TOPIC: DOCUMENTARY CREDITS (CLASSIFICATION)

I. Introduction
In the ever-expanding global marketplace, international trade is the backbone of
economic growth, facilitating the exchange of goods and services across borders. Amidst the
complex web of transactions and negotiations in international trade, documentary credits, also
known as letters of credit, stand as a vital instrument. These financial arrangements play a
pivotal role in mitigating risks and ensuring the smooth flow of commerce between parties in
different countries. However, not all documentary credits are created equal; they come in various
forms, each tailored to specific trade scenarios. This meeting today will explore the classification
of documentary credits, shedding light on the different types and their significance in the world
of international trade.

II. Overview of Documentary credits

1. Definition
A documentary credit, also known as a letter of credit (LC), is a financial instrument
used in international trade to facilitate transactions between a buyer and a seller, especially when
there is a lack of trust or familiarity between the two parties or when they are located in different
countries. It is a written commitment from a bank, on behalf of the buyer (the applicant), to pay
the seller (the beneficiary) a specified amount of money, provided that the seller meets certain
conditions and submits the required documents as proof of compliance with the terms and
conditions of the credit.
2. Importance of Documentary Credits in International Trade
 Risk Mitigation:
 Payment Risk: Documentary credits assure sellers of payment when they adhere to
specified terms, significantly mitigating the risk of non-payment, a critical concern in
international trade.
 Performance Risk: They ensure that the seller complies with the agreed-upon terms and
conditions.
 Trust Building: Documentary credits build trust between the parties involved in a
transaction, especially when dealing with unfamiliar or distant trading partners.
 Compliance with International Regulations: They help ensure compliance with
international trade regulations and standards.
 Reducing Currency Risks: When transactions involve different currencies, documentary
credits can specify the currency of payment, providing protection against exchange rate
fluctuations.

3. Purpose of Classification
 Payment Mechanism: Documentary credits are primarily used to facilitate secure and
guaranteed payments in international transactions.
 Risk Mitigation: They help mitigate risks for both the buyer and the seller.
  Trade Financing: Documentary credits can be used as a form of trade financing. Banks
can provide financing to the seller against the documentary credit, allowing the seller to
fulfill the buyer's order even before receiving payment.
 Standardization: Documentary credits follow standardized rules and guidelines. This
standardization ensures clarity and consistency in international trade transactions.
 International Acceptance: They are widely accepted in international trade, making them a
trusted and recognized instrument for cross-border transactions.

II. Types of Documentary credits

1. Standard credits
1.1. Irrevocable credit
 Definition: is a type of letter of credit that guarantees payment from a bank to a seller of
goods or services, as long as the seller meets all the terms and conditions of the credit. An
ILOC cannot be canceled or modified without the agreement of all the parties involved:
the buyer, the seller, and the issuing bank.

 Uses: An irrevocable documentary credit constitutes a firm contractual obligation on the

part of the issuing bank to honor the terms of payment of the credit as issued. The buyer
and issuing bank can not amend or cancel the credit without the express approval of the
seller.

1.2. Revocable credit

 Definiton: is a type of letter of credit that can be changed or canceled by the buyer or the
issuing bank at any time without notifying the seller. It is less secure and less common
than an irrevocable documentary credit, which requires the consent of all parties to make
any changes.

 Uses: A revocable documentary credit gives the buyer and/or issuing bank the ability to
amend or cancel the credit at any time right up to the moment of intended payment
without approval by, or notice to, the seller. Revocable credits are, therefore, of great
advantage to the buyer.

