1. The difference between documentary letter of credit and banking guarantee:
- Documentary letter of credit in contrast to banking guarantee, is a payment instrument. It means that opening letter of credit, the Bank directly assumes payment obligation. Whereas, in case of banking guarantee, the Bank is obliged to pay the amount demanded by the beneficiary only in case the debtor fails to fulfill its payment obligations.
2. Whether in case of application of letter of credit the payment against the imported goods is made only upon delivery of goods to the buyer:
- In the scope of letter of credit, the payment is made against the payment documents, in line with the payment conditions set forth by the letter of credit (immediate payment, deferred payment), and regardless of the fact whether the goods reached the actual destination of delivery.
3. What documents should be submitted for opening letter of credit?
- The documentary letter of credit is opened on the basis of client’s instruction (application). Thus, the letter of credit is independent from the sale-purchase contract; however existence of provision on payment by means of documentary letter of credit in sale-purchase contract is a precondition for opening letter of credit.
Main conditions of issuing letter of credit by the Bank
- The letter of credit may be opened on the cash assets deposited by the client or within credit limit established by the Bank for the purpose of implementation of client’s letter of credit transaction,
- For the benefit of other resident and non-resident legal entities, organizations, economic operators, state institutions and financial bodies the Bank may issue import letter of credit on behalf of Bank resident legal entity and economic operators client on contractual basis,
- The bank opens letter of credit in AMD and foreign currency.
The bank may issue the following types of letters of credit
By the nature of commercial transaction:
- Import letter of credit – The Bank issues letter of credit in accordance with the instruction of the buyer (importer). Import letter of credit is one of the most common tool for international commercial transactions and is widely applied in banking system,
- Export letter of credit - The Bank receives a letter of credit issued by other Bank for the benefit of seller (exporter). In case of export letter of credit the Bank may issue short term export loans for financing of packaging of goods or other production processes.
By the method of opening:
- Confirmed letter of credit – on the basis of beneficiaries’ request the letter of credit may be confirmed by other leading bank acceptable for the latter. Moreover, the approval of the letter of credit is bank’s independent and additional obligation ensuring the fulfillment of letter of credit.
- Unconfirmed letter of credit - The bank issues letter of credit, sending it directly to the advising bank and requesting the latter to advise letter of credit to beneficiary, without assuming any additional obligations.
By the application purpose:
- Irrevocable letter of credit - cannot be changed or cancelled by the Issuing Bank or Confirming Bank without prior consent of the parties,
- Recovering letter of credit - this LC is used for payments for regular supplies, which are made in accordance with the schedule established by the contract. It foresees automatic recovery of letter of credit initial amount (quote) upon each use, until the maximum term established,
- Transferable letter of credit – foresees full or partial use of letter of credit by one or more persons. It enables the beneficiary to transfer its letter of credit fully or partially to other beneficiary . It is possible to use this type of letter of credit in case the beneficiary is not the main supplier of goods and it acts in the capacity of intermediary between the buyer and the main supplier,
- Stand-by letter of credit – is a specific type of letter of credit and virtually resembles bank guarantee. It can be used as additional collateral to the payments to be done for the benefit of the exporter.