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A documentary credit is an irrevocable commitment by the bank to pay the seller/ exporter of
goods and services sum
certain in money, within prescribed period of time provided the exporter/ seller presents
documents in accordance with
the terms and conditions of the credit.
Letters of credit or documentary credits is a credit instrument and means of securing and
executing payments thus are
very important in today’s international trade.
There exist strict formal requirements for documentary credits. It is therefore very
important for exporter to
understand that payment will be made only if the documents are in absolute conformity with
the terms stipulated in the
credit.
Issuing of documentary credit:
• Before issuing credit, the bank shall satisfy itself with:
- Applicant creditworthiness
- Assess credit risk inherent the transaction
- Assess country risk, political risks where beneficiary is located
- Current laws and regulations on foreign exchange
• Customer will apply for the issuance or opening of the documentary credit
in
favour of his supplier abroad.
• Credit officer will request applicant to submit the following documents:
- Application form
- Application for issue of documentary credit through SWIFT
- Sales contract between buyer (applicant) and the seller (exporter)
beneficiary
of the credit
- Board resolution for the companies only
- Mandate to the Bank to authorize it to debit customer’s account for
charges
and LC values
- If the applicant is enjoying credit line from the Bank and that the
documentary credit will not be secured by cash
cover, the credit officer shall demand from the applicant and satisfy
himself
with:
* Current financial statements
* Credit appraisal report
* Due diligence report
* Utilization of other facilities
* Nature of consignment and how readily will be available
* Whether there are orders already from buyers and contracts thereof
* Mode of payments from buyers etc
• Approval for opening letters of credit will be in accordance with chart of
authorization and limits as per section 8.2
of this manual