Advantages/Disadvantages
Irrevocable Documentary Credits

Advantages Disadvantages
- Payment Assurance for Sellers: Irrevocable
credits offer strong payment assurance for
sellers. They cannot be altered or revoked
without unanimous consent from all parties
involved, providing sellers with confidence in
payment upon meeting credit terms and
conditions.
- Reduced Risk for Buyers: Buyers gain risk
reduction benefits as the required funds are
held in a bank, assuring sellers of the buyer's
financial capacity to complete the transaction.
- International Acceptance: Irrevocable
credits are a trusted and globally accepted
payment method in international trade,
simplifying transactions, especially with
unfamiliar trading partners.
- Trade Financing: Sellers can use the letter
of credit as collateral for trade financing from
banks, enabling them to secure funds for
production or purchase of goods before actual
payment is received.
Revocable Documentary Credits
Advantages
- Flexibility for the Issuing Bank: The
primary advantage of revocable documentary
credits is that they offer the issuing bank
flexibility. The issuing bank can amend or
cancel the credit without the consent of the
beneficiary (seller) and the applicant (buyer).
This flexibility can be useful in certain
situations where changes are needed.
- Simplicity: Since the issuing bank has the
authority to make changes or cancel the
credit, there is typically less documentation
and complexity involved in setting up a
revocable credit compared to an irrevocable
one.
- Costs: It can be expensive due to bank fees
and charges
- Time-consuming:
It can be time- consuming to process the
required documents and obtain the agreement
of all parties for any changes
- Incompleted Protection: Irrevocable
letters of credit may not provide complete
protection against fraud or non-performance
by the seller, especially if the documents are
not verified carefully or the credit is not
confirmed by another bank.
Disadvantages
- Lack of Security for the Beneficiary: The
most significant disadvantage of revocable
credits is that they provide little to no security
for the beneficiary (seller). The beneficiary
can ship the goods, present documents, and
still not be guaranteed payment. The issuing
bank can revoke the credit at any time, leaving
the beneficiary with no recourse.
- Uncertainty for Sellers: Sellers often prefer
irrevocable credits because they provide a
level of assurance that they will be paid as
long as they comply with the credit terms.
Revocable credits create uncertainty and risk
for the seller, which can make it challenging
to engage in international trade
- Limited Acceptance: Revocable credits are
relatively rare in international trade, and many
sellers may be hesitant to accept them due to
the inherent risk involved.
 1.3. Confirmed and Unconfirmed
a. Confirmed.
 Definition
The term confirmed letter of credit refers to an additional guarantee to an original letter
of credit obtained by a borrower from a second bank. It guarantees that the second bank will pay
the seller in a transaction if the first bank fails to do so. Borrowers may be required to get a
confirmed letter of credit if the seller has doubts about the credit worthiness of the bank that
issued the initial letter. Requiring a confirmed letter of credit decreases the risk of default for the
seller.

 Uses
Letters of credit are most commonly used in international trade and in business
transactions that require substantial payment for goods or services. Instead of requesting an
advance payment, the seller may require the buyer to obtain a letter of credit for the balance of
the payment owed at the time of delivery. This letter acts as a guarantee from the buyer's bank
that payment will be made on time and for the full amount. If the buyer fails to live up to their
obligation as outlined in the contract, the bank takes on the responsibility of covering any
remaining debt. Letter of credit are typically valid for a limited period.

 Advantages/Disadvantages

Advantages Disadvantages

- Payment Assurance: The primary - Additional Cost: Confirming banks

advantage of a confirmed L/C is that it
provides the seller with an additional layer of
payment assurance. When the advising bank
confirms the L/C, it essentially adds its own
commitment to pay the seller. This reduces
the risk of non-payment by the issuing bank.
- Risk Mitigation: Confirmed L/Cs can be
particularly useful when dealing with buyers
or issuing banks in countries with a less
stable financial or political environment. The
confirmation by a reputable advising bank
adds an extra level of security.
- Enhanced Credibility: Sellers often prefer
confirmed L/Cs because they provide a
stronger guarantee of payment. This can lead
to increased trust between buyers and sellers,
making trade transactions smoother.
- Easier Access to Financing: When a
charge fees for their services, which can
increase the overall cost of the transaction
for both the buyer and the seller.
- Limited Flexibility: Once a confirmed
L/C is issued, it can be challenging to make
changes to its terms without the consent of
all parties involved. This lack of flexibility
may be a disadvantage in situations where
the terms of the transaction need to be
adjusted.
- Longer Processing Time: Confirming an
L/C can add extra time to the processing of
the transaction, as it involves
communication between multiple banks.
This may not be suitable for time-sensitive
transactions.
- Reduced Availability: Not all banks are
willing to confirm L/Cs, especially for
 confirmed L/C is presented to a bank as certain countries or regions. This can limit
collateral, it is generally viewed more the pool of banks that can be involved in
favorably compared to an unconfirmed L/C. the transaction
This can make it easier for the seller to obtain
financing or loans

b. Unconfirmed (Advised)
 Definition:
Contrary to confirmed LC, an unconfirmed letter of credit refers to a documentary credit
where the exporters or sellers do not acquire any additional or second guarantee from a second
bank.
To define unconfirmed, we can say that unconfirmed LCs are those where there is only a
guarantee of payment by the original issuing bank. Here the second bank involves only acting as
an intermediary to help process a transaction. There is no additional letter of credit confirmation
from the secondary bank
 Uses:
Unconfirmed documentary credit will be communicated (advised) to the seller through a
bank most likely located in the seller's country, and the related shipping and other documents
will usually be presented to that bank for eventual payment.
Under an unconfirmed documentary credit only the issuing bank assumes the undertaking
to pay, this payment is the sole responsibility of the issuing bank.
 Advantages/ Disadvantages:
In dealing with a readily identifiable issuing bank in a developed country, an
unconfirmed documentary credit is very probably an acceptable, safe instrument for most sellers.
If you have any doubt about the issuing bank and its standing, you can check the name through a
local bank with an international department.

