A documentary credit is a bank undertaking to honor a complying presentation of documents under stated terms and rules. It is commonly called a letter of credit and is separate from the underlying sale contract.
Who participates?
- Applicant, usually the buyer
- Issuing bank
- Beneficiary, usually the seller
- Advising bank
- Confirming, nominated or reimbursing bank where applicable
How does the process work?
- The buyer requests issuance with agreed documentary terms.
- The issuing bank transmits the credit through an advising bank.
- The seller ships and presents the required documents.
- The nominated or issuing bank examines the presentation.
- A complying presentation is honored according to the credit’s availability.
- The buyer receives documents under the agreed arrangement.
What does the bank examine?
Banks examine documents, not the physical goods or services. A compliant invoice, transport document and certificate can satisfy the credit even if a commercial dispute exists outside the documents.
Confirmed vs. unconfirmed credit
A confirmed credit adds the confirming bank’s independent undertaking, subject to its terms. An unconfirmed credit relies on the issuing bank’s undertaking. Confirmation can address specified bank or country risk but adds cost and conditions.
What commonly causes discrepancies?
Late shipment or presentation, inconsistent descriptions, missing documents, incorrect dates and unauthorized partial shipment are common sources. The parties should review the draft credit before issuance and avoid requirements that cannot be evidenced reliably.
