Chapter 4

DOCUMENTARY CREDIT METHOD

IN FOREIGN TRADE PAYMENT
 Learning outcomes of chapter 4
After studying this chapter, learners will be able to:
• Explain the concept, process and usage cases of Documentary
credit method. On that basis, practice applying Documentary credit
method in different situations.
• Know how to analyze, evaluate and suggest solutions to solve
problems arising from practice related to Documentary credit
method at enterprises.
• Be autonomous and creative in expressing their views on
Documentary credit method applied at the enterprise and guiding
others to perform work related to international payment activities at
the enterprise.
 Documentary Credit

Definition:
A documentary credit is a conditional payment instrument made
by the issuing bank in favour of a designated beneficiary.

Kwai Wing LUK (2012), International Trade Finance, City Unversity of Hongkong Press
 Documentary Credit

Definition:
Credit means any arrangement, however named or described,
that is irrevocable and thereby constitutes a definite undertaking of
the issuing bank to honour a complying presentation.

According to Article 2, UCP 600

 Documentary Credit

Definition:
Documentary credit is an agreement in which a bank - the issuing
bank of the letter of credit, at the request of the customer - the
person requesting the opening of the letter of credit will pay a
certain amount. to another person – the beneficiary of the amount
of the letter of credit or acceptance of a draft drawn by this person
to the extent that such person presents to the bank a set of
payment documents in accordance with the terms and conditions.
case of letter of credit
 Documentary Credit

Features of a Letter of Credit:

• A legal document
• A commitment of payment or an acceptance of payment, not a
promise.
• Payment basis of a L/C is documents (Article 14 - UCP600)
Nature of a Letter of Credit:
• A L/C is formed on the basis of the sale contract,
• A L/C is fully independent with the sale contract once it is
formed
 Documentary Credit

Legal basis:
 International Law: No
 International Practice
+ UCP600, 2007 - Uniform Customs and Practice for
Documentary Credits - issued by the International Chamber of
Commerce (ICC)
+ ISBP 745, 2013- ICC - International Standard Banking
Practice for the examination of documents under documentary
credits
+ eUCP 2.0, 2019 – Supplement to UCP600 for Electronic
Presentation version 2.0
+ URR 725, 2008-ICC: The Uniform Rules for Bank – to – Bank
 Documentary Credit
Applicant

Issuing bank

Beneficiary

Advising bank

Parties Confirming bank

Paying bank

Negotiating bank
 Process of Documentary Credit

Importer/ (4) Ship Goods Exporter/

Applicant Beneficiary

(8) (5) Present

(1) Apply for a L/C
(3) L/C (9) documents
delivered

(2) L/C issued

Issuing bank Advising bank
(6) Documents

(7) Honor
 Types of Documentary Credit

Revocable L/C
 A letter of credit that can be modified or canceled by the issuing bank
after its issuance at any moment without prior notice to the parties
concerned.
 An uncertain payment security to Beneficiaries.
 For Exporter: risky
 For Importer: flexible
 Where to apply: The importer opens revocable L/C for the exporter to use
it as a basis to get an export permit, or to check the feasibilty of the export
contract implementation.
 Types of Documentary Credit

Irrevocable without recourse L/C

 A type of L/C which, after the beneficiary has received the money,
the issuing bank is not entiled to claim money back in any cases.

 The beneficiary indicates “without recourse to drawer” on the Bill of

Exchange as well as L/C
 Types of Documentary Credit

Revolving L/C

 An irrevocable L/C which will be renewed automatically for the

same amount after being used or expired until reaching the total
value of the contract.

 It can revolved with respect to either:

+ Value (amount)

+ Time: cumulative and non-cumulative

 Types of Documentary Credit

Revolving L/C (cont.)

 Types of revolving:

+ Automatic revolving

+ Limited revolving

+ Semi-automatic revolving
 Types of Documentary Credit

Back to back L/C

 An arrangement in which one irrevocable L/C serves as the

collateral for another; the advising bank of the first L/C becomes the
issuing bank of the second L/C

E.g.:
China VN ML

L/C 1 L/C 2 Back to back L/C

 Types of Documentary Credit

Reciprocal L/C
 Only effective when its counter L/C is opened.
 Insert wording « The L/C is effective if the beneficiary opens
Reciprocal L/C for the drawer of this L/C » in the first L/C.
 Insert wording « This L/C is reciprocal to L/C No. … dated …issued by
…Bank » in the reciprocal L/C.
 Types of Documentary Credit

Deferred payment L/C

An irrevocable L/C in which the issuing bank or confirming bank

confirms its commitment to the beneficiary to make gradual payment
for the full amount of the L/C within the time limit.
 Types of Documentary Credit

Red clause L/C (Advance L/C, Anticipatory L/C)

A specific type of L/C in which a buyer extends a loan to a seller

before shipment
 Types of Documentary Credit

Stand-by L/C
 This L/C is opened to ensure the rights of the importer in the case
that the exporter receives L/C but has no delivery capability.
 The issuing bank makes commitment with the importer to repayment
when the exporter fails to fulfil its shipping and compensates for
losses in case the importer makes advance payment, L/C issuing fee,
or deposit amount
 Types of Documentary Credit