1.4. Silent Confirmation

 Definition
Silent confirmation is a type of confirmation where a bank confirms a letter of credit based on
the request of the beneficiary of the credit rather than the issuing bank.

 Uses
Similar to confirmed documentary credits, Silent Confirmations are most commonly used in
international trade and in business transactions that require substantial payment for goods or
services.

 Advantages/Disadvantages
The silent confirmation market is still active as it is one of the means for the beneficiary to
mitigate the bank and country risk for those banks who do not want other banks to confirm their
credits and is also a good source of income for the bank that undertakes such transactions. If the
transaction runs smoothly, it is beneficial to the confirming bank and the beneficiary.
Nevertheless, if the transaction turns sour, then legal cost would exceed the income bringing
alongside reputational risks to the confirmer.

=> 4 most typical types of documentary credit:

 Irrevocable straight documentary credit

 Definition: An irrevocable straight documentary credit conveys a commitment
by the issuing bank to only honor drafts or documents as presented by the
beneficiary of the credit
 Uses: The irrevocable straight documentary credit is typically used in domestic
trade and for standby credits, both situations where confirmation or negotiation is
considered unnecessary because of the reputation of the issuing bank.
 Advantages/Disadvantages: The irrevocable straight documentary credit is of
greatest advantage to the buyer who does not incur a liability to pay the seller
until his own bank reviews the documents
 Irrevocable negotiation documentary credit
 Definition: An irrevocable negotiation documentary credit conveys a commitment
by the issuing bank to honor drafts or documents as presented by the beneficiary
or any third parties who might negotiate or purchase the beneficiary's drafts or
documents as presented under the documentary credit
 Uses: The great majority of documentary credits are freely negotiable. They are
common in international trade as a foreign seller typically wants to be able to
obtain payment for a shipment immediately from his local bank.
 Advantages/Disadvantages: This form of credit is of advantage to the seller in that
he does not have to wait until the buyer's bank reviews the documents to get paid
the proceeds of the credit
 Irrevocable unconfirmed documentary credit
 Definition: An irrevocable unconfirmed documentary credit conveys a
commitment by the issuing bank to honor drafts or documents as presented by the
beneficiary of the credit. Such a credit is advised (notification to the beneficiary)
through an advising bank.
 Uses: The irrevocable unconfirmed documentary credit is used when the
reputation of the issuing bank is strong enough to give confidence to the seller
that he will get paid.
 Advantages/Disadvantages: There is a slight advantage to the buyer as the buyer
is typically responsible for paying the documentary credit fees. Since
confirmation incurs a fee, the buyer would have a small savings.
 Irrevocable confirmed documentary credit
 Definition: An irrevocable confirmed documentary is one that contains a
guarantee on the part of both the issuing and advising banks of payment to be the
beneficiary (seller) so long as the terms and conditions of the credit are met.
 Uses:
 When the seller does not have the confidence that the buyer’s bank can
effectively guarantee payment.
  When the seller fears economic, political, or legal risk in the buyer’s
country.
 Advantages/ Disadvantages:
 Advantage: The most secure credit for the seller as it adds the guarantee
of a second (and usually local) bank to that of the issuing bank.
 Disadvantages: More costly since the Confirmation by a second bank is
the equivalent of added insurance and the insurance costs money.

2. Special letters of credit

2.1. Red & Green Clause
a. Definition and characteristics
A red clause letter of credit is a variation of the traditional LC that contains a unique
clause allowing the bank to make advance payments to the exporter before the exporter presents
any shipping documents.
Similar to a red clause LC, a green clause LC is a variation on the traditional LC that
allows a nominating bank to make an advance payment to the exporter. Experts often consider
green clause LCs to be an extension of red clause LCs. While a red clause LC allows for an
advance to cover the costs of purchasing raw materials, processing, and packaging of goods, a
green clause LC advances a step further by also taking pre-shipment warehousing at the port of
origin and insurance into account.
Some of the features of Green Clause LC:
• Extends offering of Red Clause LC with additional benefits like coverage of insurance costs
and pre-shipment warehousing.
• Offers 70 - 80% of the original credit amount, which is significantly more than Red Clause
LC, which offers only 20 - 25%.
• Empowers exporters and manufacturers by boosting their working capital.
• Involves collateral – if the exporter defaults on payment, the collateral will be collected by the
banks to compensate for the credit amount.
b. Uses
A Red Clause Letter of Credit acts as an advance payment. Under this LC, the issuing
bank makes an advance payment to the exporter to support by providing working capital
(indirectly) to buy raw materials and pay for the processing and packaging of goods to be
exported.
On the other hand, a Green Clause Letter of Credit not only pays for processing,
packaging and raw materials, but also ensures payment for pre-shipment warehousing at the
origin port and other insurance expenses. This type of LCs is only granted after the purchased
goods are securely stored in the bonded warehouses at the origin port.
These Letters of Credit are commonly used for trade transactions of consumables like
rice, wheat, gold, etc.

