Letters of credit
Letters of credit are a strong written commitment taken by the bank at the request of the importer (debtor) to pay the exporter (beneficiary) for the goods exported or services provided against the delivery within a fixed term of documents proving that the goods were delivered or that the service was provided.
The bank issues a letter of credit only if:
- The conditions of the letter of credit match the conditions of the import agreement;
- The commercial transaction does not breach the provisions of the currency legislation;
- The debtor’s payment obligation is covered (deposit guarantee, credit line, etc.).
Advantages for customers:
- Customers do not freeze (withdraw from circulation) their monetary means throughout the term of the letter of credit (should it be an uncovered letter of credit);
- Importers pay less for the bank obligation than for a regular loan, from the moment the letter of credit is issued and until payment. If at the moment of payment, the customer has enough funds to pay, the loan may not be necessary;
- There is certainty that exporters, having the payment guarantee of the issuing bank (at will, the confirmation of a first rank bank as well), will deliver commodities in line with the terms and conditions provided for in the agreement;
- The bank will make no payment if the exporter fails to deliver commodities in accordance with the conditions set out in the agreement.
Depending on the kind of letter of credit, the bank may issue, letters of credit, authorize and/or confirm letters of credit, transfer received letters of credit in favor of other beneficiaries.