A SIMPLIFIED DOCUMENTARY CREDIT PROCEDURE

CARRIER

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1
EXPORTER IMPORTER

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5

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EXPORTER’S IMPORTER’S /
BANK 3 ISSUING BANK
3a
(.....) If there are no discrepancies, or if any discrepancies found are waived by the applicant, the bank will
pay against the documents.
(.....) Subject to internal credit approval, the importer’s bank issues the credit (and is hence called the
“issuing bank”), under which it agrees to pay according to the importer’s instructions. The credit is then sent
(by SWIFT, courier or rarely airmail) to a bank in the exporter’s country.
(.....) The exporter’s bank (or another bank in the exporter’s country) may be requested to confirm the
documentary credit, thereby committing itself to pay under the terms of credit. Exporters may insist on
confirmed credits when they want to have a trusted local paymaster.
(.....) If the exporter agrees with the terms of the credit, it then proceeds to ship the goods.
(.....) Issuing bank debits the buyer’s account (for a time draft, the buyer’s account will be debited at maturity)
and release the shipping documents to the importer, who will then use them to obtain delivery of the goods.
(.....) The process begins when the exporter and importer agree on a contract of sale. Typically, it is the
exporter that insists on payment by letter of credit – because it does not want to take a credit risk, and cannot
get sufficient information on the creditworthiness of the buyer to grant another form of payment.
(.....) The exporter (beneficiary) is notified of the availability of the credit. Upon receipt of the written
notification of the credit, the seller should carefully review it to determine whether it can comply with its
performance requirements and whether it is acceptable.
(.....) The importer than initiates the letter of credit mechanism by going to its bank and requesting it to open
a letter of credit (by filling out a letter of credit application).
(.....) The buyer exchanges the shipping documents for the goods.
(.....) The exporter’s bank transmits the documents to the issuing bank and requests reimbursement. Upon
receipt of the documents, the issuing bank will examine them to ensure that they are in order as specified
and then reimburse the exporter’s bank.
(.....) After shipment, the exporter goes to the bank nominated in the credit to effect payment and presents
the documents that the importer has asked for. The exporter usually also presents a bill of exchange/draft,
a document representing the bank’s payment obligation.
The bank examines the documents carefully to ensure that they comply with the terms of the credit. If the
documents do not comply, the bank cites a documentary “discrepancy”, notifies the exporter and refuses to
pay the credit. The exporter may then either correct the documents or obtain a waiver of the discrepancy
from the importer.