c. Advantages and disadvantages

RED:
Advantages Disadvantages
With this LC, importers can negotiate
more favorable terms with their
suppliers. Essentially, a Red Clause LC
opens up new lines of credit for traders
and producers. It guarantees on-time
delivery of all packages.
When managing business across international
borders, importers might have a fear that the
exporter will not pay or deliver. Red Clause LCs
based on collateral put pressure on sellers to
speed up their supply chain processes to meet
the LC’s payback terms.

GREEN:

Advantages Disadvantages

• Exporters receive cash flow • They are more expensive than other LCs.
solutions through advance payment. • Importers need to hire a collateral manager if a
• Importers can be assured of goods new trade deal involves a Green Clause LC.
as the facilitator issues a • Once advance payments are approved, there
confirmation receipt of goods in the cannot be changes even if exporters need more
warehouse. funds. Hence, they lack the flexibility required for
• It allows importers to determine international trade.
the portion of advance payment and • Exporters may need to offer discounts.
nature of the payment series.
• It helps create long-term and
trustworthy relationships between
exporters and importers.

2.2. Revolving
a. Definition & Characteristics
 A revolving documentary credit is an obligation on the part of an issuing bank to restore a
credit to the original amount after it has been utilized, without the need for amendment.
 Types of Revolving credit:
 Number/ Time revolving credit: the credit may be available for a set value for a
set number of times. This form of credit may be cumulative or noncumulative.
 Cumulative revolving credit: allows the remaining balance to be used for
future shipments.
 Non-cumulative revolving credit: the recipient can spend all of the
revolving funds in one period and leftover funds cannot be used later.
 Value revolving credit: The credit amount is reinstated after utilization for a
potentially infinite number of times during the validity period of the credit.
b. Uses:
 Revolving documentary credits are used in situations where the buyer and seller agree
that goods will be shipped on a continuing basis and where the parties to the credit wish
to establish one credit to handle all the shipments rather than to establish individual
letters of credit for each shipment.
c. Advantages/Disadvantages
 Advantages Disadvantages

 Convenience: Revolving documentary  Cost: Revolving documentary credits

credits can save time and money for
both importers and exporters, as they do
not need to be reissued for each
transaction during a set period. This can
be especially beneficial for businesses
that have regular, ongoing trade
relationships.
 Reduced risk: Revolving documentary
credits can help to reduce the risk of
default for both parties, as the importer
is only required to pay once the exporter
has met all of the terms and conditions
of the credit. This can help to build trust
and confidence between trading
partners, and lead to stronger
relationships.
 Flexibility: Revolving documentary
credits can be tailored to meet the
specific needs of each trade transaction.
For example, they can be used to cover
multiple shipments or to allow for
partial payments. This can make them a
more flexible and versatile payment
option than other methods, such as cash
in advance or open account terms.
can be more expensive than other
payment methods, as banks charge fees
for issuing and managing them. These
fees can vary depending on the bank
and the complexity of the credit.
 Complexity:Revolving documentary
credits can be complex to set up and
manage, and require a good
understanding of trade finance. This can
be a challenge for businesses that are
new to international trade.
 Risk of fraud: Revolving documentary
credits can be vulnerable to fraud, if the
exporter does not meet the terms and
conditions of the credit or if the
importer does not present the required
documents.

