Documentary credit is a payment mechanism used in international trade to ensure timely and secure payment for goods or services. It involves an undertaking by a bank, known as the issuing bank, to pay a specified amount to a beneficiary, usually the seller, upon presentation of complying documents. The workability of a documentary credit depends on the clarity and completeness of its terms and conditions, which should be aligned with the underlying sales contract.

Applicant and Beneficiary Details

The documentary credit should clearly identify the applicant, who is the buyer or importer, and the beneficiary, who is the seller or exporter. The details should include their full names, addresses, and any other relevant contact information.

Documentary Credit Amount and Tolerance

The documentary credit should specify the currency and amount of the credit. It may also include a tolerance, which allows for a certain percentage of variation in the amount or quantity of goods shipped.

Partial Shipments and Transhipment

The documentary credit should state whether partial shipments are allowed or prohibited. If partial shipments are allowed, the credit may specify the maximum number of shipments or the minimum value of each shipment. The credit should also indicate whether tran-shipment, which is the transfer of goods from one vessel or carrier to another during transit, is allowed or prohibited.

Shipment Routing and Latest Shipment Date

The documentary credit should specify the place of taking in charge or dispatch, the port of loading, the port of discharge, and the place of final destination. It should also state the latest shipment date or period, which is the deadline for the beneficiary to ship the goods.

Goods Description

The documentary credit should provide a clear and concise description of the goods or services being purchased. It may also include details such as quantity, quality, and unit price.

Documents Required

The documentary credit should list all the documents that the beneficiary is required to present to the nominated bank or issuing bank to receive payment. The documents may include a commercial invoice, packing list, transport document, insurance document, and certificate of origin. The credit should specify the number of originals and copies of each document required.

Additional Conditions

The documentary credit may include additional conditions, such as the requirement for the beneficiary to provide a certificate of inspection or analysis, or to comply with certain shipping or packing requirements.

Conclusion

The workability of a documentary credit depends on the clarity and completeness of its terms and conditions. The credit should be issued promptly and should be aligned with the underlying sales contract. The applicant and beneficiary should carefully review the terms of the credit to ensure that they are able to comply with its requirements. By following the guidelines outlined above, the parties can ensure that the documentary credit is a workable and effective payment mechanism for their international trade transactions.