The potential non-payment
could arise due to various factors – political, commercial risks and could be
due to condition of cargo too. Marine
Cargo insurance offers financial protection against the incidence of loss or
damage to goods arising out of insured perils, is not the subject matter of
this post, as I venture something on the financial side and more specifically
on ‘Letter of Credit’ (LC). Again, who is
obliged to insure – whether it is Seller or Buyer or both – and that it is
categorically determined by the ‘Sale contract’ – the Inco terms is not also
the objective of this post.
The Policy of
Insurance covers financial loss arising out of physical loss or damage to the
subject matter insured but does not cover pure financial losses. Even in this global era of advanced
communication, there could be financial default arising out of – insolvency of
the buyer, failure of the buyer to make the payment, buyer’s failure to accept
the goods and more. In normal circumstances – there could be different terms of
payment – Advance payment (which is most beneficial to seller and could harm
the buyer, if goods are not sent after receipt of payment); payment upon
receipt of consignment; payment upon receipt of documents (documentary
collection); documentary credit and the like.
….. can there be
something which will make both Seller and Buyer happy and serve both the
interests in a proper way …. Can there be somebody (who is credible and
trustworthy) who can guarantee payment – more so, if that body can make payment
and collect it from the buyer later.
Other than ‘cash’
transactions, there are ‘credit’ transactions – where the buyer is allowed to
make payment after receipt of consignment (documents) within stipulated time of
30/60/90/180 days. So here is an attempt
to peep into the financial World by someone who has no finance background… In the Credit front, there can be Guarantee
and Undertaking. In the former, the
parties will be : Principal Creditor, Principal Debtor and Guarantor. In the latter, there is the Indemnifier and
Indemnified (not to confuse with Insurance Indemnity here). We are to read of an Undertaking by a reputed
Institution. It is the “letter of
Credit’ (LC) – where a Bank agrees to effect payment on behalf of buyer,
subject of course to compliance of certain stipulations – receives the
documents, pays for and then collects from the buyer. LC
is an undertaking of the Issuing Bank to the Beneficiary (who will the Seller)
for payment against compliance of set terms (documents).
Often this
transaction is International in nature.
There would be two banks – the bank which issues the LC on behalf of the
importer (buyer) and the bank of the Seller (exporter) called the accepting
bank / negotiating bank. The LC issuing
bank does not directly deal with the goods but more to do with the compliance
of documentation called ‘doctrine of strict compliance’. Technically, a letter of credit guarantees payment of a
specified sum in a specified currency, provided the seller meets
precisely-defined conditions and submits the prescribed documents within a fixed timeframe.
The
Sale contract between the Buyer and Seller would mention that payment shall be
documentary credit. The buyer
(Applicant) would apply to the bank in his Country (Issuing Bank) to open and
issue in favour of the Seller (beneficiary) an LC and to pay the Beneficiary
such amount on the fulfilment of terms and conditions specified in Letter of
Credit. Once this is done, the Seller is
assured of the price (by the bank) upon fulfilment of terms as contained
therein in the LC, the buyer gets credit from the bank, the Issuing bank would
collect commission and charges of security.
The seller, thus assured of payment – ships the goods, makes available
the necessary documents and sends them to the LC issuing bank, who processes
the documents, effects payment as agreed and then collects it from the buyer
(applicant)
These documents that
are required would include: Commercial
Invoice in Original, Packing List, Certificate of Origin, Clean bill of
lading / air waybill and Policy / Certificate of Insurance……… that there would
be stringent specifications for each of these documents is another lengthy
topic. More on the types of letter of
Credit; on Uniform Customs and practice of documentary credit and ….in the
posts to be continued.
With regards – S.
Sampathkumar
22nd Sept. 2014.
