What’s Behind a Name, or Why Documentary Credits are so Modern
Under this title – the latest LCM
Newsletter (Volume 16, Issue 4, October - December 2014) presented an article
co-written by Radek Dobáš, Andreu Vilà and myself. For starters I must say
(almost in envy) that the idea to this was not mine. It is in envy because the
basic idea is to right – and so “forgotten” in all of the “hypes” to create
something new to replace the LC.
Ever since I started working with LCs its
demise has been predicted – and perhaps for that reason that has been the
premise. I.e. people (not least the TF managers all over the world) have had
this at the back of their heads. Perhaps it has been in the back of the heads
of the UCP 600 drafters. Perhaps that is the main reason for the lack of
innovation of the LC as such; both in terms of technology and rules. Surely the
rules have been revised – but just try to compare UCP 600 to ICC Brochure 83
(dated 1933) – and you will be surprised how similar they actually are. Technology
wise some innovation has taken place – but that is mainly related to the
communication between the banks and the applicants/beneficiaries; i.e. sharing
information and presenting documents. All very fine … but really not much in 80
years!
I really hope that this article will be a
paradigm changer in this respect, and that the Trade Finance industry will say:
Yes
– we need to find new products like the BPO … but we ALSO need to innovate the
LC … because she will stay with us for a long time, so she really deserves it
….
With said – here is the full article –
should you not have read it already:
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What’s Behind a Name, or Why Documentary
Credits are so Modern
According to ICC (ICC Response to Basel
Committee Consultation, issued in April 2010) best estimates suggest that the
bank-intermediated trade finance underpins around 30 per cent of world trade.
Trade finance facilities would include banking commitments, such as letters of
credit and bank guarantees, and banking finance of trade documentation. Thus,
considering that world trade is about 18.000 billion USD in a year, the volumes
object of trade finance are huge. And a good third of that sum is handled by
documentary credits.
Documentary credits are therefore an
important portion of world trade, reaching every year an aggregate amount
roughly the size of the Italian or Russian GDP. They play a central role as an
internationally accepted mechanism for debt settlement, and also as a means for
trade finance facilitation, where the creditworthiness of the buyer is offered
to the seller. Moreover, documentary credits are a risk mitigant for banks.
International sales contracts, in particular high value contracts, involve a request
for bank guarantees. Any bank financing the buyer would face the risk of an
unfair call under such guarantee, whereas a documentary credit would allow for
satisfactory evidence of the delivery.
But letters of credit also enjoy a very
singular position in trade that turns them into a perfect platform of knowledge
for trade specialists, and particularly for bankers. A documentary credit
offers every banker a magnificent window to take a look and understand the
business of their clients (in fact they offer a view over international
business in general), and therefore empower the banker with knowledge and tools
to better manage their relationship, enhancing profitability for both parties.
The documentary credit stands in a central
position of the business and is shaped with components related to the sales
contract, to the transport contract, to general logistics, to insurance of
goods, to customs and market compliance, to legal barriers or international
sanctions. In sum, the documentary credit practitioner is in a privileged
position to see and understand how international commerce works, and thus what
the needs of the customer are beyond the documentary credit itself.
A banker that deals with documentary
credits needs to have a very good command of the basic sets of rules, mainly
UCP, but also URDG and ISP. He or she needs full familiarity with international
standards, mainly contained in ISBP, but also in many old or unpublished
opinions of the ICC Banking Commission. But beyond that technical know-how, the
curious (or only the diligent) banker will expand its knowledge into the
international sales law, such as the Vienna Convention, the difference between
property and possession, the concept of applicable law or the different dispute
resolution schemes.
Incoterms will probably be a must, together
with the understanding of the main transport documents related to international
transport conventions, such as Hague-Visby, Hamburg, Rotterdam, CMR or
Montreal. Some understanding about logistics or different container techniques,
such as the difference between an FCL and an LCL load is expected. What are the
different types of freight, or when a charter party is required would also be
of practical use.
The banker may have a look also at the
insurance of goods, and understand the difference with the carrier liabilities.
To be knowledgeable in international transport of goods insurance means
probably some insight into the British Marine Insurance Act, or the Institute
Cargo Clauses of the Lloyd’s Market Association.
Very often a certain understanding of the
way customs work is welcomed: how and when VAT or other taxes are applied, or
what is a tariff and how a system of preferences work. Let it alone some
familiarity with the way market barriers and protections work, or the impact of
sanctions in international trade.
Documentary credits are therefore not only
an important means of payment, but also a guide for bankers to understand their
clients’ international business (be it conducted under a trade finance scheme
or not), and makes it easier for that banker to be in a better position to
become a true advisor and partner to that business. When banks want to be
something more than a distributor of financial products on demand, it should be
welcomed as good news getting to know that the report of documentary credits’
death (like that of Mr. Twain) was an exaggeration.
Radek
Dobáš
Head of Documentary Business Team
Česká spořitelna, a.s.
Prague, Czech Republic
Andreu
Vilà
International Trade Development Manager
Banco Sabadell
Barcelona, Spain
Kim
Sindberg
Executive Adviser
Nordea
Copenhagen, Denmark
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That’s it – I hope you enjoyed it. The LCM
Newsletter is available – for the next 2 months – here:
http://www.tradeservicesupdate.com
Take care of each other and the LC – she deserves
it!
Kind regards
Kim