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Payment by letters of credit is a method of non-cash payments between organizations, the essence of which is as follows. The payer's bank instructs the bank serving the payee to pay the agreed amount of money within the agreed time period, subject to the conditions stipulated in the payer's letter of credit.
The letter of credit form looks very similar to the payment order form, which was presented above.
A letter of credit is convenient to use in situations where large payments are involved, but business partners do not really trust each other.
In business relationships, the moment of payment, as a rule, does not coincide with the moment of receipt of the goods or services, that is, what is paid for. Because of this, there are risks.
If the money is paid earlier, the payer risks losing it and not receiving the product or service. If the goods are transferred earlier or the service is provided, the recipient runs the risk of not receiving the money due to him for this. To resolve this contradiction, the recipient and the payer involve two intermediaries - the recipient's bank and the payer's bank. And the letter of credit becomes a document that formalizes the relationship between the payer and the recipient through the mediation of two banks. Despite the fact that banks sometimes fail, it is safe to say that the average Russian bank is much more reliable than the average Russian organization. This is explained not by the fact that some special people work in banks, but by the principles of the organization of the banking system.
Therefore, in a situation of complex relationships between organizations, it makes sense for them to trust the mediation of more reliable banks. The word "letter of credit" itself comes from the Latin word accedifivus - trust.
In accordance with the letter of credit, a certain amount of money is transferred from the payer's current account opened with his bank to the beneficiary's bank. But this amount is not transferred to the current account of the payee.
The letter of credit stipulates the conditions under which money can be credited to the recipient's settlement account. For example, the recipient must submit to his bank a bill of lading or an act of acceptance of delivery, drawn up in a certain way, confirming that the goods have been received by the payer or services have been provided to him and the payer has no claims.
The letter of credit has an expiration date.
If the conditions of the letter of credit are not met during the period of its validity, the beneficiary's bank will return the money to the payer's bank and the payer's bank will credit this money back to the payer's current account.
Partial payment by letter of credit is allowed. Letters of credit are revocable and irrevocable. A revocable letter of credit may be revoked by the payer from the beneficiary's bank at any time before its expiration without giving reasons. And the payer will be able to get back an irrevocable letter of credit only after the expiration of the letter of credit.
According to the terms of payment, letters of credit can be with or without acceptance. The condition of payment with acceptance provides for the following: in order for the money to be credited to the settlement account of the recipient, in addition to fulfilling the conditions of the letter of credit, the acceptance of the payer or the acceptance of a person authorized by the payer is required.
An irrevocable letter of credit can have an additional positive feature: it can be confirmed. The beneficiary's bank confirms the letter of credit.
The most logical option for a letter of credit is a letter of credit that is irrevocable, confirmed and without acceptance. It is this version of the letter of credit that expresses its very idea in its purest form: business partners exclude all risks associated with their possible mutual bad faith, transferring the final execution of the payment to a pedantic neutral intermediary.
There is another type of letters of credit, which is insignificant for the recipient, but important for the payer: letters of credit can be covered and uncovered. A covered letter of credit for the payer means that the corresponding amount of money is immediately withdrawn from his current account. An uncovered letter of credit means that payments under the letter of credit are taken to be provided by the payer's bank, and the amount of money will be withdrawn by the bank from the payer's current account only after the execution of the letter of credit. That is, the bank provides the payer with some service, providing him with a cash loan for the duration of the letter of credit. Banks provide such services, of course, not free of charge.
A letter of credit is a contingent monetary obligation of a bank issued by it on behalf of a client in favor of its counterparty under an agreement under which the bank that opened the letter of credit (issuing bank) can make a payment to the supplier or authorize another bank to make such payments, subject to the submission of documents, stipulated in the letter of credit, and subject to the fulfillment of other conditions of the letter of credit.
Banks can open the following types of letters of credit:
covered (deposited) and uncovered (guaranteed);
revocable and irrevocable (can be confirmed).
