Settlements by payment orders, claims and collections are relatively unreliable, since their implementation often depends on the financial condition of the payers. Therefore, such payment methods with partners whose financial condition is not known or there is no confidence in their reliability usually require the provision of additional bank guarantees.
A letter of credit form of payment can practically eliminate the risk of insolvency or dishonesty of a partner, since payment is guaranteed by a separate written document (letter of credit) issued by the bank, which is a letter duly executed and signed by the bank's management. In this letter, the bank assumes the obligation to pay the amount indicated in it, or to accept bills of exchange (drafts) with their subsequent payment or early redemption (negotiation), against provision by the seller, supplier, contractor, lessee, etc. commercial documents confirming the fulfillment of either their obligations or the events that have occurred. At the same time, the bank guarantees payments regardless of the financial condition of the payer.
A letter of credit is issued (opened) by a bank at the request and at the expense of the payer. Its cost depends on the amount for which it is opened, the method of payment, the validity period, the financial condition of the payer, the availability of the necessary funds from the payer or the provision of a loan (coverage of a letter of credit) to the payer. Thus, a letter of credit is a transaction isolated from other contracts, the parties to which do not deal with goods and services, but only with documents.
This section will deal mainly with documentary letters of credit, the payments of which are made against the provision by the recipients of funds of sets of commercial documents confirming the fulfillment of their obligations under contracts.
Settlements by letters of credit in international trade
The procedure for international settlements by letters of credit is governed by the "International Rules and Customs for Documentary Letters of Credit". International Chamber of Commerce (ICC) Publication No. 500, 1993 edition.
To understand the principles of calculation by letters of credit, a simplified Scheme No. 3 is given.
This section will deal with settlement by documentary letters of credit against commodity deliveries. Settlement with the acceptance of bills of exchange and drafts will be discussed in the subsection on settlements for commercial loans with installment payments.
Within the period specified in the contract, the buyer applies to his bank with a request to open a letter of credit in favor of the seller, who is the recipient of the money. A bank that opens a letter of credit called issuing bank , agrees with the buyer on the terms of the future letter of credit, including the cost of services of banks participating in the settlements. The very content of the letter of credit must strictly comply with the conditions contained in the contract of sale signed by the parties or in another agreement.
The contract may provide for the opening revocable, which is extremely rare, or irrevocable letter of credit. In the absence of such an indication in the letter of credit, in international practice it is considered irrevocable.
All types of letters of credit must clearly indicate whether they are executed by cash payment (wireless transfer), or installment payment with or without interest, with acceptance and negotiation of drafts.
If the letter of credit does not provide that it is executed by the issuing bank, then the designated nominated bank must be indicated in it.
The issuing bank sends a letter of credit to the seller or recipient of funds (beneficiary), usually through the advising bank, and if this bank has assumed such functions, it checks the authenticity of the letter of credit with reasonable care by external signs, advises it (confirms its participation in the settlement transaction), making an appropriate note on it, and sends it to the seller or recipient of money (beneficiary). If the bank for any reason cannot advise the letter of credit, it must immediately inform the issuing bank about this.
It should be borne in mind that the beneficiaries can be not only the seller himself, but also other firms indicated by him.
Scheme No. 1
The seller, in turn, carefully checks the content of the letter of credit for compliance with the terms of the signed contract and, having made sure of such compliance, delivers the goods and sends documents confirming the fulfillment of contractual obligations to the advising bank.*
The advising bank checks the external compliance of the documents received from the seller with the terms of the letter of credit and transfers them to the issuing bank.
The issuing bank, for its part, checks the received documents and, making sure that they comply with the terms of the letter of credit, makes a payment, notifies the advising bank of the payment made, which, in turn, informs the seller (beneficiary) of the crediting to his account of the amount for the delivery goods.
A slightly different payment option may be chosen by the seller and buyer when the issuing bank designates another correspondent bank as the nominated bank. This condition of the contract must be reflected in the application sent by the buyer to the issuing bank to open a letter of credit.
In this case, the issuing bank and the nominated bank must agree on the method of covering the letter of credit by debiting the correspondent account of the issuing bank with the nominated bank or crediting the correspondent account of the nominated bank with the issuing bank.
With this option, the executing bank checks the compliance of the documents received from the seller with the terms of the letter of credit, itself credits the funds to the account of the seller (beneficiary) and debits the corresponding amount from the account of the buyer's bank.
All banks participating in settlements by letters of credit use the most modern means of fast communication.
Irrevocable letters of credit
In commercial practice, in the vast majority of cases, " irrevocable letters of credit " , which cannot be canceled by the buyer before the end of the period of validity specified in them. They combine the obligation of the issuing bank to make a payment and guarantee it for any financial condition buyer.
Confirmed letters of credit
Vendors exporting to countries with unstable economic systems, where bankruptcy of even large banks is not uncommon, or with unstable political systems, in which circumstances related to interethnic conflicts and hard-to-predict government policies may arise, they fear the insolvency of banks issuing irrevocable letters of credit. Therefore, they include in the terms of contracts a requirement that buyers open " irrevocable and confirmed letters of credit " . Such letters of credit are confirmed by other banks, which undertake to make payments in the event of the insolvency of the issuing banks or in the event of unforeseen circumstances of a political and economic nature.
To confirm irrevocable letters of credit, both reliable banks of exporting countries and third countries with stable regimes can be involved. Naturally, such letters of credit are more expensive than simply irrevocable letters of credit, but often the end justifies the means.
Transferable (transferable) letters of credit
If the seller is interested in paying off his creditors as soon as possible, for example, with suppliers of raw materials, components, electricity, etc., he can stipulate in the contract the obligation of the buyer to open transferable (transferable) a letter of credit providing for payments of all or part of the amount of the letter of credit to different beneficiaries. Then the buyer, in his application for opening a letter of credit, must specify that the letter of credit to be opened must be transferable, indicate the details of the beneficiaries and the amounts they receive.
Standby letters of credit
They are used to guarantee payments in the event of the occurrence or non-occurrence of an event defined in it, that is, they are very similar to bank guarantees, but are more universal in that they can provide not only for the transfer of funds, but also for the acceptance of payment obligations.
Revolving letters of credit
A letter of credit is a relatively expensive payment method. The cost of banking services depends on the type of letter of credit, the amount for which the letter of credit is opened and the validity period of the letter of credit. In cases where the contract provides for several supplies of goods of approximately equal value, the parties usually agree to open revolving letter of credit for the entire period of deliveries, for an amount approximately equal to the cost of one delivery, provided that after payment for each delivery, the original amount on the letter of credit is restored.
The procedure for payments by revolving letters of credit is not provided for by the "Uniform Rules ..." (MTP No. 500 ed. 1993). Therefore, the parties, in addition to the "Uniform Rules ..." must agree with the banks special conditions for a revolving letter of credit.
Revolving letters of credit are usually opened irrevocably, they can also be confirmed and transferable. The obligations of a bank issuing a revolving letter of credit may include: cash payment (that is, by bank transfer, but immediately against commercial documents), acceptance of bills of exchange or drafts of the seller, payments on drafts within the terms established in them or their negotiation, that is, early redemption at a discount .
The terms of a revolving letter of credit always indicate the amount to be restored after each payment of the amount and the limit total amount all payments. In order to avoid difficulties in paying for individual consignments of goods, the cost of which may differ due to different configurations, differences in the quantity of goods, etc., in the terms of revolving letters of credit, it is usually indicated that the amount of the amount to be recovered may fluctuate within certain limits , for example ±10%.
General assumptions for letters of credit
"Uniform Customs and Practice for Documentary Credits" ICC No. 500 provides for the following general assumptions:
Settlements by letters of credit in domestic Russian trade are regulated by the Regulation of the Central Bank of the Russian Federation dated 08.09.2000 No. 120-P.
Below are extracts from the above Regulation, giving general concept principles of the letter of credit form of payment with comments.
A letter of credit is an obligation of a bank accepted on behalf of the payer to make or authorize another bank to make payments in favor of the Beneficiary upon presentation of documents corresponding to the list given in it.
Payments under letters of credit are made only in non-cash form.
With a covered letter of credit (deposited), the Issuing Bank (see Scheme No. 3) at the expense of the payer or at the expense of the loan granted to him transfers to the account of the Executing Bank the amount for the term of the letter of credit.
In the case of an uncovered letter of credit (guaranteed), the Issuing Bank grants the Executing Bank the right to write off payment amounts from its account in the manner agreed between the banks.
The terms of the letter of credit may provide for its acceptance by the payer or a person authorized by him.
Letters of credit can be revocable, which can be canceled without the consent of the recipients of funds, and irrevocable, the cancellation of which is impossible without the consent of the recipients of funds.
If there is no indication in the text of a letter of credit that it is irrevocable, it is considered (contrary to international rules) revocable.
The terms of the main agreements (contracts) must contain the following information regarding the use of letters of credit:
The main agreement may provide for the right of the Issuing Bank to request the executing bank to confirm an irrevocable letter of credit.
All types of letters of credit allow partial payments, that is, payments for individual consignments of goods, parts of work performed and services provided.
Payments under letters of credit (unlike international conditions and customs) are intended for settlements with one recipient.
For violations committed in the form of letters of credit, banks (as opposed to international conditions and customs) are liable. Thus, the executing bank is obliged to check the compliance of the payment documents presented by the recipient and, in particular, the compliance of signatures and seals with the samples contained in the bank's file cabinet.
