Import Services

Documentary Credits (DC)

DCs, more commonly known as letters of credit are a widely used method to effect payments in domestic and international trade. A written undertaking is issued by a bank (usually referred to as the issuing bank) on the instructions of the buyer of goods to the seller. The payment is made under conditions stated in the undertaking. Payments are always upto a stated limit and against stipulated documents.

The use of a DC provides enough safeguards for the parties involved. The seller is ensured payment, provided he complies with terms he agreed to while the buyer can include all terms and conditions within the DC that satisfy him on the quality and quantity of the goods without having to sight / inspect the goods themselves

Since banks act as trustworthy third parties/ intermediaries, the issues relating to trust between the buyer and the seller are taken care of.

DCs can be either sight or usance depending on whether credit period is extended to the buyer by the seller. Important aspects to check for when you receive a DC are:

• Payment terms
• Availability of the DC
• Acceptability of issuing bank
• Terms of shipment
• Feasibility of complying with terms of the DC
• Workability of the DC
• Bank charges to whose account

Confirmation to a DC enhances security under the DC and mitigates any existing issuing bank and/ or country risk since the same are taken over by the confirming bank.

Collections

Trade between counterparties on collection basis is carried out where there is an inherent comfort level between the buyer and the seller but each party desires to safeguard itself to some extent. However, the buyer is at relatively lower risk than the seller. He can inspect the documents before paying for them.

The collection cycle starts when the seller, having shipped the goods and obtained the necessary documents, presents the documents together with his instructions to his bank (remitting bank). The Bank will send these to its branch/ correspondent bank (collecting bank) in the buyer's country for payment. Collection can be on D/P (Documents against Payment) or D/A (Documents against Acceptance) basis. Under D/P, the buyer gets the title to the goods only after he pays for them. In a D/A scenario, the buyer gets title to the goods against accepting to pay on a future date (i.e. due date) by accepting a Bill of Exchange drawn by the seller on the buyer; hence a credit period is extended by the seller to the buyer.

The risk to the exporter is much greater because he does not have a bank's undertaking as in the case of a documentary credit. This system is usually used when dealing with parties that have an established track record or where the exporter is sure that the importer will not refuse the goods.

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