Documentary Credit Payment Process Flow Chart

The bank (issuing bank of the letter of credit) will issue a letter, called a letter of credit (Letter of Credit), under which the issuing bank commits to pay or accept a bill of exchange to a third party (the beneficiary of the letter of credit) when this person presents to the issuing bank a set of payment documents in accordance with the terms and conditions specified in the letter of credit.

In Article 2, UCP 600, the definition of documentary credit is as follows: “ A documentary credit is any arrangement, however named or described, which is a definite and irrevocable undertaking of the issuing bank to honour a complying presentation ”.

Letter of credit is the core, an important tool of the documentary credit payment method. There are many different types of letters of credit suitable for each business model. The division is based on many different criteria such as: Payment term, nature... However, their usage levels are very different, in which the commonly used letters of credit are irrevocable credit, confirmed irrevocable credit, back-to-back credit, standby credit...

The subjects participating in the documentary credit method are very diverse, including: The person requesting to open a letter of credit; The beneficiary; The bank opening the letter of credit; The bank advising the letter of credit; The paying bank; The reimbursing bank; The confirming bank; The bank discounting documents...

1.1.2.2 Characteristics of payment method by letter of credit

a. Letter of credit is a two-party economic contract.

Many people mistakenly believe that a letter of credit is a three-party economic contract, including: the applicant, the issuing bank and the beneficiary. In fact, a letter of credit is an independent economic contract between only two parties: the issuing bank and the beneficiary. All requests and instructions of the applicant for a letter of credit are represented by the issuing bank, therefore, the official voice of the applicant for a letter of credit is not expressed in the letter of credit. Understanding this is very important, because

Many importers and exporters believe that the letter of credit belongs to them, and that the bank only provides a service for a fee. Therefore, the agreement between the exporter and the importer is important, and whether the bank agrees or not is only a payment fee factor. For example, if an amendment to the letter of credit has been agreed by the exporter and the importer, but in fact the issuing bank does not agree, the amendment is not valid.

b. Letter of credit independent of underlying contract and goods

In essence, a letter of credit is a transaction that is completely independent of the foreign trade contract or other contract on which the letter of credit is based. In no case shall the bank be involved in or bound by such a contract, even if the letter of credit contains any reference to it.

Thus, the letter of credit is important, it is formed on the basis of the foreign trade contract, but after being established, it is completely independent of this contract. Once the letter of credit has been opened and accepted by the parties, whether the content of the letter of credit is consistent with the foreign trade contract or not, it does not change the rights and obligations of the parties related to the letter of credit.

Some importers do not understand or ignore this rule, when facing risks in the basic contract transaction, they turn to complain or prevent the bank from paying the properly presented set of documents. This is not allowed.

In practice, some importers may use a letter of credit as a backup tool to specify, detail or supplement the terms that are missing in the commercial contract; in addition, to correct or amend unfavorable contents in the signed foreign trade contract. However, this only avoids having to open a letter of credit for the exporter, while the exporter can still sue the importer in court based on the terms of the commercial contract.

c. Letter of credit deals only with documents and payment is based only on documents.

Banks, on the basis of documents, examine the presentation to decide whether the presented documents are consistent on their face. Thus, documents in L/C transactions are of special importance, they are evidence of the seller's delivery of goods, and represent the value of the goods that have been delivered. Therefore, they become the basis for the bank to pay, the basis for the importer to repay the bank, and the importer's receipt of goods... Whether the exporter receives the money or not depends solely on whether the presented documents are consistent or not; at the same time, the bank will only pay when the presented set of documents is consistent, meaning that the bank is not responsible for the truth of the goods that any document represents.

When the presented documents are in compliance, the issuing bank must unconditionally pay the exporter, even though in reality the goods may not be delivered exactly as stated on the documents. Thus, the payment of L/C is not based on the actual situation of the goods; if the goods do not match the documents, the two parties will directly resolve the matter on the basis of the sales contract, without involving the bank. Only in the case that the documents are not in compliance, but the bank still pays the exporter, will the bank be fully responsible, because the importer has the right to refuse to pay back the money to the bank.

d. Letters of credit require strict compliance of the set of documents

Since the transaction is based on documents and payment is based only on documents, strict compliance with documents is a basic principle of letter of credit transactions. To receive payment, the exporter must prepare a suitable set of documents, strictly comply with the terms and conditions of the letter of credit, including the number of types, quantity of each type and the content of the documents must meet the function of the required documents.

In terms of payment and risk prevention tools for exporters and importers, payment by letter of credit has superior advantages.

superior to other payment methods. That is why this method has existed and developed as it is today. However, in international trade practice, due to market developments, prices, etc., letters of credit can be abused to become a tool to refuse to receive goods, refuse to pay, and a tool for fraud and deception.

The nature of a letter of credit is to transact only with documents and when examining documents, only the surface of the documents is considered, not the "inside" nature of the documents, which is why many disputes arise regarding the strict compliance of the documents. In reality, creating a perfect set of documents without any errors is not an easy task, moreover, there is a very thin line between "conformity" and "error", depending on the customs, qualifications, viewpoints, and motives of the people involved. In addition, due to the independent nature of the L/C from the underlying contract, the party with the intention of fraud can take advantage of not delivering the goods or delivering the wrong goods, but still creating a suitable set of documents for payment. In fact, there have been many such cases in the world.