2.3. Transferable
a. Definition and characteristics
A transferable documentary credit is one where the beneficiary may request that part of
the proceeds (payment) of the credit be transferred to one or more other parties who become
second beneficiaries.
b. Uses
Transferable L/Cs are often used in international trade to facilitate complex transactions
involving multiple suppliers or when the primary beneficiary does not have direct access to
certain markets. They offer flexibility but also require careful management to ensure compliance
with L/C terms and smooth transaction execution.
c. Advantages and disadvantages

Advantages Disadvantages

- Flexibility in Trade: Transferable L/Cs - Costs: Transferable L/Cs may incur

 allow for flexibility in international trade additional costs, such as handling fees and
by allowing secondary beneficiaries fees associated with amending the L/C.
(middlemen or traders) to fulfill the - Confidentiality: Transferable L/Cs require
requirements of the L/C. disclosing to intermediaries. This can be a
- Financial Facilitation: Transferable disadvantage if the primary beneficiary wants
L/Cs can help secure financing for the to keep certain aspects of the transaction
secondary beneficiary confidential.
- Access to New Markets: Exporters who
do not have direct access to certain
markets can use intermediaries in those
regions to facilitate trade, making it easier
to enter new markets.

d. Transferable procedure
 Transferable credit issuance procedure
1. Intermediary (first beneficiary) contracts with seller (second beneficiary) to purchase goods.
2. Intermediary contracts to sell goods to buyers. (Or steps 1 and 2 are reversed.)
3. Buyer applies for and opens a documentary credit with the issuing bank.
4. Issuing bank issues the documentary credit and forwards it to advising bank.
5. Advising bank notifies intermediary of documentary credit.
6. Intermediary orders transfer of documentary credit to seller (second beneficiary.
7. Advising bank transfers credit in care of transferring (seller's) bank.
8. Transferring bank notifies seller (second beneficiary) of documentary credit.

 Transferable credit assignment of proceeds procedure

1. Intermediary (first beneficiary) presents documents to the negotiating bank.

2. Negotiating bank pays intermediary any funds not assigned to the seller (second beneficiary).
3. Negotiating bank pays the transferring bank who then in turn pays the seller (second
beneficiary) the assigned funds.
4. Negotiating bank presents documents to the issuing bank.
5. Issuing bank pays/reimburses the negotiating bank in accordance with the terms of the credit.
6. Issuing bank presents documents to the buyer.
7. Buyer pays/reimburses the issuing bank in accordance with the terms of the credit.

2.4. Back-to-Back
a. Definition and characteristics
A back-to-back documentary credit is a new documentary credit opened in favor of
another beneficiary on the basis of an already existing, irrevocable, non-transferable
documentary credit.
As the name implies, a back-to-back documentary credit is actually two distinct
documentary credits:
 A documentary credit opened by the buyer naming the seller as the beneficiary, and
  A second documentary credit opened by the seller naming the actual supplier of the
goods as the beneficiary.
A back-to-back credit is used in situations where the original credit is not transferable and
where the bank is willing to open the second credit at the request of the seller, using the first
credit as collateral or support for the second credit.
b. Uses
The uses of a back-to-back documentary credit are similar to those of a transferable
credit. The seller/intermediary uses the financial strength of the buyer to effect the transaction.
c. Advantages/Disadvantages

Advantages Disadvantages

- Facilitates Intermediary Trade: The - Limited Transparency: The use of back-

intermediary can use the LC received from
the buyer to open a new LC in favor of the
supplier, bridging the gap between the two
parties. This helps facilitate trade where
the intermediary doesn't have the funds or
creditworthiness to pay the supplier
upfront.
- Flexibility: Back-to-back credits offer
flexibility in trade negotiations. The
intermediary can negotiate different terms,
such as pricing, delivery schedules, or
quality standards, with the supplier while
adhering to the original LC's terms with
the buyer. This flexibility can help secure
favorable terms for both parties.
to-back LCs can reduce transparency in the
supply chain. The buyer and supplier may
have limited visibility into each other's roles
and responsibilities, which can lead to
misunderstandings or disputes.
- Complexity and Administrative Burden:
Managing back-to-back LCs can be
administratively complex. The intermediary
must carefully coordinate and track the
transactions, ensuring that the terms of both
LCs align and that the documentation is in
order. This can result in increased
administrative costs and potential errors.

d. Procedure
1. Buyer and seller negotiate a contract. Seller places order with supplier
2. Buyer applies for and opens a documentary credit with issuing bank
3. Issuing bank issues the documentary credit and forwards it to advising bank
4. Advising bank notifies seller of documentary credit
5. Seller orders assignment of credit to supplier
6. Advising bank assigns credit to supplier

