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Page 1: Documentary credit

Documentary Credit

Page 2: Documentary credit

Generic Flow of Documentary CreditSeller (Beneficiary) Buyer (Applicant)

Advising/Confirming Bank Issuing Bank

1. Contract

Goods

5. Shipment/Dispatch 12. Takes Delivery

2. D

C Ap

plic

ation

11.

Sett

lem

ent

4. Advice of DC 10

. Doc

umen

ts7. Money

6. Docum

ents

3. Documentary Credit (DC)

9. Reimbursment

8. Documents

Page 3: Documentary credit

Definition

A Documentary Credit as an instrument of settlement of payment obligation between buyer and seller.

• Letter of Credit : A credit is issued by the issuing bank and addressed to the Beneficiary in the form of a ‘Letter’• Commercial Credit: A credit issued by the

issuing bank in settlement of a commercial transaction

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Definition of DC

• Documentary Credit : A Credit is issued by the issuing bank and requires the presentation of stipulated documents for compliance

• Standby Letter of Credit: A credit is issued by the issuing bank to be used for settlement only where there has been some form of default or financial guarantee.

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Roles of Letter of Credit (LC)

Counterparts of a trade are usually located overseas. Sellers (exporters) and buyers (importers) have the following concerns when signing a trade contract:• Exporter/Seller: What if we ship the goods to

the importer but they don’t pay us the proceeds?

• Importer/Buyer: What if we are forced to pay the proceeds but the goods do not arrive?

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Role of LC

An L/C is a letter issued by a bank to guarantee the payment of proceeds. The bank, which issued an L/C, guarantees that the proceeds will be paid even if the importer goes bankrupt or is unable to pay for any other reason, on the condition that the documents satisfying certain conditions (terms of L/C) are presented.

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Roles of LC

1. Supplementation of credit of the buyer (importer) L/Cs make it easier for buyers to gain trust from sellers in selling their products.

2. Convenient tool for the seller (exporter) Sellers will have opportunities to receive finance for the proceeds from the bank easily, in the form of negotiation of export bills.

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What You Should Know About LC

• U.C.P.600, Uniform Customs and Practice for Documentary Credits 2007 Revision (UCP 600) has been established by the International Chamber of Commerce (ICC), to standardize interpretations and procedures of L/Cs. Majority of L/Cs are subject to rules of the UCP.• L/C transactions entirely based on the

presentation of documents

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What You Should Know About LC

• Transactions with L/Cs are separate and independent from export contracts that are the background of the L/Cs. They are entirely based on the presentation of documents.

• Therefore, banks issuing L/Cs must pay the proceeds as written in the L/C so long as the documents fulfilling the terms and conditions of the L/C are presented, even if the goods or their shipment violate the export contract

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Ilustrasi Jurnal – SIGHT LCTGL Issuing Bank Advising Bank

2 Feb No Entry

10 Feb N/A N/A Shipment

11 Feb No EntryPresentation of DocumentsNotify the customers

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Ilustrasi Jurnal – SIGHT LCTGL Issuing Bank Advising Bank

14 Feb No Entry

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Ilustrasi Jurnal – SIGHT LCTGL Issuing Bank Advising Bank

18 Feb

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1. Drawer (ABC Company Ltd.: the customer, negotiation applicant)2. Amount (US$55,800.00: amount requested for negotiation together with currency indication; within

the unused balance of the L/C, usually in agreement with the invoice amount)3. Drawee, place of payment (HIJ BANK, New York: the payer and the place of payment of the amount of

the bill indicated in the L/C4. Maturity (30 DAYS AFTER SIGHT: as required in the L/C)5. Payee (BTMU: negotiating bank of the bill) 6. Date and place of issue (OCTOBER 10, 2008, TOKYO) 7. Issuing bank of the L/C, L/C No., date of issue (HIJ BANK, New York; HIJLC1234567890; April 10, 2008) 8. Applicant of the L/C (XYZ Corporation New York: payer of the import proceeds)

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Ilustrasi Jurnal – USANCE LCTGL Issuing Bank Advising Bank

2 Feb No Entry

10 Feb N/A N/A Shipment

11 Feb No EntryPresentation of DocumentsNotify the importerAkseptasi notify advising bank

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Ilustrasi Jurnal – USANCE LCTGL Issuing Bank Advising Bank

14 Feb No Entry


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