Through analyzing the above characteristics, the documentary credit payment method has the following advantages:

* For importers :

Payment is made on the basis of documents representing the goods. The importer is opened a letter of credit by the bank, the bank confirms using its reputation and finance to commit to pay the exporter to ensure delivery of the goods. And the importer has reason to believe that the bank will not pay before the exporter delivers the goods, because this requires the exporter to present a set of shipping documents.

* For exporters :

The exporter can rely on the payment of the issuing bank or the confirming bank instead of relying on the financial capacity, reputation and risk level of the importer. The exporter is confident that he will receive the export payment if he hands over to the issuing bank the documents.

documents are complete and in accordance with the provisions of the letter of credit. In addition, the exporter can use the letter of credit as a method of financing exports such as: Discounting the set of documents, requesting the bank to lend capital by mortgaging the letter of credit.

* For banks :

This is a valuable customer service, besides providing a safe method for international trade, documentary credit is also a profitable business opportunity for banks. Banks are not only intermediaries in collection and payment but also:

- Act as a representative of the importer to pay for goods to the exporter, ensuring that the exporter receives the amount of money corresponding to the goods they have supplied.

- Is the person who ensures that the importer receives the quantity and quality of goods represented by the set of documents and corresponding to the amount of money spent.

However, the importer and the bank may also face risks because the documents considered may be in accordance with the terms of the letter of credit, but in fact the goods do not match the set of documents. In that case, either the importer faces risks, or the bank faces risks due to the importer's non-payment.

Currently, the international legal basis commonly used for documentary credit is the Uniform Customs and Practice for Documentary Credits, abbreviated as UCP. In recent times, the 1993 revision called UCP 500 has been used at a very high rate. From July 1, 2007, the next revision - UCP 600 took effect, strengthening the legal basis for international payment activities.

In international payments in general, especially foreign trade payments, payment method by L/C is very popular, especially for markets in developing countries where the market economy has not reached a high level.

1.1.3 Business process for payment by letter of credit

1.1.3.1 Participants

* Applicant

Is the party at whose request a letter of credit is issued. In international trade, the Opener is usually the importer, who requests his serving bank to issue a letter of credit and is legally responsible for the issuing bank paying the beneficiary of the letter of credit.

* Beneficiary

As the beneficiary of a letter of credit issued, that is, to receive the payment amount or to own the bill of exchange accepted for payment under the letter of credit.

* Issuing bank

Is the bank that issues the letter of credit at the request of the applicant, meaning the bank that has granted credit to the applicant. The issuing bank is usually agreed upon by both parties and specified in the sales contract. If there is no prior agreement, the importer is allowed to choose the issuing bank.

* Advising bank

Is the bank that advises the letter of credit to the Beneficiary at the request of the Issuing Bank. The advising bank is usually a correspondent bank or branch of an issuing bank in the exporter's home country.

1.1.3.2 Documentary credit payment process flow chart

Advising bank

Issuing bank

(8 )

(7)

(2 )

Beneficiary

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(3) (5) (6) (1) (9) (10)

Applicant

(4)

DTM

Table 1.1: Documentary credit payment process flow diagram

Note:

First, the exporter and importer must sign a commercial contract, in which the payment term is chosen as documentary credit.

(1) The importer, based on the commercial contract, writes a request to open a letter of credit for the exporter to enjoy and sends it to the serving bank.

(2) The issuing bank of L/C will issue a letter of credit based on the credit opening request. If all requirements are met, the bank will issue a letter of credit.

(3) The advising bank exercises its right to advise the letter of credit and transfer the L/C to the beneficiary.

(4) The exporter delivers the goods based on acceptance of the contents of the L/C.

(5) After completing the delivery, the exporter prepares a set of payment documents according to the L/C and sends them to the designated bank for payment.

(6) Based on the examination of the documents, the nominated bank will make payment to the exporter (either by cash, acceptance, or discount).

(7) The nominated bank transfers the documents to the issuing bank and claims payment.

(8) The issuing bank checks the documents and if they meet the conditions set out in the L/C, it will pay.

(9) The issuing bank informs the importer of the status of the documents and requests them to make payment.

(10) The importer checks the set of documents, if they are suitable, they will pay (or accept), the Bank will give them the documents so they can receive the goods. On the contrary, the issuing Bank will not give the set of documents to the importer in case they do not complete the payment procedure.

1.1.4 Legal documents related to payment method by L/C

International payment activities, especially in the context of each country's economy being a component part of the international economy, are increasingly important in each country's foreign economic activities. To carry out this economic relationship through international payment activities, it is necessary to have legal documents as a basis for payment activities between countries to be quick, convenient and safe, especially in the context of international economic integration.

1.1.4.1 International Law and Conventions

- United Nations Convention on Contracts for the International Sale of Goods (Wien Convention 1980)

- Geneva Convention 1930 on Uniform Law for Bill of Exchange (ULB 1930)

- United Nations Convention on International Bill of Exchange and International Promissory Note (UN Convention 1980)

- Sources of law and international conventions on transport and insurance.

- Bilateral and multilateral agreements…

1.1.4.2 Sources of national law

- Banking law

- Commercial law

- Foreign exchange law