The procedure for working with letters of credit in the Issuing Bank and the Executing Bank is not described, since it refers to interbank transactions.
A comparison of the "Uniform Conditions and Customs for Documentary Letters of Credit" developed by the Paris Chamber of Commerce No. 500c with the Regulation "On Cashless Payments in the Russian Federation" shows that the rules adopted by the Central Bank of the Russian Federation, on the one hand, limit the freedom of settlements, on the other hand, increase the responsibility of banks. Obviously, in modern Russian conditions, this is expedient, bearing in mind the still significant level of criminalization of our economy.
Formulation of the letter of credit form of payment
In the contract of sale, for example, one of the following most general wordings of the letter of credit form of payment can be given:
" Payment for the supply of goods under this contract will be made from an irrevocable (confirmed ) revolving letter of credit , opened by the issuing bank (official name of the bank ) in favor of the buyer (buyer's official name ) against giving them to the executing bank (official name of the nominated bank ) following documents :
The buyer is obliged to open a letter of credit 10 days before the date of the contractual delivery date of the first batch of goods . (Possible options : ___ days after the signing of the Contract ; within 10 days from the date of notification of the seller about the start of production of goods, etc. . d .).
The letter of credit must be opened for a period of 10 months . The costs for opening a letter of credit shall be borne by the Buyer , for renewal - Seller ".
Other terms of letters of credit*
The buyer, in his application to the issuing bank to open a letter of credit, must absolutely exactly rewrite the wording contained in the contract in the instructions. It is necessary to strive for reasonable brevity and specificity of payment terms, however, sellers and buyers, in an effort to protect their commercial interests, usually include additional conditions in the texts of contracts. Among them, for example, may be the following:
In such cases, the seller is forced to ask the buyer to extend the letter of credit and confirm to him his consent to compensation for the additional costs associated with such an extension.
In addition, if any of the parties to the agreement and the Issuing Bank put forward additional or special conditions opening and execution of a letter of credit, they are agreed by the parties and are included in the formulation of payments.
specific situation
At the resumed negotiations, payment terms were agreed upon, which provided that the customer would open an irrevocable revolving letter of credit for the cost of 3 units within 10 days from the date of notification by Sever CJSC of the readiness for delivery of the first three units with a validity period of 1 month. The supplier CJSC "Sever" produced the units in a timely manner, informed the customer about the readiness of the first batch for delivery and demanded the opening of a letter of credit with immediate payment. However, the customer announced the deterioration of his financial situation and the impossibility, in connection with this, of opening a letter of credit. Due to the fact that the special characteristics of the special equipment did not allow it to be sold to other buyers, OJSC "Sever" suffered significant losses, but continued to negotiate with the customer, in parallel preparing a claim for arbitration. |
Test for a specific situation
What mistake did the company make?"North"under a letter of credit?
Possible answers:
JSC company"North"should have:
1. Insist on advance payment within 3 days after notification of the OJSC"North"on readiness for delivery of each batch of units.
2. Agree to receive an advance payment of 10% upon signing the contract and provide the Customer with a deferral of payment of the remaining 90% for a year under the guarantee of a local bank.
3. Agree to receive an advance upon signing the contract and insist on the opening of an irrevocable,confirmed revolving letter of credit prior to the start of equipment manufacturing.
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Ministry of Education and Science of the Russian Federation
federal state budgetary educational institution higher professional education
"Tula State University"
Department of "World Economy"
Course work
State regulation of foreign economic activity
Letter of credit as a form of international payments
Fulfilled Art. gr. 730493 Vanina K.S.
Checked by Assoc. cafe "ME" Filatova Yu.M.
Introduction
Chapter 1. Theoretical basis letter of credit as a form of international settlements
2.1 Forms of letter of credit
Conclusion
letter of credit international imported
Introduction
With the development of integration of countries in the world community, with the establishment and strengthening of world economic ties, the methods and forms of international settlements have become more relevant, since countries, entering into market relations among themselves, exporting and importing goods and services, need developed forms of mutual settlements to avoid misunderstandings and conflicts at the global level.
The change and improvement of international payments are associated with the development and internationalization of commodity production and circulation. They reflect a relatively isolated form of movement of value in the international turnover of the forces of the mismatch between the periods of production and sale of goods, the remoteness of sales markets. International payments cover settlements on foreign trade in goods and services, as well as on non-profit organizations, loans and the movement of capital between countries, including those associated with the construction of a facility abroad and the provision of assistance to developing countries.
It is in the field of foreign economic activity that enterprises come into contact with market methods management, with such instruments of global foreign exchange market like foreign currencies exchange rates, transfer, discount rate, factoring, exchange rate risks, etc.
The market economy has created ample opportunities for the implementation of foreign economic activity of enterprises, which in turn required an increase in the number of commercial banks engaged in foreign exchange services for clients.
Topic term paper is very relevant, since the development of relations between countries leads to an increase in the role of international payments, such as a letter of credit, as well as the improvement of their forms and types.
The use of a letter of credit form of payment in international practice is governed by the Uniform Customs and Practice for Documentary Credits, which were developed by the International Chamber of Commerce. On January 1, 1994, ICC No. 500 (UCP No. 500) came into effect - edition of 1993.
The first unified rules (UCP) were adopted at the Vienna Congress of the International Chamber of Commerce (ICC) in 1933. Then they were revised several times (in 1951, 1962, 1974, 1993). The UCP is the result of a private codification carried out by the ICC, so their revision and accession are carried out without much formality. It is not countries (states) that join the UCP, but banks or banking associations, which, in written notifications to the ICC, confirm that they will use the UCP in letter of credit practice, which are reviewed approximately every ten years. This is not a tradition, but rather a necessity dictated by rapid development scientific and technological progress: new technologies and means of communication, the emergence of innovations in international transportation, etc., which entails significant changes in international trade and cannot but affect the banking practice of international settlements.
In foreign trade, mainly documentary letters of credit are used.
The object of the study is the legal relationship associated with the use of a letter of credit in barter transactions and the implementation of foreign economic activity.
The subject of the study is the legal acts regulating the features of registration of letter of credit operations.
The purpose of this course work is to study the letter of credit as a form of international payments.
Based on the goal, the following tasks are defined in the work:
1. Define the concept and principles of work of letters of credit;
2. To study the forms and types of letters of credit;
3. To study the legal aspects of the use of letters of credit.
Chapter 1. The concept of international settlements; letter of credit as a form of international settlements
1.1 International settlements: concept and essence
A significant part of the operations in foreign currency carried out authorized banks, associated with the maintenance of international trade turnover, i.e., with payments for goods and services.
International settlements is the regulation of payments for monetary claims and obligations arising from economic, political, cultural relations between legal entities and individuals from different countries.
The procedure for making payments for imported and exported goods is regulated by the legislation of the country, and is also subject to international rules for documenting and paying for payment documents.
International settlements include, on the one hand, the conditions and procedure for making payments, developed by practice and enshrined in international documents and customs, on the other hand, daily practical activities banks for their implementation. The vast majority of settlements are carried out non-cash through entries in bank accounts. At the same time, the largest banks play the leading role in international settlements. The degree of their influence in international settlements depends on the scale of foreign economic relations of the home country, the use of its national currency, specialization, financial status of goodwill, and the network of correspondent banks. For settlements, banks use their foreign branches and correspondent relations with foreign banks, which are accompanied by the opening of accounts "loro" (foreign banks in this bank) and "nostro" (this bank in foreign ones). Correspondent relations determine the procedure for settlements, the size of the commission, methods of replenishing the spent funds. For the timely and rational implementation of international settlements, banks usually maintain the necessary foreign exchange positions in various currencies in accordance with the structure and term of upcoming payments and pursue a policy of diversifying their foreign exchange reserves. In order to obtain higher profits, banks strive to maintain minimum balances on their nostro accounts, preferring to place their assets on the global loan capital market, including the European market.
The activity of banks in the field of international settlements, on the one hand, is regulated by their national legislation, on the other hand, it is determined by established practice, which exists in the form of established rules and customs or is fixed by separate documents.
Intergovernmental agreements establish general principles settlements, detailed conditions are clearly formulated in foreign trade contracts.
General provisions of the foreign trade contract.
Foreign trade contracts usually contain the following main articles, including monetary and financial terms, which are agreed between the exporter and importer:
Currency and method of determining the price;
Payment currency;
Clauses that protect the parties from the risk of currency losses (as a result of changes in exchange rates);
Measures against unreasonable delay in payment, non-payments, bank guarantees, acceptances, etc.;
Form of payment (letter of credit, collection, bank transfer, open account);
Means of payment (bill, check, etc.).
The specific terms of the contract depend on the existence and content of intergovernmental agreements on payments. They fix:
Type of currencies, prices and payment - freely convertible, clearing, closed;
Terms of payment, including the possibility of using a commercial loan;
The preferred form of payment.
When determining the terms of the contract, the customs typical of international banking and commercial practice, the business reputation of partners, the state of the balance of payments of partner countries are also taken into account.
1.2 The concept of a letter of credit and its essence
Documentary letter of credit (and stand-by letter of credit - Stand-by) (hereinafter referred to as "letter of credit") means any agreement, however named or indicated, by virtue of which the bank (issuing bank), acting at the request and on the basis of the instructions of the client (applicant of the letter of credit) or on his behalf:
Must make payment to or order from a third party (the beneficiary), or pay or accept bills of exchange (drafts) drawn by the beneficiary, or
Authorizes another bank to make such payment, pay and accept bills of exchange (drafts);
Gives the authority to negotiate (buy or discount) to another bank against the stipulated documents, if all the conditions of the letter of credit are met. For the purposes of the UCP, branches of such a bank in other countries will be treated as another bank.