2.5. Standby Letter of Credit

a. Definition:
A standby documentary credit is an obligation on the part of an issuing bank to pay a
beneficiary in the case of the nonperformance of the applicant.
Standby LCs are used as a form of guarantee to cover default by a Buyer; The Buyer pays
directly for goods ordered and, only in the event of non-payment by the Buyer, does the Seller
claim under the Standby LC. Standby LCs are used to support regular supply contracts with
Exporters. The Importer arranges for their bank to provide the Exporter with a Guarantee that, in
the event that goods have been shipped and the Exporter has not been paid, the Importer's bank
will guarantee payment for a pre-determined amount
b. Uses:
Standby letters of credit can be used to guarantee the following types of payments and
performance:
 Repayment of loans
 Fulfillment by contractors and subcontractors
 Securing payment for goods or services delivered by third parties
c. Advantages/Disadvantages

Advantages Disadvantages

- Importers can secure a regular supply of
goods.
- Enables the Importer to establish a pre-
determined credit line with the Exporter.
- Enables the Importer to negotiate better
price or credit terms with the Exporter.
- Importer is necessary to have a line of credit with
a bank before the bank can issue an LC.
- The Importer cannot cancel or amend a Standby
LC without the agreement of all parties involved.
- The decision to pay is in the hands of the issuing
bank, not the buyer.
- Standby LCs do not guarantee the quality or
quantity of the goods.

IV. Practical Application in Vietnam (UPAS L/C)

1. Definition, characteristics, uses, advantages and disadvantages of UPAS L/C
a. Definition
Upas L/C is a type of deferred payment letter of credit commonly used in the field of
import and export. It is widely utilized in import and export activities. With this type of letter of
credit, the beneficiary, which is typically the exporter, can receive immediate payment by
obtaining financing from a bank. Conversely, the importer is required to pay interest accrued
from early payment.
b. Characteristics
 Tenure: The duration varies depending on individual banks, but typically, the maximum
tenure is 12 months.
 Currency: All transactions involve currencies that are agreed upon between the bank
issuing the L/C and the exporter, importer, or intermediary bank.
 Loan Facility: The availability of loans depends on individual banks and may vary based
on customer profiles and contract values.
 L/C Language: Given the evolving business landscape and globalization, the language
used in Upas L/C can be widely applied, including both English and Vietnamese, subject
to the agreement of the parties involved.
 Fees: Fees and charges are subject to negotiation between the two parties.

c. Uses
 With UPAS L/C, the negotiating bank can advance funds to the exporter after their
shipment and presentation of the compiled documents, while the importers can pay on maturity.
UPAS L/Cs are a tool that facilitates international trade by balancing the need for delayed
payment with the desire for immediate payment upon compliance with L/C terms. They are
particularly useful in situations where both parties are looking to optimize their working capital
and risk exposure.
d. Advantages/Disadvantages

Advantages Disadvantages

- Safety: It offers protection to both the buyer
and seller in international trade transactions. It
guarantees payment to the seller upon
presentation of compliant shipping documents,
eliminating the risk of non-payment or delayed
payment.
- Flexibility: it provides the buyer with the
flexibility to manage their cash flow more
effectively by paying the financing bank with
interest on the due date. Another advantage of
UPAS LC is that it allows the seller to obtain
financing from the financing bank, providing
them with additional working capital.
- Takes a long time: the process of
preparing and verifying shipping documents
can be time-consuming and costly,
potentially leading to delays in payment.
- Complexity: UPAS LC requires the
involvement of intermediaries, including
banks and other intermediaries, which can
add complexity and cost to the transaction.

2. Reason why UPAS L/C is popular in Vietnam

 To meet capital mobilization and liquidity needs in the context of global integration
In practice, to meet the immediate payment needs of exporters, a prerequisite is that the issuing
bank must have the necessary funds, and/or the importer must make immediate payment to the
issuing bank. So, in cases where both the importer and the issuing bank do not have funds
available, how can the exporter still receive immediate payment, and the importer purchase
goods with deferred payment terms? To address this issue, UPAS L/Cs are used.
 Compliant with Vietnamese Regulations:
+) According to Decision No. 226/2002/QĐ–NHNN dated June 23, 2002, the concept of "letter
of credit " is entirely in line with the spirit of UPAS L/C . In fact, it is even more detailed and
clear compared to the concept in UPAS L/C.
Since different currencies often have different interest rates, the use of UPAS L/Cs allows
import-export businesses the opportunity to choose the currency of financing (domestic or
foreign) to take advantage of interest rate differentials in the currency market, while banks can
also earn service fees.
+) The regulation for opening deferred payment credit letters issued with Decision No.
711/2001/QĐ-NHNN dated January 25, 2001 (Decision 711), states that payment by deferred
credit letter is a credit payment method with a fixed term. This regulation also details the
conditions and scope of implementing deferred L/Cs, security measures when opening deferred
L/Cs, and the fee structure for deferred L/Cs.
Although there are relatively specific and detailed provisions, this document only applies
to a specific type of L/C, namely UPAS L/Cs, while in practice, various types of L/Cs have
emerged. Therefore, the issuance of a general legal document to regulate UPAS L/C payment
activities will establish a common legal framework, serving as an important basis for all
parties to apply and implement it.
 Risk Reduction for Both Parties:
Compared to a regular L/C, UPAS L/C allows the Importer (buyer) to make deferred
payments while enabling the Exporter (seller) to receive immediate or earlier payment than the
deferred payment term of the L/C. Simultaneously, it assists the buyer in making quick, secure,
and cost-effective payments, saving capital at an interest rate of 2-3% per year compared to
conventional lending products. With this payment method, the financing bank pays the seller
in advance and collects the principal amount and related fees from the customer on the
L/C's maturity date.
UPAS L/C helps mitigate risk for both the buyer and the seller. The seller knows they
will receive payment after a defined period, while the buyer has time to inspect and ensure the
goods meet requirements before making payment. This is an advantage because Vietnam does
not yet have specific regulations governing the form of international payment through L/C. The
legal provisions are still scattered across various documents, making it difficult to enforce
penalties in case of errors.

