker will receive the money and deposit it in the bank account. If only a commitment has been requested from you, in case of non-payment at maturity, it will be requested.
Due to the fact that the guarantee role of the bank in this type of international trade is less than documentary credits, so exporters should consider the following items before concluding the contract in the form of documentary receipts.
:Familiarity with the buyer and ensuring his proper business relationship
– Stability of political, economic and legal conditions of the buyer country
– Legal restrictions on the entry of goods and the departure of currency in the country of the buyer