Settlements in the form of documentary letters of credit are more typical for transactions involving payment against the presentation of documents by the exporter ( cash payment) or providing the buyer with a short-term (up to 1 year) commercial loan. The use of a letter of credit to pay the full cost of goods in settlements on account of a medium-term (and even more so long-term) commercial loan is extremely rare - only in trade with certain groups of goods. When providing a buyer with a loan for enough long term the letter of credit can be used in combination with other forms of payment and covers that part of the cost of goods that is paid against the presentation of commercial documents to the bank, i.e. in cash. When settling on a commercial loan, letters of credit may also be opened for the acceptance of urgent drafts (bills of exchange) of the beneficiary (exporter) issued on the bank that executes the letter of credit, or on the importer. In this case, the nominated bank makes an acceptance (or an acceptance and payment of drafts). By means of acceptance, the bank fulfills its obligations under the letter of credit. In the future, the parties enter into legal relations regulated by the rules of the bill of exchange (which is also convenient for the exporter, since the bill of exchange legislation is unified in many countries).
Focusing on the nature of the relationship between sales contracts and letters of credit, it should be noted that a letter of credit is a transaction that is separate from a sales contract (contract) or other agreement on which it may be based, and banks are in no way connected and are under no obligation to deal with such contracts, even if there is a reference to such contract in the letter of credit. Likewise, the client, as a result of its relationship between the issuing bank and the beneficiary, cannot make a claim for the obligations of the bank to make payment, pay or accept a bill of exchange (draft) or negotiate and / or fulfill any other obligations under the letter of credit. The beneficiary under a letter of credit may in no case take advantage of the contractual relations existing between banks or between the applicant of a letter of credit and the issuing bank. In transactions with letters of credit, the interested parties deal only with documents, but not with goods, services and / or other types of performance of obligations to which documents may relate.
Letters of credit are issued by banks on the basis of an order or statement from the importer (applicant under a letter of credit), which actually repeats all the conditions of the section of the contract relating to the procedure for payments. The contracts stipulate, in particular, the following:
Name of the bank in which the letter of credit will be opened (preference is given to banks that are correspondents of the authorized bank);
Type of letter of credit;
Name of advising and executing banks;
Terms of payment execution (at sight, payment by installments, by acceptance or negotiation, etc.);
List of documents against which payment should be made;
Validity period of the letter of credit;
The procedure for charging a bank commission;
Shipping times, etc.
After the conclusion of the contract (purchase and sale agreement - see the documentary letter of credit scheme) and the definition of the main payment instructions, which directly indicate the method of payment by means of a documentary letter of credit between counterparties, the exporter prepares the goods for shipment, which he notifies (for example, by telex or fax - depending on the agreement between the parties) of the importer. Having received such a notice, the buyer sends an instruction (application) to his bank to open a letter of credit, in which he indicates all its necessary conditions.
An importer giving an order to open a letter of credit is called an Applicant.
The bank opening the letter of credit (issuing bank) acts on the basis of the instructions of the applicant.
The exporter is a beneficiary because it benefits him.
If there is a special agreement between the parties to the contract, the importer may instruct to open a letter of credit after a certain time from the date of the contract. The issuing bank, by issuing a letter of credit, guarantees payment to the beneficiary, provided that he complies with certain terms and conditions.
After opening a letter of credit, in which the issuing bank usually indicates how the funds will be credited, it is sent to the exporter in whose favor it was opened; the issuing bank sends the letter of credit to the beneficiary. As a rule, through the bank serving the latter, whose task is to advise (notify) the letter of credit to the exporter. Such a bank is called an advising bank.
A letter of credit received from the issuer may be advised through the advising bank without obligation on its part, but that bank, if it decides to act as advising bank for the letter of credit, must, with reasonable diligence, by appearance, verify the authenticity of the letter of credit which it advises. It assumes no obligation to guarantee payment to the exporter. The terms of the guarantee come from the advising bank in the form of its letter of credit.
The advising bank (in the country of the exporter) may be asked by the issuing bank to confirm this letter of credit, i.e. add your own conditional payment guarantee to the guarantee already provided by the issuing bank. If the advising bank confirms this letter of credit, then it is called the confirming bank (advising/confirming bank). Thus, a confirmed letter of credit contains conditional guarantees from two banks, one of which is usually located in the country of the exporter (the confirming bank) and the other in the country of the buyer (the issuing bank).
Further, the letter of credit is subject to transfer to the beneficiary. The advising bank also receives a copy of the letter of credit or telex, since it usually receives documents from the beneficiary under the letter of credit, checks them and sends them to the issuing bank, and in some cases appoints the issuer as the executing letter of credit bank, i.e. is authorized to pay, negotiate (purchase) or accept exporter's drafts.
Banks charge a higher fee when settling by letter of credit, as it is complex and costly.
Benefits of using a letter of credit for the importer (buyer):
Reducing the risks associated with prepayment;
Ability to accurately determine the date of delivery of goods, as well as its price;
The possibility of obtaining goods on credit;
Possibility to confirm your solvency, which is especially beneficial when establishing new trade relations;
Ability to achieve more favorable conditions delivery and payment for goods;
The buyer will not have to pay the seller until the latter has fulfilled all contractual obligations;
The possibility of obtaining a trade credit when using a letter of credit with a deferred payment.
Benefits of using a letter of credit for an exporter (seller):
Reducing the risks associated with the solvency of the buyer;
Reducing the risks associated with the supply of goods;
Ability to reduce risks associated with the political situation in the country of the buyer;
Flexible cash flow planning;
Reliability of payment regardless of the buyer, provided that the seller delivers the goods and submits shipping documents in accordance with the terms of the letter of credit;
A guarantee given by a documentary credit that the rules in force in the importer's country at the time the letter of credit is opened will not prevent payment from being received.
So, the use of a letter of credit in settlements is most beneficial for an exporter who receives an unconditional guarantee of payment before the goods are shipped. At the same time, receipt of payment under a letter of credit (provided that the exporter fulfills the conditions of the letter of credit and submits the documents specified in it to the bank) is not associated with the buyer's consent to payment.
However, for exporters, a letter of credit is the most difficult form of payment: receipt of payment from a letter of credit is associated with strict compliance with its conditions, correct execution and timely submission to the bank of the documents specified in the letter of credit. By monitoring compliance with the terms of the letter of credit and the submitted documents, banks protect the interests of the buyer, acting on the basis of his instructions.
The disadvantage of the letter of credit form of payment is a complex document flow and delays in the movement of documents associated with the control of documents in banks and their transfer between banks.
From a practical point of view, all letters of credit are divided into two large groups:
Cash letters of credit
Commodity letters of credit.
A letter of credit is a nominal document issued by a bank to a person who has deposited a certain amount to receive it in another bank, city or country within a certain period. A documentary letter of credit is an instruction from a bank serving the buyer to the supplier's bank to pay the supplier's invoices for shipped inventory items on the terms stipulated by the buyer and specified in the letter of credit.
Chapter 2. Forms and types of letters of credit
2.1 Forms of letters of credit
Forms of a letter of credit differ in the agreement on the amount of security and the moment of taking on the risk.
Revocable letter of credit. (Revocable L/C).
A revocable letter of credit may be changed or canceled at any time by the issuing bank at the direction of the issuer of the letter of credit, even without prior notice to the beneficiary. A revocable letter of credit does not constitute any legal payment obligation of the bank. Only when the issuing bank or its correspondent bank has made payment according to the documents, the withdrawal of the letter of credit remains without legal effect. Therefore, a revocable letter of credit usually does not provide sufficient security to the beneficiary. It is never confirmed by a correspondent bank and can be used in business relationships between partners who are known to each other as mutually trustworthy. Today, a revocable letter of credit is rarely used. Therefore, care should be taken that the form of the letter of credit is clearly indicated in the opening instruction, since, if there is no corresponding designation, such a letter of credit is always considered irrevocable.
The Uniform Rules do provide for two cases where the issuing bank of a revocable letter of credit “must reimburse a bank authorized by it to make payment on presentation, acceptance or negotiation under a revocable letter of credit for any payment, acceptance or negotiation made by that bank upon receipt of the notice change or cancellation, against documents that appear to be in conformity with the terms of the letter of credit” and also provide a refund to another bank “authorized by it to make payment by installments under a revocable letter of credit” if that bank has made payment against documents consistent with the terms of the letter of credit (or accepted such documents under the letter of credit) before receiving from the issuer a notice of change/cancellation of the letter of credit.
Irrevocable letter of credit. (Irrevocable L/C).
An irrevocable letter of credit gives the beneficiary a high degree confidence that his deliveries or services will be paid as soon as he fulfills the terms of the letter of credit, which, when all the required documents are presented and all its conditions are met, constitutes a firm obligation to pay the issuing bank. The benefits of using an irrevocable letter of credit for the beneficiary are undeniable, since the exporter receives the obligation of the bank, and not just the promise of the counterparty under the contract. The seller is well aware that he will receive payment on his demand only if he himself fulfills the conditions of the letter of credit, in particular, submits the documents listed therein within the validity period of the latter. The bank, for its part, is finally bound - this means that even if its client fails to fulfill its obligations on time, unable for one reason or another to make a payment on time, the bank is not released from these obligations to the foreign seller.