Irrevocable Transferable L/C

An irrevocable transferable L/C which allows the beneficiary (the

exporter or the first beneficiary) to transfer all or a part of the
original L/C to a third party. The new beneficiary has the same
rights and protection as the original beneficiary. This type of L/C is
extensively used by brokers, who are not the actual suppliers.
• Be able to substitue some terms in L/C: delivery date, validity
period …
• Be unsure about the supplier’s benefits if payment documents
are inconsistent.
 Notices related to L/C contents

a. Credit number, date and place of issue

 Credit number: every L/C has its own number.
 SWIFT MT 700  field 20 “Documentary Credit Number”
 Place of issue: where Issuing Bank writes commitment to pay the
exporter.
 Date of issue:
+ the start date of arising the issuing bank’s undertaking to the
exporter.
+ the start date of the validity of the L/C
 Notices related to L/C contents

b. Name and address of the persons concerned

* Businessmen
- Applicant
- Beneficiary
* Banks:
- Issuing bank
- Advising bank
- Paying bank
- Confirming bank
 Notices related to L/C contents

c. Credit amount
- Currency code
- Way to write the credit amount
+ Do not write the absolute value
+ Write: “not exceeding 100,000.00 USD” or “about 100,000.00
USD” ≈ ± 10%
- Amount in figures and words must be consistent with each other
and consistent with the L / C
- See more at Article 30 UCP 600
 Notices related to L/C contents

d. Validity period, payment period and shipment period

specified in the L/C
• Validity period:
- the period that the issuing bank commits to pay the exporter.
- from the date of issue to the expiry date of L/C
• Shipment period:
- Specified in L/C and regulated by the Commercial contract.
• Payment period:
- Specified in L/C and regulated by the Commercial contract.
 Notices related to L/C contents

e. Contents of Commodities
f. Contents of merchandise transportation and exchange
g. Documents presented by the exporter.
h. Issuing bank’s undertaking
“Upon receipt of said advice and documents in compliance with
terms and conditions of the credit, we shall reimburse you according
to your instruction in the currency of the credit”
i. Other special terms.
j. The issuing bank’s signature
6. Tradecard
 Tradecard

Definition

TradeCard payment method is the method of wire transfer through the

designated bank to the exporter's account.

Nong Thi Nhu Mai et al. (2022), International Settlement, Finance Pubshing
House
Process of Tradecard
 Tradecard

Shorten the time to search, evaluate

and negotiate with foreign partners

Save time and money

Strengths
Ensure safe payment for the seller and
receive the goods as required for the
buyer
Less risks

Easy to use
7. Bank payment obligation
(BPO)
 Bank payment obligation (BPO)

Definition

“Bank payment obligation” is an independent and irrevocable

commitment of a Bank (referred to as the Issuing Bank / Obligator Bank)
to pay immediately or undertakes to make a term payment and make a
payment upon maturity of a specified amount to another bank (referred
to as the Recipient Bank - Recipient Bank) after successfully matching
the data following the globally uniform rules of BPO of the International
Chamber of Commerce (ICC)
Nong Thi Nhu Mai(ICC,
et al. 2013).
(2022), International Settlement, Finance Pubshing
House
 Bank payment obligation (BPO)

Exporter

Importer
Parties

Obligator Bank

Recipient Bank
 Bank payment obligation (BPO)

Legal basis

Uniform Rules for Bank Payment Obligations – URBPO

issued by ICC, effective from 01st July 2013

 Process of Bank payment obligation (BPO)

(1) Contract

Importer Exporter

(4) Advise
(2) Contract (8) BPO (5) Payment data
(6
data+ BPO
payment
request
(3) BPO

(5) Payment data

Obligator bank Recipient bank

(6) Honor
 Benefits of Bank payment obligation (BPO)

Benefits Importer Exporter

Guaranteed payment - Control the payment - Be sure to receive
execution time. payments on time,
- Avoid prepaid thereby improving
payments. liquidity forecasting.
- Can guarantee - Early payment (if it is
payment to suppliers, immediate payment).
thereby being able to - The seller can fix the
negotiate better delivery time
payment terms. according to his ability,
determine the
payment term and
make delivery
accordingly.
 Benefits of Bank payment obligation (BPO)

Benefits Importer Exporter

Improve operational - Simple BPO issuance - Documents are sent
efficiency process. directly to the buyer.
- Reduce the burden of - Reduce the risk of
documents and invalid documents.
complicated L/C. - Save time and
- Improve inventory manpower by not
management and having to present
avoid inventory costs paper documents.
through “just in time” - Service fee is lower
orders than L/C fee.
- Service fee is lower
than L/C fee.
 Benefits of Bank payment obligation (BPO)

Benefits Importer Exporter

Risk reduction - Be able to receive goods - Reduce the risk of non-
early. payment and late payment.
- Increase flexibility when - Be safer than Open Account
changing transaction method.
parameters. - Credit risk is transferred from
- Promote partnerships the buyer to the Obligator bank
with merchants through a or Confirming Bank.
- It is possible to sell goods with
variety of payment
deferred payment to buyers
methods and more flexible
because there is a bank
options. guaranteeing payment
- The buyer does not refuse to
pay for the reason related to
the quality of the goods
 Benefits of Bank payment obligation (BPO)

Benefits Importer Exporter

Financing - Optimize the use of - Optimize the use of banking
payables/receiv banking services. services.
ables - Reduce DPO (number of - Reduce DSO (time to collect
days to pay remaining) backlogged goods).
- Extend the payment - Funding before/after delivery.
term.
- Transfer responsibility for
payment to the bank.
 Benefits of Bank payment obligation (BPO)

Simple process

For banks Automatic data matching process

Cost-effective as well as document

processing time
 Revision Questions

1. Present the content and procedure of Documentary credit.

2. Present the strengths and drawbacks of Documentary Credit.

3. Compare Documentary credit methods with Remittance and

Collections.
Thank you!