How to offload the risk of non-payment under LCs

Letters of credit (LCs) sometimes fail to deliver on the purpose for which they are chosen over other international trade settlement payment options because payment under LCs is subject to the beneficiary’s presentation of documents that comply strictly with the terms and conditions of documentary credit, and the smallest discrepancy in one of the documents would make the LC vulnerable to the risk of non-payment. Although most presentations under documentary credits are discrepant, applicants normally accept the discrepancies and facilitate release of payment to the beneficiaries.

Even after meeting an importer’s expectations in terms of quality of goods, the exporter carries most of the risk of non-payment and other risks associated with the presentation of a discrepant or non-compliant document until the funds are realised. These risks include the probability of goods getting damaged at port, added demurrage/detention costs and a delay in the working capital cycle. In addition to this, each discrepant presentation attracts a penalty of USD50–120, depending on the bank.

In addition to what is normally checked when undertaking a credit, the following need to be kept in mind at different stages of credit to avoid discrepancies in documents presented:

1. Dates/periods/place of expiry

  • Exporters are the best to ascertain when production/procurement will happen and how soon the shipment can be effected. The date and place of expiry, latest shipment date, presentation period and shipment schedule, if any, should be acceptable to both the importer and the exporter.

LC expiry date = Latest shipment date + Presentation period

This relieves the exporter from the fear of late presentation even if the shipment is effected on the last date of shipment. There is opportunity for presentation of documents to the nominated bank until the expiry date if presentation is made within “n” number of days, as mentioned under field 48 on presentation period.

  • It is imperative to keep the place of expiry as the exporter’s country, unless otherwise required. This allows the beneficiary to present the documents to the bank nominated in his country until the expiry date.

2. Pre-preparation checks

  • Insist on providing a draft of the LC before final issuance to avoid additional fees such as amendment fees and amendment advising fees.

3. Document preparation checks

  • Complete all the documents mentioned in the LC; ensure you do not miss any.

How Acuity Knowledge Partners can help

With more than 20 years of experience in serving our 350+ clients across the globe, we have extensive knowledge of supporting the banking sector and delivering in line with sector standards. The following are some of the best-in-class advantages we offer:

  • Access to a cost-effective team of certified document checkers

About the Author

Rohan has 12+ years of experience in International Trade Finance, Treasury services & Liability operations. Apart from end-to-end trade finance deliverables, he has been part of many trade operations projects and processes where he was responsible for carrying out pilots, developing SOPs, and setting up teams for final delivery. Rohan is a commerce graduate with an MBA in Finance from Lal Bahadur Shastri Institute of Management, Delhi.

Originally published at https://www.acuitykp.com

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We write about financial industry trends, the impact of regulatory changes and opinions on industry inflection points. https://www.acuitykp.com/

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Acuity Knowledge Partners

We write about financial industry trends, the impact of regulatory changes and opinions on industry inflection points. https://www.acuitykp.com/