Documentary Transactions

Documentary letters of credit

Letter of credit is the obligation of the bank to pay the seller of goods or services the specified amount on condition of timely provision of corresponding documents that corroborate the shipment of goods or completion of services. This form of accounts facilitates financing and ensures reliable legal protection.

Mechanism of payment using the letter of credit

The buyer receives a guarantee that the bank will not effect the payment at his expense until it receives the documents according to the conditions of the letter of credit and until the bank makes sure that the received documents satisfy the requirements of the buyer according to outward signs. The bank will refuse to pay the documents at the expense of the buyer, if the documents on the goods do not correspond to the conditions of the letter of credit, thereby protecting the interests of the buyer.

The seller can be sure to receive the payment, as soon as he presents to the bank the documents that correspond to payment conditions.

The seller receives immediate payment against shipping documents specified in the conditions of the letter of credit (if the letter of credit envisages payment conditions “upon presentation”).

The required documents usually include documents of title to the goods/shipping documents (such as the bill of lading (receipt of the captain of the ship), waybill, copy of the railway waybill) that testify that the goods were shipped according to the buyer’s requirements and specification.

The most widely spread scheme of accounts using the documentary letter of credit

1. The buyer and the seller negotiate the issue of the letter of credit (letter of credit as form of accounts).
2. Upon the seller’s consent, the buyer asks his bank to issue the letter of credit. The buyer’s bank (the issuing bank) thus undertakes to pay the fixed amount to the seller on condition that the seller presents documents that correspond to the conditions of the letter of credit within the specified period of time.

3. The buyer’s bank (issuing bank) informs the seller’s bank (advising bank) about opening of the letter of credit.

4. The seller’s bank (advising bank) informs the seller that the letter of credit was issued for his benefit.

5. The seller ships the goods, prepares the required documents and forwards them to his bank for presentation to the executing bank.

6. The executing bank checks the documents, and, if they correspond to terms and conditions of the letter of credit, pays to the seller the amount of presented documents, which does not exceed the amount of the letter of credit on the whole.

7. The executing bank forwards the documents to the buyer’s bank for further transfer to the buyer, who can now use them for receiving the documents.

BANK GUARANTEES

JSC Bank "Kontrakt", according to the existing legislation, offers bank guarantees to natural and legal persons who carry out entrepreneurial activities.

Bank guarantees is not a form of accounts, but a tool aimed at ensuring completion of these or those commitments of the parties.

The bank offers the following kinds of guarantees

Payment guarantee — ensures carrying out of buyer’s (Principal’s) commitments before the seller (Beneficiary) regarding payment of the cost of the agreement for shipment of the production, completion of a job or rendering service within the specified term.

Guarantee of returning the advance payment   is the obligation of the Bank regarding return of the amount of advance (or its unused part), if the seller does not carry out or does not carry out completely his commitments under the contract.

Performance bond – this guarantee ensures any payment requirements of the buyer regarding the seller, which may arise in case of non-delivery of the goods or non-carrying out of the conditions of the contract signed by them. This guarantee allows to strengthen the contractual relations between the buyer and the seller, by means of this guarantee the buyer insures himself against the risks of breaking deadlines or non-carrying out the jobs.

Guarantee of repaying the credit – this is the commitment of the Bank to repay payment requirements of the creditor regarding the debtor that arise in case if the latter does not carry out his financial commitments under the credit agreement.

Tender guarantee is the commitment of the Bank to refund the Beneficiary (the organizer of the tender) the amount of lost profit, if the Principal does not carry out his commitments to effect payment for the benefit of the Beneficiary within the frames of the amount specified in the guarantee. Tender guarantee is valid until the contract of the tender participant is concluded. This kind of guarantee provides the clients with the opportunity to participate in auction and supports their business rating.

The Bank offers guarantees on conditions envisaged by the Agreement about providing the bank guarantee, particularly the amount of commission payment for using the guarantee and the order of its payment, security, urgency, recurrency, target use, mutual responsibility of the parties (the Bank and the Principal).

In order to receive the guarantee the client is to present required documents (the list of required documents is presented by the Bank) and the application of the Bank’s standard.

After the financial-economic activity of the Principal is analyzed and his credit capacity and solvency are defined, the credit committee settles the matter of providing the bank guarantee to the Principal.

The time of providing the guarantee is from 1 to 7 days and depends on the kind of guarantee and availability of all required documents (according to the list).

Agreement about providing the bank guarantee needs to be ensured analogously to the credit agreement.

Sergei Germanovskiy, E-mail: client@kontrakt.ua