Chapter 11: DOCUMENTARY CREDITS, PART 2 Settlement (Making Payment)

CHAPTER 11

Documentary Credits, Part 2

S ETTLEMENT (M AKING P AYMENT )

SETTLEMENT REFERS to the process of payment of the beneficiary(ies) to the credit after presentation of documents under the credit. Utilization, availability of payment and settlement are all closely related and often the terms are used interchangeably. Utilization is the process of the seller shipping the goods, presenting documentation and getting paid. Availability and settlement are part of the same process, but refer more specifically to the seller getting paid. There are three primary means of settlement: settlement by payment, settlement by acceptance, and settlement by negotiation. Each is described briefly below and in greater detail in the pages which follow.

SETTLEMENT BY PAYMENT If the credit is an irrevocable, confirmed credit, the value of the credit is available to the beneficiary as soon as the terms and conditions of the credit have been met (as soon as the prescribed document package has been presented to and checked by the confirming bank). In an unconfirmed credit the value of the credit is made available to the beneficiary once the advising bank has received the funds from the issuing bank. See the following chapter for information on confirmed and unconfirmed credits.

SETTLEMENT BY ACCEPTANCE In settlement by acceptance the beneficiary presents the required documentation package to the bank along with a time draft drawn on the issuing, advising, or a third bank for the value of the credit. Once the documents have made their way to the buyer and found to be in order, the draft is accepted by the bank upon which it is drawn (the draft is now called a bank acceptance) and it is returned to the seller who holds it until maturity.

SETTLEMENT BY NEGOTIATION In settlement by negotiation the buyer accepts the documents and agrees to pay the bank after a set period of time. Essentially, this gives the buyer time (a grace period) between delivery of the goods and payment. The issuing bank makes the payment at the specified time, when the terms and conditions of the credit have been met.

Settlement by Payment

PROCEDURE Refer to the diagram on the facing page for each numbered step.

SELLER 1.The seller (beneficiary) ships the goods to the buyer and obtains a negotiable transport document (negotiable bill of lading) from the shipping firm/agent. 2.The seller prepares and presents a document package to the advising/confirming bank consisting of (a) the negotiable transport document, and (b) other documents (e.g., commercial invoice, insurance document, certificate of origin, inspection certificate, etc.) as required by the buyer in the documentary credit.

ADVISING / CONFIRMING BANK

3.The advising/confirming bank (a) reviews the document package making certain the documents are in conformity with the terms of the credit, and (b) pays the seller.

4.The advising/confirming bank then sends the documentation package by mail or by courier to the issuing bank.

ISSUING BANK

5.The issuing bank (a) reviews the document package making certain the documents are in conformity with the terms of the credit and (b) pays or reimburses the advising/confirming bank as previously agreed (in the documentary credit). 6.Sends the document package by mail or courier to the buyer.

BUYER

7.The buyer pays or reimburses the issuing bank as previously agreed.

Settlement by Acceptance

PROCEDURE Refer to the diagram on the facing page for each numbered step.

SELLER 1.The seller (beneficiary) ships the goods to the buyer and obtains a negotiable transport document (negotiable bill of lading) from the shipping firm/agent. 2.The seller prepares and presents a document package to the advising/confirming bank consisting of (a) the negotiable transport document, (b) other documents (e.g., commercial invoice, insurance document, certificate of origin, inspection certificate, etc.) as required by the buyer in the credit, and (c) a draft drawn on the bank at the specified tenor (maturity date).

ADVISING / CONFIRMING BANK

3.The advising/confirming bank (a) reviews the document package making certain the documents are in conformity with the terms of the documentary credit, and (b) accepts the draft and returns it to the seller. 4.The advising/confirming bank then sends the documentation package along with a statement that it has accepted the draft by mail or by courier to the issuing bank.

ISSUING BANK

5.The issuing bank (a) reviews the document package making certain the documents are in conformity with the terms of the documentary credit and (b) at maturity

of the draft pays or reimburses the advising/confirming bank as previously agreed

(in the documentary credit). 6.Sends the document package by mail or courier to the buyer.

BUYER

7.The buyer pays or reimburses the issuing bank as previously agreed (in the documentary credit).

Settlement by Negotiation

PROCEDURE Refer to the diagram on the facing page for each numbered step.

SELLER 1.The seller (beneficiary) ships the goods to the buyer and obtains a negotiable transport document (negotiable bill of lading) from the shipping firm/agent. 2.The seller prepares and presents a document package to the advising/confirming bank consisting of (a) the negotiable transport document, (b) other documents (e.g., commercial invoice, insurance document, certificate of origin, inspection certificate, etc.) as required by the buyer in the credit, and (c) a draft drawn on the bank.

ADVISING / CONFIRMING BANK

3.The advising/confirming bank (a) reviews the document package making certain the documents are in conformity with the terms of the documentary credit, and (b) pays the seller. 4.The advising/confirming bank then sends the documentation package by mail or by courier to the issuing bank.

ISSUING BANK

5.The issuing bank a) reviews the document package making certain the documents are in conformity with the terms of the documentary credit and b) pays or reimburses the advising/confirming bank as previously agreed (in the documentary credit). 6.Sends the document package by mail or courier to the buyer.

BUYER

7.The buyer pays or reimburses the issuing bank as previously agreed (in the documentary credit).