The Role That Documents Play in a Documentary Credit Transaction - Assignment Example

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 is 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 the presentation of documents to the bank within the stipulated time frame is the only criterion for payment, the buyer runs the risk of not getting the goods in good condition, while the payment would already have been made through the issuing bank.

A seller might run the risk of not being able to present the LC before the stipulated date. There could be delays in delivery and the LC might expire before the issuing bank gets a confirmation from the buyer about the proper delivery of goods. A signature from the buyer's side might also be required to honor the LC, but it might not be possible to obtain it before the expiry of the LC. The document itself might have some discrepancies which could render the document invalid, thus putting the exporter to the risk of non-payment for his goods.