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Documentary Credit Transaction - Case Study Example
Globalization and technology have shrunk the world to a great extent. International trade has grown extensively in the past few years and this had led to various improvements in payment methods to speed up the whole process. One of the most commonly used form of payment for cross border trade today is through a documentary credit or letter of credit.
As there is a risk of non payment by the importer, sellers can enter into an agreement with the importer's bank through a letter of credit ( lc).When there is a "documentary credit clause" in the agreement between the buyer and the seller, a letter of credit is issued by the buyer and the bank makes the payment to the seller.An lc is issued by the customer's bank naming the seller as the beneficiary, and as soon as the conditions mentioned in the lc are met by the seller, the payment is made by the bank. A bank in the country of the buyer issues the LC and is referred to as the Issuing Bank. A bank that advises the LC to the Seller is called the Advising Bank and is generally in the country of the Seller.
While lcs are a safe, speedy and convenient method of payment for exporters, there might be a few pitfalls that the seller might have to consider before signing the contract.The risk shifts from the actual buyer to the bank.Since presentation of documents to the bank within the stripulated time frame is the only criteria for payment, ...