In recent times of rapidly expanding commercial relations with foreign partners,
as well as increasing volume of foreign trade, international settlements have
become of growing importance. A documentary letter of credit now is one of the
most popular means of payment in international trade, when parties to the
transaction do not know each other and want to optimize the risks of settlement.
Compared with other methods of payment, the letter of credit has the same
benefits for both the exporter and the importer.
An import letter of credit is a document issued by the bank at the buyer’s (client
of the Bank) request, under which the bank undertakes an obligation to make
payment to a seller (foreign partner) for the goods shipped, against the
presentation by the seller the documents, which strictly comply with the terms of
the letter of credit.
Scheme of an import letter of credit
- The seller and the buyer enter into an agreement, which provides for settlement
by means of a letter of credit.
- The buyer (client of the Bank) applies to the bank to issue a letter of credit.
- After making a deposit of clients’ funds into an account specially opened for
that purpose or after granting a credit line intended for issue of letters of credit
(secured with a property acceptable to the Bank), the Bank issues a letter of
credit and sends it to the seller's bank.
- The seller's bank notifies (advises) the seller about the issued letter of credit.
- The seller ships the goods to the buyer and provides its bank with all the
documents specified in the letter of credit to prove shipment of the goods.
- The seller's bank sends the documents to the buyer's bank.
- The buyer's bank checks the documents and, if they meet the terms and
conditions of the letter of credit, debits funds from the client’s account, release
the documents to the client, and transfers the funds to the seller's bank. The
buyer acquires the ownership of the goods.
- The seller's bank credits the amount to the seller’s account.
The buyer (client of the Bank) will be sure that payment for the goods is to be made
only if its bank will receive the documents that meet the terms and conditions of
the letter of credit and confirm that the goods specified in the letter of credit, have
been shipped to the buyer on time. Meanwhile, the seller (exporter) is also insured
against the risk of insolvency of the buyer, as the Bank takes over buyer’s
obligation of payment, which means that if the buyer for whatever reason will be
not willing to pay for the goods, the Bank will be obliged to settle with the seller.
The Bank issues letters of credit after making a deposit of clients’ funds into an
account specially opened for that purpose or after pledge or mortgage of client’s
real estate or other property. The real estate or personal property offered for
mortgage must be evaluated by independent property evaluators. In this case,
the client is provided with a credit line intended for issuing of letters of credit.
An export letter of credit is a scheme of settlement, when the Bank's client
is the seller (exporter)
- The Bank receives from the buyer's bank an export letter of credit issued in
favour of the seller (Bank’s client).
- The seller (client of the Bank) provides the Bank with all the documents
meeting the terms and conditions of the letter of credit and confirming shipment
of the goods to the buyer.
- After assessing risk of insolvency of the buyer's bank, which issued the letter
of credit, the Bank credits the seller’s account against the commercial documents
in accordance with the terms and conditions of the letter of credit, i.e. discounts
- After an agreed period of time, the Bank receives payment from the buyer's
bank under the export letter of credit.
How to issue a letter of credit?
If you have decided to issue a documentary letter of credit, please call the
information line and arrange for a meeting with a Bank specialist or fill in the
application and arrive at the nearest Bank's branch, customer service
centre, or subdivision for a consultation. Please be sure to bring the documents
indicated in the credit application.