3. UPAS L/C of Techcombank

a. Actual situation
 New regulations of the State Bank (Circular 03): Limit foreign currency lending to
businesses that do not have foreign currency revenue to repay loans
 Requirements from the supplier: Payment immediately

b. Model of the involved parties in an UPAS L/C transaction (Procedure)

Detailed explanation:
1. The importer and exporter sign a sales contract
2. The importer opens UPAS L/C at Techcombank
3. Techcombank contacts the discounting bank to check the credit limit and discount fee
applicable to the specific UPAS transaction
4. Techcombank sends telegram MT700 to the discounting bank
5. The discounting bank notifies the L/C to the exporter
6. The exporter delivers the goods
7. The exporter presents the documents at the discounting bank
8. The discounting bank checks the documents and sends them to Techcombank, and at the
same time sends a telegram requesting payment acceptance to Techcombank.
9. Techcombank sends MT799 to the discounting bank, notifying that the documents have
been accepted for payment and fees (if any).
10. Discounting bank pays the exporter
 11. Techcombank returns the set of documents to the importer
12. On the due date of the bill of exchange, the importer pays the L/C to Techcombank
13. Techcombank pays money to the discounting bank or the discounting bank debits
Techcombank's nostro account opened at the discounting bank (if any)
c. Benefits of UPAS L/C
 For Techcombank:
 Diversify services provided to customers
 Collect fees from UPAS L/C service
 For importers
 Get a good price in the sales contract with the exporter because the exporter
receives the money immediately from the discount bank
 Funded by Techcombank in the form of deferred payment L/C
d. Compare instant bank-funded L/C and UPAS L/C

Instant bank-funded L/C UPAS L/C

The time the beneficiary Immediately upon presenting a Immediately upon presenting a
receives payment set of valid documents set of valid documents

The time when the L/C Loan maturity date Bill of exchange maturity date
opener must make
payment

L/C financing method Capital from the issuing bank Capital from discounting banks

Service prices -Fees related to international -Fees related to international

payments according to the fee payments according to the fee
schedule schedule
-Interest -Fee for accepting bills of
exchange