To change or cancel the terms of a letter of credit with an irrevocable letter of credit, the consent of both the beneficiary and the responsible banks is required. If the seller wishes to change or cancel separate conditions letter of credit, he must require the buyer to issue an appropriate instruction to the issuing bank. Partial acceptance of changes contained in the same change notice is not permitted and therefore will not be valid.
The beneficiary is informed about the opening of an irrevocable letter of credit through a correspondent bank. The last issuing bank executing the letter of credit can only instruct the beneficiary to advise the letter of credit or confirm it. From the point of view of additional obligations, irrevocable letters of credit are divided into confirmed (Confirmed) and unconfirmed (Unconfirmed).
Irrevocable unconfirmed letter of credit.
With an irrevocable unconfirmed letter of credit, the correspondent bank only advises the beneficiary of the opening of the letter of credit. In this case, he does not accept any obligation to pay and, therefore, is not obliged to make it according to the documents provided by the beneficiary.
Since the beneficiary can rely solely on the issuing bank abroad, an irrevocable unconfirmed letter of credit is only appropriate when the political risk and the risk of transferring funds are negligible. If the correspondent bank can rely on a good relationship with the issuing bank and a stable political and economic situation, then he, as a rule, makes a payment according to documents in order to quickly conduct transactions in the interests of the client.
Irrevocable confirmed letter of credit.
If the correspondent bank confirms the letter of credit to the beneficiary, then he thereby undertakes to make payment according to the documents corresponding to the letter of credit and submitted on time. Consequently, in this case, the beneficiary, along with the obligation of the bank that opened the letter of credit, has a legally equivalent and independent obligation of the correspondent bank to make payment. Therefore, the degree of security for him is significantly increased - in most cases, such a letter of credit is confirmed by a bank in the exporter's country.
This is hardly acceptable in settlements for foreign trade operations of Russian organizations, since in most cases the confirmation by Russian banks of letters of credit opened by foreign banks in favor of Russian organizations and private firms does not provide additional guarantees of payment to beneficiaries. Russian banks make payments under letters of credit of exporting clients, as a rule, only after receiving the corresponding reimbursement from foreign issuing banks. AT individual cases exporters can still, by agreement with their banks, use their loans, but in a limited amount. Therefore, sometimes it seems quite right for Russian exporters to want to have their export letters of credit confirmed by third banks, large foreign correspondents of a Russian bank, although this is not always beneficial, since it leads to the freezing of funds of the issuing bank (importing bank) and thus causes additional costs.
There can always be many reasons for a correspondent bank to reject an instruction to confirm a letter of credit. Therefore, Russian exporters can be advised to consult with a bank before concluding a deal and final signing of a contract on the question of whether the latter will confirm a letter of credit of a particular country emanating from a particular bank, and under what conditions.
According to international practice, an irrevocable letter of credit confirmed by a “home bank” provides the exporter with the greatest guarantees. The currency risk remaining even after that can be insured by currency futures contracts, if it is possible to foresee the term (period) of receipt of the payment. Although even if the payment date is not determined from the outset, the banks involved in currency transaction, can in most cases offer a profitable solution.
Thus, the bank that confirmed the letter of credit becomes obliged to the beneficiary to make the payments stipulated by the letter of credit in a timely manner. The confirming bank assumes the same obligations as the issuing bank. That is, if the letter of credit is confirmed by another bank, the exporter has confidence that he can be covered by those risks that are not secured by the issuing bank.
2.2 Covered and uncovered letters of credit
Quite often, confirming banks, insuring themselves against various risks, require, upon confirmation, the immediate transfer of funds to cover upcoming payments under a letter of credit. Such letters of credit are called covered letters of credit.
Letters of credit are considered to be covered, upon opening of which the issuing bank previously provides the executing bank with foreign currency funds (coverage) in the amount of the letter of credit for the period of validity of the obligations of the issuing bank, subject to the possibility of their use for payments under the letter of credit. Coverage can be provided in several ways:
By lending the amount of the letter of credit to the correspondent account of the nominated bank in the issuing bank or another bank;
By giving the executing bank the right to write off the entire amount of the letter of credit from the account of the issuing bank maintained by it at the time of receipt of the letter of credit for execution;
Through the opening by the issuing bank of insurance deposits or coverage deposits in the executing bank.
Often in practice Russian banks seek to get away from covered letters of credit and (instead of coverage) issue a confirmed reimbursement undertaking, although, unlike coverage, a commission must be paid for it.
The use of the cover leads to the actual freezing of the importer's funds for the period from the opening of the letter of credit to the payment of funds under it. When opening a covered irrevocable letter of credit, the importer's bank debits the current account of its client for the amount of the letter of credit and reserves it on a special account from the moment the letter of credit is opened until its expiration date. After this period, the unused part or the entire unused amount of the letter of credit is restored to the client's account. The importer incurs almost double expenses under the letter of credit, as he is forced to pay commission expenses to banks when paying for the goods, not to mention the freezing of funds for the duration of the entire operation. In such a situation, the importer tries to avoid confirmation of letters of credit, and under normal conditions of foreign trade relations, exporters need confirmation only if they do not trust the issuing bank.
Consequently, letters of credit are further subdivided according to the method of securing payment into covered and uncovered. Therefore, each letter of credit must clearly indicate how it is executed.
2.2 Types of letters of credit and methods of their execution
Letter of credit payable at sight (against documents). Immediate receipt of the amount indicated in the documents upon presentation of the documents. Cash payment agreed.
Letter of credit providing for the acceptance of drafts of the beneficiary. Receipt of the amount specified in the documents upon the due date of payment. The due date for the bill has been agreed. It is possible to receive the amount minus the discount interest (discount) on the bill after the issuance of the documents.
Letter of credit with installment payment. Receipt of the amount indicated in the documents upon the due date of payment. The term of payment (without bill of exchange) is agreed. It is possible to receive the amount minus the discount percentage after the submission of documents.
A letter of credit providing for the negotiation of drafts of the beneficiary. Receipt of the amount in any bank, i.e. not only in the advising or specifically designated negotiating bank (for letters of credit in which the issuing bank has designated the negotiating bank; non-free negotiation.
Letter of credit with final settlement. Transfer of funds for goods supplied and services rendered minus a predetermined percentage paid separately, over time, upon receipt by the issuing bank from the importer of documents confirming payment or acceptance for payment.
Letter of credit using a pro forma invoice. It involves settlement against pre-agreed and drawn up documents (seller's guarantee of shipment) confirming that the goods will be shipped.
Letter of credit with a red clause. Assumes advance payment.
Revolving letter of credit. Use within the limits of the established shares, which are renewed.
Stand-by letter of credit (standby letter of credit). Use as a tool similar to a warranty.
Transferable letter of credit (transferable). Provision of own suppliers for the purpose of execution of a transaction by them with limited use of own funds. Possibilities are provided for using the letter of credit by several second beneficiaries at once.
Transit letter of credit. Receipt by the issuing bank from the intermediary bank of an advice or confirmation of a letter of credit.
Transfer letter of credit. Contains instructions for reimbursement or a mandate through a third bank to advise the beneficiary directly or through a named bank for transfer without obligation (the advice specifically states that this limits the role of the third bank).
2.3 Participants in letters of credit
Participants in letter of credit operations - importer, letter of credit bank, advising authority, payment authority, payee.
The importer is the holder of the letter of credit. He opens a letter of credit in his bank in favor of the exporter.
Letter of credit bank - the bank of the importer, in which a letter of credit is opened in favor of the exporter. A letter of credit bank, on behalf of its client, gives an obligation to pay.
An advising authority is a bank that informs the exporter about the opening of a letter of credit. It can be, for example, the exporter's bank or any third bank.
The payment authority is a credit institution that accepts documents from the exporter and pays the appropriate amount to the payee. This is usually the exporter's bank.
The payee is the exporter. The bank that opens the letter of credit undertakes to pay it under the letter of credit.
The following legal relationships exist between the participants of a letter of credit operation:
1. The letter of credit and the recipient of the letter of credit conclude a contract of sale, taking into account the main conditions of the transaction.
2. The accreditor and the accrediting bank sign a contract of instruction to open a letter of credit.
3. The letter of credit bank and the advising/confirming bank conclude a contract of instruction for the implementation of letter of credit operations.
4. The letter of credit bank and the recipient under the letter of credit in the case of an irrevocable letter of credit give a conditional abstract payment obligation, which means that when the recipient of the payment fulfills the letter of credit obligations, the bank that opened the letter of credit is obliged in any case to make a payment in his favor.
5. Advising bank and the bank selected by the issuing bank for advising the documentary letter of credit to the beneficiary (exporter). The advising bank does not assume any payment obligations under the documentary letter of credit. The only obligation of the advising bank, if it agrees with the order of the issuing bank, is to verify the authenticity of the letter of credit by external signs and advise it to the beneficiary.
