Typical Procedure of Documentary Credit:
Although there are endless variations on the letter of credit, the following five major steps are involved in the operation of a documentary letter of credit:
- Issuing
- Advising
- Amendment ( if necessary)
- Presentation and
- Settlement.
A typical LC procedure is as follows. The process beings when the exporter and importer agree on a contract of sale.
Exporter and Importer enter into a contract of sale calling for settlement by documentary credit.
Typically, it is the exporter who insists on payment by letter of credit and the importer then initiates the Letter of Credit mechanism by going to his/her bank ( Issuing bank) to issue a documentary credit in favour of exporter (beneficiary).
The documentary credit is then sent to a bank in the exporter’s country (called advising bank) which advisees the beneficiary of the documents and other terms and conditions against which sight payment , deferred payment, negotiation or acceptance may be made. Exporters may insist on confirmed credits when they want to have a trusted local paymaster. The exporter checks the documentary credit against the contract of sale to ensure he/she can comply with the credit requirements. If he feels he can not comply he seek to have the credit amended.
If the exporter agrees with the terms of credit, the exporter then proceeds to ship the goods. After shipment, the exporter goes to the bank ( frequently the advising bank) to present the documents that the importer has asked for. The bank examines the documents carefully to ensure that the correspond exactly with the terms of the credit to decide whether to decide whether to settle with the beneficiary in the terms of the credit (i.e. by sight payment, deferred payment, negotiation or acceptance).
The bank, if it has effected settlement to the beneficiary, then forward the documents to the issuing bank and obtain reimbursement as agreed between the two banks. The issuing bank examines the documents and forward them to its customers who pays in accordance with arrangements agreed between the customers.
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