4. Evaluating the actual implementation of UPAS L/C at Vietnamese commercial

banks today
a. Achievements
 The legal framework for UPAS L/C is becoming more refined in Vietnam.
The legal framework for UPAS L/C has been continually improved over time, with
notable developments such as:
 The Law on Credit Institutions dated June 16, 2010, and the Law on Amending and
Supplementing Some Articles of the Law on Credit Institutions dated November 20,
2017.
 The Foreign Exchange Ordinance dated December 13, 2005, and the Ordinance
amending and supplementing some articles of the Foreign Exchange Ordinance dated
March 18, 2013.
  Circular No. 21/2012/TT-NHNN dated June 18, 2012, issued by the Governor of the
State Bank of Vietnam, regulating lending and borrowing activities; buying and selling
deferred payment documents among credit institutions, branches of foreign banks.
Circular No. 01/2013/TT-NHNN dated January 7, 2013, and Circular No. 18/2016/TT-
NHNN dated June 30, 2016, amending and supplementing some provisions of Circular
No. 21/2012/TT-NHNN.
 Product diversification and improvement are on the rise.
Until now, most commercial banks in Vietnam have implemented UPAS L/C. Among
them, the product has undergone continuous improvement and diversification to better meet the
needs of customers.
One of the advantages of UPAS L/C for businesses is finding a reliable payment address
to be proactive in business plans. As for the banks, they can earn service fees equivalent to
foreign currency lending services for customers, promoting international payment activities,
foreign exchange trading, and other services. However, from a business perspective, this is
genuinely a good financial solution for importers without foreign exchange revenues to actively
conduct business activities in the current competitive and evolving economic environment.
 The implementation of Blockchain UPAS L/C applications.
In the era of digital technology, blockchain technology emerged as the key to resolving
bottlenecks in international payments in general and L/C transactions in particular, including
UPAS L/C. Since 2019, blockchain technology was first applied in international payments in the
Vietnamese market by HSBC Vietnam branch through Voltron. This technology was initially
tested with L/C transactions at Vietnamese commercial banks on the Corda blockchain platform
from R3 via Contour. During the research and trial phase, Contour invited banks to pilot the first
L/C transaction, and it was entirely free. The trial program concluded at the end of 2020.
According to Nguyen Nhi Quang (2021), five Vietnamese commercial banks have conducted
pilot tests of Blockchain applications in five L/C transactions, including BIDV, HDBank,
VietinBank, MBBank, and Vietcombank.

b. Limitations
The UPAS (Usance Payable at Sight) letter of credit in Vietnam has a few disadvantages:
 Regarding service fee and interest rate risks:
After the State Bank (SBV) decided to increase operating interest rates for terms of 1
month to less than 6 months from 4% to 5%/year, many commercial banks immediately raised
deposit interest rates. Up to now, with joint stock commercial banks, deposit interest rates for
terms from 1 month to less than 6 months have increased to 4.5-5%/year. At the same time,
forecasts suggest that in the near future these banks may adjust interest rates to increase. This
will lead to an increase in the interest rate charged for UPAS L/C, thereby increasing costs for
customers.
 Credit risks:
Customer appraisal, UPAS L/C opening plan, goods management, and cash flow at some
commercial banks are not as strict as with normal loans. The UPAS L/C delay payment period is
often much longer than the customer's normal working capital turnover, increasing the risk of
insolvency when the UPAS L/C is due when the customer uses it for other purposes ( real estate
investment, stock investment, use in other business activities...).
 Exchange rate risks:
 When accepting payment for a set of documents, the customer only submits collateral
sufficient for the value of the set of documents corresponding to that day's exchange rate. But if
on the maturity date, the exchange rate increases sharply, the initial collateral will not be enough
to secure/pay the value of the documents. At this time, the bank faces the risk of lacking payment
sources if customers do not pay the difference due to exchange rate fluctuations.
On September 22, 2022, the US Federal Reserve (FED) decided to increase interest rates
by 0.75% and after 5 adjustments to increase interest rates, bringing the operating interest rate
(federal funds rate) to 3- 3.25%/year. At the same time, the FED forecasts to continue to increase
interest rates and maintain above 4%/year after 2023 to control inflation, with the USD index
rising to a record high compared to many recent years. Therefore, exchange rate risk is a problem
that both banks and customers are facing.
 The efficiency of capital use:
The maximum use of UPAS L/C is reducing customers' need for regular loans, especially
for commercial banks that have excess capital but still receive funding with a total cost (all in
fee) below the deposit interest rate. mobilize capital. Some commercial banks only collect fees
like normal L/C, without adding the differential interest rate to compensate for the risk of late
payment financing, or they collect fees but are not significant, lower than the interest rate.
Regulate capital and mobilized interest rates at the same time.

5. Recommendations

Regarding Recommendation

- Sustaining Stable Monetary Policy and Inflation Control

State Bank of Vietnam - Enhancing Uniform Management of L/C Transactions
- Control Over UPAS L/C Issuance Conditions

- Strengthening L/C Transaction Inspection and Control

Commercial Banks
- Utilizing Currency Derivatives

- Taking Timely Action to Mitigate Exchange Rate Risks

Enterprises
- Enhancing Competitive Capability

V. Conclusion

In the world of international trade, understanding the various types of documentary

credits, also known as letters of credit, is vital. These instruments facilitate secure transactions
between buyers and sellers, especially when dealing with unfamiliar or distant partners. We've
explored different types, including irrevocable and revocable credits, confirmed credits, silent
confirmation, and UPAS L/C. Choosing the right type of documentary credit is crucial for
mitigating risks and ensuring smooth international trade. These instruments play a vital role in
building trust, compliance with regulations, and reducing payment and performance risks. As
global trade evolves, a deep understanding of documentary credits remains essential for
successful navigation in this complex landscape.