Chapter 3. Legal aspects and specifics of letters of credit
3.1 Legal aspects of using letters of credit
Article 867 of the Civil Code of the Russian Federation interprets the term "letter of credit" in two ways: on the one hand, this is a payment obligation of the bank (guarantee), and on the other - settlement transaction, produced by the bank at the direction and at the expense of the client. It is easy to see that, in fact, these are two sides of the same process and the settlement operation (second value) is performed within the framework of the guarantee (first value). However, this duality allows the use of one term in contracts. As already mentioned, the specifics of the use of letters of credit leads to the fact that they are used mainly for foreign trade operations. Therefore, the legal content of a letter of credit is described in the "unified rules and customs of a documentary letter of credit", approved by the International Chamber of Commerce on 01.01.1993 (No. 500). At the same time, it should be understood that agreements on the use of letters of credit are concluded on the territory of specific states, whose legislation does not always coincide with the international one and takes precedence over it. (For letters of credit, the law on income tax and the law on VAT are of the greatest importance, but discrepancies in the form and composition of documents are also possible).
Therefore, despite the existence of “unified requirements”, it is customary in contracts for opening a letter of credit to describe in detail the conditions for its conclusion.
A postscript is possible “... in accordance with the “unified requirements” (to the extent that they do not contradict the current legislation” (then the state on whose territory the contract was concluded is indicated).
But although “requirements” almost always cannot be used directly, the standard they offer makes it easier for lawyers to work and makes it possible to avoid ambiguities in the conclusion of a contract.
Please note that the possibility of settling the transaction using a letter of credit must be mentioned in the "settlement procedure" section of the sales contract.
From point of view tax accounting the main issue when using a letter of credit is the question of the timing of the tax consequences (primarily VAT and income tax) of the transaction.
According to the law Russian Federation on value added tax tax implications come either after the funds are credited to the balance account, or after the shipment of goods (according to the first event rule). Similar conditions are mentioned in the income tax law.
From this it follows that in the area of application of the legislation of the Russian Federation, tax obligations for the supplier (beneficiary) occur upon shipment of the goods (he receives the money after), and for the buyer (applicant of the letter of credit) - after the payment of the letter of credit.
At the same time, “payment” does not mean booking funds for an operation (it cannot be considered an action, since the letter of credit can still be canceled or revoked), but directly debiting them from the account.
Of course, other jurisdictions may have different rules.
The form (blank) of an application for issuing a letter of credit (form 0401063-Appendix 1) is regulated by Appendix 3 to the Instruction on the Procedure for Performing Bank Documentary Operations.
The required requisites are:
application number;
the date of its submission;
full name and legal address of the applicant;
name of the issuing bank;
form of letter of credit;
expiry date;
place of submission of documents;
full name and address of the beneficiary;
a mark on the permission / prohibition of partial shipments;
a mark on the permission / prohibition of overloads;
who executes the letter of credit (executing bank);
a note about who pays for the insurance;
the list of documents against which the letter of credit is paid;
place of shipment (Article 46 of the "Uniform Rules");
the deadline for shipment (Article 46 of the "Uniform Rules");
a brief and precise description of the goods;
delivery conditions;
terms of submission of documents;
signature of the head, chief accountant and seal of the enterprise.
According to the same Appendix, the following documents are required to obtain a letter of credit:
commercial invoice (original and several copies);
transport document (sea bill of lading, air waybill or other);
insurance document (policy, certificate or declaration on an open policy);
packing list.
In addition, the Appendix contains a number of recommendations.
As you can see, transactions using letters of credit require extremely accurate execution of a large number of documents. An error in any of them can lead (and almost always leads) to the bank's refusal to pay the letter of credit.
Moreover, it is the task of the exporter to draw up these documents and subsequently provide them to the bank. Naturally, the additional risk reduces the attractiveness of the scheme and increases its cost.
3.2 Specifics of letters of credit in foreign economic activity
All of the above can apply both to letters of credit used within the country and to letters of credit for foreign trade. However, letters of credit are rarely used for domestic operations. Especially high level the security guaranteed by such transactions is of little demand in the domestic market, and the high price requires large transactions, which again are quite rare.
There are several settlement options in international trade - bank transfer, documentary collection, documentary letter of credit, open account settlement, bills of exchange or checks. The parties make their choice based on the capabilities of banks, the solvency and reputation of the counterparty, the availability of loan agreements, terms, type of goods and much more. However, it is the documentary letter of credit that is most beneficial for the exporter - it allows you to receive payment almost instantly after shipment. The letter of credit is less beneficial for the importer, since he becomes the applicant and he bears all the costs associated with its execution. However, the high risk of default is a more serious problem, and a letter of credit can solve it.
Also, when using letters of credit in foreign economic activity, the scheme may change somewhat. New aspects may appear in it:
Negotiating bank. A bank authorized by the issuing bank to buy and/or discount bills of exchange.
confirming bank. As already mentioned, it adds its obligation to the obligation of the issuing bank or nominated bank.
Reimbursing bank - a bank named in a documentary credit from which the executing, accepting or negotiating bank may request reimbursement after it has fulfilled its payment obligations under the letter of credit. The Reimbursing Bank is not required to pay or provide reasons for denial of payment, unless it has issued its own Reimbursement Undertaking.
In foreign trade transactions, special forms of letters of credit can also be used - import, export, reserve, and so on. However, they do not have any fundamental differences.
Finally, the following difficulties may arise in foreign trade transactions:
* The shipment schedule specified in the contract cannot be fulfilled;
* Conditions regarding the cost of transportation are unacceptable;
* The price of the item is insufficient due to the change exchange rate currencies;
* The quantity of the ordered goods does not correspond to that which was supposed earlier;
* Description of the shipped goods is not enough or excessively detailed;
* The documents listed in the Commercial Letter of Credit are difficult or impossible to obtain.
Above all, it is worth noting that in Europe and America, a special kind of standby letter of credit is most often used - the so-called "stand by". Such a letter of credit is not an indirect security for payment and is realized only in the event of a complete failure by one of the parties to fulfill its obligations. The reason for this practice is the ban in most US states on the issuance by banks of the usual guarantees for Russia.
Conclusion
Letters of credit are used as a form of payment in a commercial transaction, along with advance payment, collection and open account(or pay-as-you-go). In addition, in international trade, unlike domestic Russian practice, a letter of credit is used as a means of financing a transaction by analogy with a bank guarantee.
The main disadvantages of the letter of credit form of payment for counterparties are, firstly, in certain delays in the passage of documents through banks and, secondly, in the high cost of a letter of credit. For operations (opening, advising, confirmation, acceptance and verification of documents under a letter of credit, etc.), banks charge a fee depending on the amount of the letter of credit. The commission is charged by banks based on the current bank rates. When opening a letter of credit, its applicant must clearly and specifically indicate at whose expense the costs of the letter of credit should be paid (postal and telegraph expenses, commission for opening, advising, confirmation of the letter of credit, payment commission etc.): at the expense of the applicant of the letter of credit or the beneficiary. This is necessary so that the bank employee, when calculating the commission, has the opportunity to attribute it to the expense of the party that must pay it according to the terms of the contract and letter of credit. In international practice, it has become customary to share banking costs between counterparties, each of which pays bank commissions on the territory of their country. Russian organizations, carrying out settlements under a letter of credit, it is advisable, if possible, to achieve the attribution of all bank expenses at the expense of foreign customers.
Having studied the topic "Letter of credit as a form of international payments", we can draw the following conclusions:
¦ The letter of credit reliably insures many risks faced by the company in the implementation of foreign economic activity.
¦ A letter of credit is a fairly flexible settlement instrument that can be used for settlements on a wide variety of transactions.
¦ A letter of credit is an instrument, the rules for the use of which are determined by an authoritative international organization and are recognized practically all over the world. This is beneficial for both clients and banks, since each participant in the transaction has a clear understanding of their rights, obligations and standard requirements for all participants in the transaction.
¦ A letter of credit can be used as a short-term financing tool.
The letter of credit form of payment is widely used in international trade.
In international banking practice, this unique instrument, which combines settlement and guaranteeing functions, has been actively used for centuries and is still relevant. Of course, it costs more than usual advance payment but the cost/risk ratio is justified.
List of sources used
Regulations:
1. The Constitution of the Russian Federation of 12.12.1993// Russian newspaper №237, 25.12.1993
3. Federal Law of the Russian Federation of December 8, 2003 N 164-FZ (as amended on July 11, 2011) "On the basics state regulation foreign trade activities"// Rossiyskaya Gazeta No. 3368, 12/18/2003
4. Federal Law of the Russian Federation of December 10, 2003 No. 173-FZ "On currency regulation and currency control"// Rossiyskaya Gazeta No. 3367, 12/17/2003 (as amended on 12/6/2011)
5. Resolution of the Board National Bank Republic of Belarus dated March 29, 2001 N 67 "On approval of the Instructions on the procedure for performing banking documentary operations"
6. "Civil Code of the Russian Federation (Part Two)" dated January 26, 1996 N 14-FZ (as amended on November 30, 2011) (as amended and supplemented, effective from January 1, 2012)
Literature:
6. Antonov V.A. World monetary system and international payments. - M.: TEIS, 2007. - 193 p.
7. Degtyareva OI Organization and technique of foreign trade operations. M: 2006
8. International monetary and credit relations and financial relations. - Textbook / Ed. L.N. Krasavina. - 2nd ed., revised. and additional - M.: Finance and statistics, 2007 .-608s.
9. International economic relations. - Textbook / Ed. V.E. Rybalkin - 2nd ed. Moscow: Business school 2007 - 368s.
10. Foreign economic activity of the enterprise. Fundamentals: Proc. for universities / G. D. Gordeev, L. Ya. Ivanova, S. K. Kazantsev and others; Ed. L. E. Storovsky. M: 2008.
11. Fundamentals of foreign economic knowledge: A textbook for economic education/ edited by I. P. Faminsky - M .: International relations, 2007. - 376 p.
