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The Stages of Documentary Credit Transaction
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The stages in an irrevocable documentary credit transaction are as follows:
1. The importer (buyer) asks their bank to issue a letter of credit in favour of the exporter (seller). The importer applies for a letter of credit by filling out a form. This gives the following details:
-type of credit (i.e. revocable or irrevocable)
-beneficiary (the person receiving the money)
-amount
-how long the credit will be available for (i.e. valid until a certain date)
-documents involved in the transaction (e.g. bill of lading, commercial invoice, insurance certificate)
- description of goods.
2. The importer’s bank (called the issuing bank as it issues the letter of credit) asks a bank in the seller’s country to advise the seller that a letter of credit has been issued in their favour. The issuing bank may also ask the bank in the seller’s country to confirm the letter of credit (i.e. promise to see that the conditions of payment are fulfilled). For these reasons the bank in the seller’s country is called the confirming or advising bank.
3. The exporters dispatch the consignment to the importers and present the shipping documents: bill of lading, commercial invoice, insurance certificate, etc.) to the confirming bank.
4. The exporters draw a bill of exchange on the confirming bank. The bank pays exporters against the bill and then sends the shipping documents to the issuing bank.
5. The issuing bank checks the documents and pays the confirming bank.
6. The issuing bank releases the shipping documents to the importers and debits their account.
7. The importers collect the consignment by presenting the shipping documents to the shipper.
Standby Letter of Credit
Exporters may require a guarantee to make sure that they are paid. This is frequently done by means of a standby letter of credit where the bank will pay the exporters if, for any reason, the importers do not pay. It is often used when there is a contract involving several shipments and the exporters want to get part of, or all, of their payment at once. In some countries, the USA for example, standby letters of credit are preferred to bank guarantees and have the advantage of being subject to the Uniform Customs and Practice for Documentary Credits (UCP500).
| Buyer/Importer | Issuing bank | Advising/Confirming Bank | Seller/Exporter |
| 1.Asks his or her bank to open a letter of credit in favour of the seller | Asks bank in buyer’s country to advise or confirm the shipping documents | Advises seller of the transaction and may confirm payment against a B/E drawn on it, if that has been arranged | Dispatches consignment to the buyer and presents the shipping documents to the advising /confirming bank |
| The buyer gets the consignment by presenting the shipping company | Releases the shipping documents to the buyer or agent bank in his or her country against payment. | Pays seller or discounts B/E drawn on it, and sends the shipping documents to the issuing bank in the buyer’s country |
7. Match the terms (A) and their definitions (B); translate into Russian/ Belarusian:
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A. a) profit; b) damage; c) d) legislation; e) securities; f) indebtedness; g)deposit; h) currency i) price; j) charge; k) to finance; l) certificate of origin; m) consular invoice; n) certificate of inspection; o) Electronic Data Exchange(EDI); p) revocable letter of credit; q) irrevocable letter of credit; r) documentary credit; s) Cash Against Documents transaction (CAD); t) a dishonored bill; u) a negotiable bill; v) a discounted draft; w) a clean bill; x) a sight bill/ sight draft; y) a bill of exchange (B/E); z) a drawer; a’) a drawee; b’) to overdraw an account.
B.
1. The documents are handed over to the importer when cash has been paid.
2. A document or sometimes a stamp on document, giving permission for goods to be imported, issued by the consulate in the importing country.
3. A sum of money that has to be paid as a price, especially for services.
4. Sold to a bank at a percentage less than its value.
5. The relevant documents completed on computer templates to the exporters specific requirements and transferred by email.
6. Any kind of money, that is in general use as cash, any generally accepted means of payment.
7. A debt receipt that is not paid the due date.
8. A letter of credit that can be cancelled.
9. Paid on presentation.
10. Not accompanied by shipping documents.
11. A document showing where goods were made, which is used to prevent goods from outside coming into free trade area or customs union without being taxed.
12. Investments generally, especially stocks, shares, bonds which are bought as investments.
13. A paper signed by agents to ensure the customer is getting goods of the type and quality he ordered.
14. A person asking for the money/exporter.
15. Harm, loss of value caused by being broken or spoilt.
16. A debt receipt endorsed (signed on the back) by the drawer.
17. A letter of credit accompanied by documents.
18. Laws, especially statute laws, i.e. Act of Parliament in Britain or Act of Congress in the USA.
19. To take out more money than there is in credit.
20. A letter of credit that cannot be cancelled except with the agreement of the seller.
21. The difference between the price received for a product and the amount paid as reward to the factors of production.
22. To provide or arrange means of payment.
23. A loose-leaf sheet supplied by a bank to each customer, giving details of all debits and credits made.
24. An order sent by the drawer to the drawee.
25. Money or its equivalent deposited with a person or organization, especially a bank, for safe-keeping, or as security, or to bear interest.
26. A person paying /importer.
23. The rate at which a commodity can be exchanged for another commodity or for money.
24. A sum owed, debts in general.
8. Fill in the blanks by inserting the following; translate into Russian/ Belarusian.
A.
a) safekeeping; b) veins; c) profit; d)guarantor; e) the Federal Deposit Insurance Corporation; f) chartered; g) demands; h) to borrow; i) the Federal Reserve System; j) handling; k) storing; l) to overdraw; m) losses and gains; n) tougher; o) statements; p) security; q) an account; r) mortgage; s) money supply; t) liquid; u) interest; v) accepts; w) to confirm;x) guarantee; y) standby.
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B.
1. The first banking house was associated with goldsmiths who took in their customers’ silver and gold for ….
2. Presently, banking system is considered to be … of the economy.
3. The difference between interest and charges received, and interest and expenses paid, becomes the banks’ ….
4. The government must stand ready to serve as the ultimate … of the money supply.
5 Further, the whole question of protecting the bank depositors was resolved by ensuring deposits through ….
6. All banks … by (that is, licensed to operate as a bank) by the federal government were required to become the members of the Fed. These are known as national banks.
7. When the banking system is always able to meet depositors’ … for money, there is no need to withdraw.
8. Banks can make loans to people who want…, but because these loans create demand deposits that are part of the money supply, they must be controlled.
9. At the center of the U.S. banking system is …, which was established in 1913.
10. In a moneyed economy, a bank is a necessary institution for the … and … of money.
11. It is possible … an account, i.e. take out more money than there is in credit.
12. Modern financial systems contain a mass of amplifiers that multiply the impact of both… …, creating huge uncertainty.
13. …monetary policy of the government would have encouraged investors to steer towards more liquid products.
14. … give a detailed account, on a day-to-day basis, of all money and cheques will have either been paid into account or withdrawn from the account.
15. A loan will usually be covered by a negotiable …, e.g. shares with repayment specified on the agreement.
16. With an overdraft, however, the customer is given permission to overdraw …. up to a certain limit.
17. … is a type of lending money to customers to buy real estate with the bank buying the property for the customer and the customer repaying over a twenty/twenty- five-year period.
18. The value of coins and paper currency together with the demand deposits total $372.6 billion and economists call this combination the ….
19. These are the most … financial assets, which means that they can be used most easily and directly to buy things.
20. Savings accounts … earn but in most cases you cannot write a check against them.
22. If the drawee … the bill, they will sign their name on the face of it and date it.
23. The issuing bank may also ask the bank in the seller’s country … the letter of credit (i.e. promise to see that the conditions of payment are fulfilled).
24. … letters of credit are preferred to bank guarantees and have the advantage of being subject to the Uniform Customs and Practice for Documentary Credits (UCP500).
25. Exporters may require a … to make sure that they are paid.
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