12. Melkumov Ya.S. Promissory note and its use in economic circulation.
13. International monetary and financial relations: Textbook /
Ed. Krasavina L. N. - M.: Finance and statistics, 2008.
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The essence of currency and settlement relations in the sphere of international economic relations. Forms and practice of international payments. Implementation of payments in the form of a letter of credit. Currency clearing. Practice commercial transactions using foreign currency.
A letter of credit is a conditional monetary obligation accepted by a bank (issuing bank) on behalf of the applicant (payer under a letter of credit) to make a payment in favor of the beneficiary (recipient of funds under a letter of credit) of the amount specified in the letter of credit upon submission by the latter to the bank of documents in accordance with the terms of the letter of credit in terms specified in the text of the letter of credit, or pay, accept or discount a bill of exchange, or authorize another bank (executing bank) to make such payments or pay, accept or discount a bill of exchange).
Classification of letters of credit can be made on various grounds.
1. From the point of view of the possibility of changing or canceling a letter of credit by the issuing bank, they differ: irrevocable letter of credit - a firm obligation of the issuing bank not to change or cancel it without the consent of the parties concerned; revocable, which can be changed or canceled at any time without prior notice to the beneficiary.
In the absence of a corresponding indication, the letter of credit is considered irrevocable. In the previous version of the Rules on Letters of Credit - UCP 600, a presumption of irrevocableness of a letter of credit was established. The current version of the Rules provides that all letters of credit subject to UCP 600 will be irrevocable.
Irrevocability of a letter of credit protects the beneficiary from arbitrariness or fraud of the applicant of the letter of credit or the issuing bank, which, in turn, guarantees the stability of the fulfillment by the parties of their obligations.
2. From the point of view of additional obligations of another bank under an irrevocable letter of credit, they differ: confirmed and unconfirmed letters of credit.
If the issuing bank asks the advising or other third bank to confirm its irrevocable letter of credit, then such confirmation (if the required documents are presented and all the conditions of the letter of credit are met) constitutes a firm undertaking of the confirming bank in addition to the obligation of the issuing bank to pay, accept or negotiate a draft.
If the letter of credit does not state that it is confirmed, such letter of credit is considered unconfirmed. If the exporter wishes to receive an additional guarantee under a letter of credit, he must specify in the contract which bank (his own or a third country) this letter of credit should be confirmed.
3. From the point of view of the possibility of renewal of a letter of credit, renewable (revolving) letters of credit are used, which are opened for a part of the cost of the contract with the condition of restoring the original amount of the letter of credit after its full use (for a number of sets of documents), or after the presentation of each set of documents. As a rule, the text of the letter of credit indicates the total amount, which cannot be exceeded by the totality of obligations under this letter of credit. Renewable letters of credit, which reduce distribution costs, are widely used in settlements under contracts for large amounts with regular shipment of goods over a long period. A letter of credit is considered to be revolving, under which the applicant assumes the obligation to replenish the amount of money under the letter of credit to the original amount within a certain period after making payments from it. A revolving letter of credit is subject to renewal within a period specified by the parties and/or a specified number of times. A non-renewable letter of credit is a letter of credit that is terminated by execution.
A revolving letter of credit should not be confused with a letter of credit containing a so-called evergreen clause, which provides for the automatic renewal of the letter of credit for another fixed period, calculated from the date of expiration, unless the bank notifies the beneficiary of the opposite.
A revolving letter of credit may be cumulative or non-cumulative. A letter of credit is considered cumulative, according to which the unused amounts of the current letter of credit can be added to the next letter of credit.
4. From the point of view of the possibility of using a letter of credit by the second beneficiaries (direct suppliers of goods), transferable (transferable) letters of credit are distinguished. For complete deliveries made by sub-suppliers, at the direction of the first beneficiary, the letter of credit may be transferred in whole or in part to the second beneficiary. A transferable letter of credit is transferred no more than once.
A letter of credit can be transferred only if it is expressly designated by the issuing bank as transferable (transferable).
The transfer of such a letter of credit by the first beneficiary to the second means the transfer of not only the rights of the creditor (under a monetary obligation), but also the obligations of the debtor (obligations of the debtor) to deliver the goods under the main contract.
5. From the point of view of the nature of the reimbursement agreement, covered and uncovered letters of credit are distinguished.
A letter of credit is considered covered, in accordance with which the issuing bank, upon opening it, is obliged to transfer funds to the disposal of the advising bank on the date of maturity. When opening a covered letter of credit, the issuing bank transfers the currency in the amount of the letter of credit, as a rule, to the confirming bank as security for the fulfillment by the issuing bank of obligations under the letter of credit, which in some cases indicates that the confirming bank does not trust the solvency of the issuing bank.
A letter of credit is considered uncovered, according to which the issuing bank grants the advising bank the right to write off the entire amount of the letter of credit from the account of the issuing bank located with it. In modern conditions, uncovered letters of credit prevail.
6. From the point of view of the possibilities of implementing a letter of credit, there are: letters of credit with payment against documents (at sight or with installments), acceptance letters of credit that provide for the acceptance of drafts by the issuing bank, subject to the fulfillment of all requirements of the letter of credit; letters of credit with payment by installments, letters of credit with negotiation of documents.
Letters of credit with payment against documents are used to settle contracts without payment by installments (or with short-term deferred payment, for example, up to 30 days from the date of shipment of the goods). With a letter of credit with payment at sight, payment is made immediately at the bank against documents without a draft of the beneficiary, or against a draft at sight, issued by the beneficiary, usually to the issuing bank and accompanied by the documents specified in the letter of credit. The peculiarity of payment by installments is that the beneficiary receives from the letter of credit not the entire amount under the letter of credit, but only part of it, the remaining amount is paid in a certain order after certain periods, which are determined by special instructions contained in the letter of credit. When making settlements under a letter of credit with deferred payment, in the case of submission of documents that fully comply with the terms of the letter of credit, the issuing bank assumes the obligation under the letter of credit opened by it to make payment upon maturity, of which it notifies the beneficiary. The validity period of such letters of credit does not cover the entire installment payment period and is intended only for the presentation of documents.
Acceptance letters of credit are also used for settlements under contracts providing for a commercial loan provided by the seller to the buyer. If the letter of credit is accepted, the bill of exchange is issued to the advising bank in a special manner. Acceptance letters of credit provide for the obligation of the issuing bank to accept and, when due, pay the draft (or promissory note) drawn on it, provided that all the conditions of the letter of credit are met.
The purpose of issuing an acceptance letter of credit is to finance the buyer. But on subsequent accounting, it is a means for the beneficiary to receive an immediate settlement. Considering the bill, the bank provides it with funds for the period of acceptance against the payment of a commission (discount rate).
A negotiable letter of credit differs from a payment letter and an acceptance letter of credit in that drafts are issued to the buyer or issuing bank, and not to the nominated bank. Letters of credit executed by negotiation (purchase) imply the obligation of the bank to pay without recourse to the beneficiary the draft issued by him and / or documents submitted under the letter of credit.
The UCP 500s that have been in force so far have been accompanied by serious discussions in the ICC Banking Commission about the meaning and use of the term "negotiation" in accordance with Art. 10(b, ii). The subject of discussion was primarily the use of the term "giving value", the meaning of which was difficult to explain. The definition of negotiation set forth in UCP 600 is an attempt at a new interpretation of an old term. The concept of "negotiation" stands for the purchase of drafts or documents by advancing (or agreeing to advance) funds to the beneficiary before receiving reimbursement from the reimbursing bank. The practical meaning of negotiation lies in the agreement between the beneficiary and the nominated bank that the latter will take over the functions of the issuing bank in relation to the execution of the letter of credit in favor of the beneficiary on agreed terms. Most often, this means making a payment before actually receiving a refund from the reimbursing bank, withholding a certain commission or interest for the period before the funds are received. For this reason, the "initiator" of issuing a negotiated credit is usually the beneficiary, and not the applicant or issuing bank. At the same time, from the point of view of the issuing bank, the execution of a letter of credit through negotiation and cash payment is no different.
A variety of documentary letters of credit operating in international practice on the basis of the Uniform Customs and Practice for Documentary Letters of Credit allows the parties to choose the optimal form that best suits their interests.
Despite the fact that a letter of credit is a fairly reliable form of international settlements, it has some drawbacks. The use of a letter of credit in settlements is most beneficial for an exporter who receives an unconditional guarantee of payment before the goods are shipped. At the same time, receipt of payment under a letter of credit (provided that the exporter fulfills the conditions of the letter of credit and submits the documents specified in it to the bank) is not associated with the buyer's consent to payment.
However, for exporters, a letter of credit is the most difficult form of payment: receipt of payment from a letter of credit is associated with strict compliance with its conditions, correct execution and timely submission to the bank of the documents specified in the letter of credit.
By monitoring compliance with the terms of the letter of credit and the submitted documents, banks protect the interests of the buyer, acting on the basis of his instructions.
The disadvantage of the letter of credit form of payment is also a complex document flow and delays in the movement of documents associated with the control of documents in banks and their transfer between banks.
For the seller, a letter of credit has the following advantages:
For the buyer, a letter of credit is attractive for the following reasons:
1. The essence of settlements under a letter of credit
Letters of credit are instructions from the paying bank to the receiving bank to make payments to individuals or legal entities funds within the designated amount on the terms specified in this order.
According to many foreign experts in the field of international settlements, the use of such a payment instrument in international settlements as a documentary letter of credit allows the parties to the transaction to reach a compromise on the choice of the optimal form of organization of settlements. It is a documentary letter of credit that can protect the interests of the parties to the transaction as much as possible and has a reasonable cost of use. Moreover, recently a documentary letter of credit has become especially often used in the process of financing international trade, which once again emphasizes the relevance of a comprehensive study of this payment instrument as a means of ensuring the reliability of payments and, as a result, contributing to an increase in international trade.
In world practice, a letter of credit is considered the most reliable form of payment, equally useful and reliable for both parties to the contract. The main advantage of using a letter of credit is the participation in the organization of settlements by a third independent party - a bank that issues a documentary letter of credit and then controls the making of payments on it. Documents required usually include documents of title/shipping, such as a bill of lading (receipt from the master of the ship), waybill, duplicate railway bill of lading, which show that the goods were shipped in accordance with the buyer's requests and specifications.
If the terms of the letter of credit are formulated correctly, then it reliably protects the interests of the seller - the beneficiary of the letter of credit and provides him with certain advantages:
Under correctly formulated conditions, a letter of credit also provides a number of advantages for the buyer (applicant under a letter of credit) compared to other forms of organization of settlements in foreign trade, in particular:
A documentary letter of credit is especially useful when concluding long-term combined contracts, in particular, contracts for the production of equipment, providing for phased execution (advance payment, delivery, installation, commissioning, commissioning).
There are very strict requirements for the execution of documents in a letter of credit transaction. It is important for the beneficiary of the letter of credit (who is the seller of the goods or service) to know that the payment is made only against documents that fully comply with the requirements of the letter of credit, and only on the basis of these documents the bank will decide on the possibility of making a payment. For all issues of working with letters of credit, including when checking the compliance of documents with the terms of a letter of credit, one should be guided by the recommendations of the International Chamber of Commerce.
The letter of credit form of payment most often goes according to the following scheme:
From a practical point of view, all letters of credit are divided into two large groups:
A letter of credit is a nominal document issued by a bank to a person who has deposited a certain amount to receive it in another bank, city, country for a certain period of time.
A documentary letter of credit is an instruction from a bank that directly serves the buyer to the supplier's bank to pay the supplier's invoices for shipped inventory items on the terms specified by the buyer, as well as those specified in the letter of credit.
All of the above allows us to make the assumption that a documentary letter of credit is the best tool for organizing international settlements.
2. Types of letters of credit
In international practice, a wide variety of types of letters of credit are used - early opening, compensatory letters of credit, transferable (transferable), reserve, renewable (revolving), letters of credit with a "red clause", letters of credit of preferential action and others.
Today, a transferable (transferable) letter of credit is increasingly being widely used. A transferable letter of credit is a letter of credit whereby the first beneficiary may request a bank authorized to pay or specifically authorized by the letter of credit to make the letter of credit available in whole or in part to one or more (second) beneficiaries. That is, the initial letter of credit can be divided into several secondary letters of credit, if necessary. However, the second beneficiary cannot transfer credit to a third beneficiary. The letter of credit must be irrevocable and must clearly state that it is transferable.
Transferable letters of credit are carried out using the mechanism shown in Fig. 2.2.
The main stages of international settlements using a transferable letter of credit are:
Rice.
If the beneficiary under the letter of credit is not the supplier of the goods, and the terms of the letter of credit do not provide for the possibility of its transfer, then a compensatory letter of credit may be used in the calculations. It can be opened by the beneficiary under the main, basic letter of credit as a counter letter of credit in favor of the manufacturer of goods or a sub-supplier. Compensatory and basic and letters of credit are independent and in legal relation not related.
Settlements using a compensatory letter of credit are carried out according to the scheme shown in Figure 2.3.
As can be seen from the diagram: after the opening of the main letter of credit (1), the issuing bank notifies the seller's bank (2) about this. At the same time, the issuing bank acts as a direct advising and, as a rule, confirming bank, which notifies the seller that the letter of credit is open (3). At the next step, the seller applies directly to the bank with an application to open, on the basis of the basic letter of credit, his counter letter of credit in favor of the manufacturer of the goods or subsupplier (4). Further, the second issuing bank opens a letter of credit and notifies the bank that serves the manufacturer of goods (5), and the bank itself notifies the supplier (6). And, finally, the supplier ships the goods to the buyer (7), and also submits to the bank the documents that are provided for by the terms of the letter of credit.
Rice. 2.3.
In order for a letter of credit to be paid, the terms of the letter of credit must be exactly met.
A revolving (renewable) letter of credit can be used for the supply of goods in equal lots in settlements. What does it provide for? This is a letter of credit that is opened for part of payments from the total amount under the concluded contract, automatically renewed as payments are made for the next batch of goods or services rendered. The opening of a revolving letter of credit is carried out with uniform deliveries (quotas), which are stretched over time in order to cyclically reduce the contract amount. When opening a revolving letter of credit, most often, the size of one quota and the number of quotas, the total amount of the letter of credit, and the term for using the quota are indicated.
Also, sometimes in international practice, a letter of credit is used.
"with a red clause" What is it? in plain language, it provides for the issuance by the executing bank to the exporter of advances up to a certain amount. It is important that the beneficiary most often uses the advance for the purchase of goods intended for export. It is obvious that some part of the amount of the letter of credit will go to pay for the unshipped goods. Banks also issue advances directly against the presentation by the exporter of a "commitment to ship" and a similar document. Even in the event that the goods were not shipped under this letter of credit, when opening a letter of credit "with a red clause", the issuing bank undertakes to compensate the executing bank for the amounts of advances already paid.
In international practice, a standby (guarantee) letter of credit is directly used as a way to fulfill obligations under a contract, according to which the seller does not need to submit documents for the goods to the bank that opened the letter of credit if the buyer pays for the goods within the agreed period. Such a letter of credit is paid by the issuing bank only if the buyer has not made payment on time. In fact, this type of letter of credit is a guarantee obligation. The advantage of a guarantee letter of credit is that it is "reusable", that is, it can be used by purchasing several consignments of goods.
It should be noted that banks are not responsible for the transportation and safety of goods, for the accuracy of execution, for the legality or reliability of the documents submitted to them. They are only responsible for the financial aspect of the transaction, without assuming any obligations regarding the goods listed in the sales contract.
Recently, Russian enterprises are increasingly using a documentary letter of credit in settlements for foreign trade operations, as well as to organize the financing of their commercial contracts. The letter of credit form of payment in Russia has become more widespread in export-import transactions than within the country.
The procedure for settlements under a letter of credit in the legislation of the Russian Federation (RF) is currently determined by the Civil Code (CC) of the Russian Federation (; chapter 46
3 "Settlements under a letter of credit"). In the field of foreign trade, settlements under letters of credit are also carried out in accordance with the instructions of the Vneshtorgbank of the USSR No. 1 dated December 25, 1985 on the procedure for making banking operations according to international accounts.
However, in Russian reality there are factors constraining the growth of the volume of these transactions. The main ones limiting the growth in the use of documentary letters of credit Russian companies in international settlements, is the inconsistency of Russian legislation with international rules for working with documentary letters of credit. Often a rather strange situation arises when the same banks, when working with letters of credit, are forced to use both international rules and the customs of working with documentary letters of credit (when interacting with beneficiaries and foreign banks), and the norms of Russian legislation (for example, in relations with the applicant) .
Such double standards create banks a large number of problems. Moreover, in Russian legislation some aspects of the use of a documentary letter of credit in international trade are not regulated, which, of course, hinders the growth of operations using it.
At the moment, there are plans to introduce a number of changes, both in legislation and in regulatory framework Central Bank RF for the purpose of their improvement and compliance with international standards.
The international practice of working with documentary letters of credit is constantly changing, new documents of the International Chamber of Commerce are constantly published. In this regard, it is important not only to eliminate the existing discrepancies between Russian legislation and international rules for working with letters of credit, but also to promptly respond to all changes in international standards that are the result of a dynamically developing world economy.
Difficulties of the international procedure when issuing documentary letters of credit:
In such a transaction, four parties appear, and not two, as in ordinary mutual settlements, since in addition to the customer and the supplier, the customer’s bank and the supplier’s bank also participate here. This will be difficult to understand for a novice participant in foreign economic activity. Employees of Russian banks and companies that are engaged in settlements using documentary letters of credit are forced to engage in self-education, studying foreign literature and the practical experience of foreign banks, as well as in the course of their work to study the features of a letter of credit form of payment. As a result, the process of training employees is delayed, and their qualifications leave much to be desired.
Such a form of payment is always a requirement for strict adherence to deadlines, documentation requirements, as well as a complication of the registration procedure. With each change in the terms of fulfillment of obligations by any participant in the transaction, documentary confirmation with the signatures of all parties is always required. In addition to the contract between customers and suppliers, it is required to make an additional exchange of documents between banks. While now it is all done in in electronic format and happens instantly, it takes time, as well as control of all procedures.
Another disadvantage is the cost of this form of payment.
From the moment the letter of credit is opened, the buyer's funds are frozen in the bank account, and the cover of the letter of credit or a fee for bank guarantee in the case of an uncovered letter of credit. A supplier that does not have the funds to purchase materials for production has a need for borrowed funds, for which the buyer also pays in the end. Banking fees charged for all transactions related to letters of credit.
The illogicality of the current state of affairs lies in the fact that the need for secure forms of payment in intermediary foreign trade in Russia is enormous. The existing problems are practically not discussed at present. In this regard, Russian enterprises and banks are striving to come up with methods for optimizing international settlement schemes that would comply with Russian legislation.
The following situation can be cited as an example of the restraining role of Russian legislation in the issue of the widespread use of all types of documentary letters of credit in international settlements. Foreign trade operations carried out through intermediaries occupy a significant niche in international trade. The needs of settlements in such transactions are fully met by a transferable letter of credit, which is the most optimal form of settlement that reliably protects the interests of all parties involved in the transaction: a foreign buyer, a Russian intermediary and a Russian supplier. However, its use in Russia encounters a number of serious problems. Russian legislation and the rules of the Central Bank of the Russian Federation generally do not provide for the possibility of transferring a letter of credit from one beneficiary to another.
All of the above creates obvious prerequisites for increasing the use of documentary letters of credit in international settlements and settlements in Russia. Many Russian economists consider a documentary letter of credit to be the only optimal instrument for international settlements to be used by Russian companies in international trade. As a result, optimistic forecasts are formed in the Russian business environment regarding the use of documentary letters of credit in our country. This gives reason to hope that the institution of a documentary letter of credit will develop successfully in Russia.
Comparative analysis of the costs of an import transaction
Letter of credit- this is an agreement by virtue of which the bank undertakes, at the request of the client (importer, orderer), to pay for documents to a third party (exporter, beneficiary, in whose favor a letter of credit is opened) or to make payment, acceptance of a draft issued by the beneficiary, or negotiation (purchase) of documents. The bank's obligation under a letter of credit is independent and does not depend on the legal relations of the parties under a commercial contract. This provision is aimed at protecting the interests of banks and their clients: the exporter is ensured by limiting the requirements for processing documents and receiving payment only by the terms of the letter of credit, and the importer is ensured that the exporter strictly fulfills all the terms of the letter of credit.
Russian enterprises and banks, when making international payments in the form of a documentary letter of credit, are guided by the provisions of the "Uniform Customs and Practice for Documentary Letters of Credit" (International Chamber of Commerce Publication No. 525, edition 1995)
The following are involved in settlements under a documentary letter of credit:
Importer (applicant) who applies to the bank with a request to open a letter of credit;
Issuing bank opening a letter of credit (importer's bank);
The advising bank, which is instructed to notify the exporter of the opening of a letter of credit in his favor and transfer to him the text of the letter of credit, certifying its authenticity (exporter's bank);
The exporter is the beneficiary in whose favor the letter of credit is opened.
Settlement scheme for a documentary letter of credit:
Explanations for the scheme:
1. The importer, within the terms agreed with the exporter, instructs (submits an application) to his bank to open a letter of credit.
2. The importer's bank asks the exporter's bank to open a letter of credit in favor of the respective exporter. Immediately or within the stipulated time transfers the cover (the amount of the letter of credit) to the exporter through the exporter's bank.
3. Notification (advising) of the exporter about the opening of a letter of credit in his favor.
4. The exporter, after checking the terms of the letter of credit, sends the goods to the importer.
5. Registration and submission by the exporter to his bank of a set of documents required to receive payment from a letter of credit.
6. The exporter's bank forwards the documents of title and other documents to the importer's bank.
7. Checking by the importer's bank of the received documents and their payment (if all the conditions of the letter of credit are met, the money is transferred to the account of the exporter's bank).
8. Issuance by the importer's bank of paid documents to the importer.
9. Transfer by the exporter's bank of the amount of foreign exchange earnings to the exporter's account.
The scheme of the letter of credit form of payment is as follows. The importer submits to the bank an application for opening a letter of credit. The importer's bank that opened the letter of credit sends a letter of credit to one of its correspondents in the exporter's country, appointing him as the advising bank and instructing him to transfer the letter of credit to the beneficiary. After receiving a letter of credit opened in his favor (as security for the payment of goods), the beneficiary ships the goods, submits documents, as a rule, to the advising bank, which sends them for payment to the issuing bank. After checking the correctness of the paperwork, the bank that opened the letter of credit makes their payment. If the document complies with the terms of the letter of credit, the bank transfers the money according to the instructions of the advising bank and issues the documents to the importer, who receives the goods. The proceeds received are credited to the account of the exporter. In accordance with the terms of the letter of credit, an advising bank can also be appointed as a bank authorized to pay for documents (executing bank), which in this case pays the documents to the exporter at the time they are presented to the bank, and then requires a refund of the payment made from the issuing bank (on uncovered letters of credit). Usually, if the executing bank and the issuing bank do not have mutual correspondent accounts, then the third (reimbursing) bank, in which correspondent accounts of these banks are opened, takes part in the settlements. When opening a letter of credit, the issuing bank gives instructions (reimbursement authority) to the reimbursing bank to pay the claims of the nominated bank during the term and within the amount of the letter of credit.
Types of letters of credit:
I. From the point of view of the possibility of changing or canceling the letter of credit by the issuing bank (importer's bank):
1) irrevocable letter of credit - the obligation of the issuing bank not to change or cancel it without the consent of the interested parties earlier than its validity period (30, 60, 180 days). During this time, the exporter submits to the bank the documents of title and other documents indicated in the order. Without the consent of the exporter and the banks involved in this operation, the letter of credit cannot be withdrawn or changed. The application for opening a letter of credit must indicate whether it is irrevocable. In the absence of such indication, the letter of credit is considered irrevocable;
2) revocable, which can be changed or canceled by the issuing bank at any time without prior notice to the beneficiary (exporter).
II. From the point of view of additional obligations of the third bank under the letter of credit, confirmed and unconfirmed letters of credit are distinguished.
1) Confirmed letter of credit - the obligation of the issuing bank not to change or cancel it, backed by a guarantee from another bank. If the issuing bank authorizes or asks another bank to confirm its irrevocable letter of credit, then such confirmation (if the required documents are presented and all the conditions of the letter of credit are met) constitutes a firm undertaking of the confirming bank in addition to the obligation of the issuing bank to pay, accept or negotiate a draft. The issuing bank (importer) and the confirming bank, which receives a certain remuneration, are responsible for fulfilling the conditions of the letter of credit.
2) An unconfirmed letter of credit does not imply an obligation of the advising bank (exporter) to guarantee the fulfillment of the conditions of the letter of credit. But the advising bank must, with reasonable diligence, verify the authenticity of the letter of credit by outward appearances. Responsibility for the fulfillment of obligations is borne only by the issuing bank (importer).
III. From the point of view of the possibility of renewing a letter of credit, rollover (revolving, renewable) letters of credit are used, which are opened for a part of the contract value with the condition of restoring the original amount of the letter of credit after its full use (for a number of sets of documents) or after the presentation of each set of documents. As a rule, the text of the letter of credit indicates the total amount that the aggregate of obligations under this letter of credit cannot exceed (ie the minimum amount below which the balance of the letter of credit must not decrease and is subject to replenishment). They are used in settlements under contracts for large amounts with regular shipment of goods over a long period.
IV. From the point of view of the possibility of using a letter of credit by the second beneficiaries (direct suppliers of goods), transferable (transferable) letters of credit are distinguished. In the case of complete deliveries made by sub-suppliers, at the beneficiary's instruction, the letter of credit can be transferred in whole or in part to the second beneficiaries in the country of the latter or in another country, i.e. the bank, on behalf of the first exporter, makes payment to one or more second beneficiaries from this letter of credit. A transferable letter of credit is transferred no more than once.
V. From the point of view of the availability of currency coverage, covered and uncovered letters of credit are distinguished. When opening a covered letter of credit, the issuing bank transfers the currency in the amount of the letter of credit, as a rule, to the advising bank (exporter). Other forms of cover for letters of credit include deposit and blocked accounts, insurance deposits, etc. In modern conditions, uncovered letters of credit prevail.
VI. From the point of view of the possibilities of implementing a letter of credit, they differ: letters of credit with payment against documents; acceptance letters of credit providing for the acceptance of drafts by the issuing bank (importer), subject to the fulfillment of all requirements of the letter of credit; installment letters of credit; letters of credit with negotiation of documents.
Unlike a documentary credit cash letter of credit- a nominal document containing an instruction to pay money to the recipient within a certain period, subject to the conditions specified in it.
For the importer
A letter of credit is the most complex and expensive form of payment. For the performance of letter of credit operations (advising, confirmation, document verification, payment), banks charge more high commission than other forms of payment, such as collection. In addition, to open a letter of credit, the importer usually resorts to bank loan, paying a percentage for it, which makes this form of payment more expensive.
The letter of credit leads to the immobilization and dissipation of the importer's capital, as he must open a letter of credit before receiving and selling the goods, but at the same time gives him the opportunity to control (through banks) the fulfillment of the terms of the transaction by the exporter.
For exporter
After advance payments, settlements in the form of a letter of credit are the most profitable, since this is the only form of settlement (except for bank guarantee operations) that contains the bank's obligation to make a payment. Thus, for the exporter, an irrevocable letter of credit has the following advantages compared to the collection form of payment: reliability of settlements and a guarantee of timely payment for goods, since it is carried out by a bank; promptness of receipt of payment if the bank makes payment immediately after the shipment of the goods against the presentation of shipping documents (otherwise the exporter can obtain a loan from his bank in national currency before receipt of payment under the letter of credit); receipt by the importer of permission to transfer currency to the country of the exporter when issuing a letter of credit in foreign currency.