When opening a covered (deposited) letter of credit, the issuing bank transfers at the expense of the payer's funds or the credit provided to him the amount of the letter of credit (coverage) at the disposal of the executing bank for the entire period of the letter of credit. When opening an uncovered (guaranteed) letter of credit, the issuing bank grants the executing bank the right to write off funds from its correspondent account within the amount of the letter of credit. The procedure for writing off funds from the correspondent account of the issuing bank under a guaranteed letter of credit is determined by agreement between the banks.
A revocable is a letter of credit that can be changed or canceled by the issuing bank on the basis of a written order of the payer without prior agreement with the recipient of funds and without any obligations of the issuing bank to the recipient of funds after the withdrawal of the letter of credit. Irrevocable is a letter of credit that can be canceled only with the consent of the recipient of funds. At the request of the issuing bank, the nominated bank may confirm an irrevocable letter of credit (confirmed letter of credit). An irrevocable letter of credit confirmed by the nominated bank cannot be changed or canceled without the consent of the nominated bank. The procedure for providing confirmation on an irrevocable confirmed letter of credit is determined by agreement between the banks.
The letter of credit is intended for settlements with one recipient of funds.
The terms of the letter of credit may provide for the acceptance of a person authorized by the payer.
The recipient of funds may refuse to use the letter of credit before its expiration, if the possibility of such refusal is provided for by the terms of the letter of credit.
The procedure for settlements under a letter of credit is established in the main contract, which reflects the following conditions:
name of the issuing bank;
name of the bank servicing the recipient of funds;
name of the recipient of funds;
the amount of the letter of credit;
type of letter of credit;
method of notifying the recipient of funds about the opening of a letter of credit;
method of notifying the payer about the account number for depositing funds opened by the executing bank;
a complete list and exact description of the documents submitted by the recipient of funds;
terms of validity of the letter of credit, submission of documents confirming the delivery of goods (performance of work, provision of services), and the requirement for execution of these documents;
terms of payment (with or without acceptance);
responsibility for non-fulfillment (proper fulfillment) of obligations.
The main contract may include other conditions relating to the procedure for settlements under a letter of credit.
Payment under the letter of credit is made in a cashless manner by transferring the amount of the letter of credit to the account of the recipient of funds. Partial payments under a letter of credit are allowed.
For violations committed in the execution of the letter of credit form of payment, banks are liable in accordance with applicable law.
In the application for a letter of credit, in the "Type of letter of credit" field, it is indicated whether it is revocable or irrevocable (if not specified, the letter of credit is considered revocable), covered (deposited) or uncovered (guaranteed).
The procedure for filling in the details for the supplier's bank is the same as for the recipient's bank in the payment request. In the field "Supplier" is specified. I I N (if assigned) and the name of the supplier.
To carry out settlements, but to a covered (deposited) letter of credit, bank institutions form an account number, which they bring to the attention of customers. The supplier is obliged to communicate the number of this account to the payer.
The account number must be indicated by the payer in the application for opening a covered (deposited) letter of credit in the field "Account No." supplier.
Upon receipt of an application for opening a covered (deposited) letter of credit at the institution of the supplier's bank, a separate personal account is opened in it no later than the next day, to which the payer's funds are credited. In the application for a letter of credit, an employee of the supplier's bank makes a corresponding note indicating the number of a separate personal account opened under this letter of credit (Appendix 3).
In the case of an uncovered (guaranteed) letter of credit, the field "Account No" of the supplier. Emphasized.
The "Supplier's number" field indicates the number of the supplier's account, to which the supplier's bank must credit funds if the condition of the letter of credit is met.
In the application for a letter of credit in the field "Terms of payment" it is indicated "without emphasis" or "with acceptance", in the latter case, this field indicates the authorized person of the buyer, the data of his passport or a document replacing the passport.
In the "Validity period of the letter of credit" field, the date (day, month and year) of closing the letter of credit is indicated.
An application for opening a letter of credit shall be submitted in the number of copies required by the payer's bank to fulfill the conditions of the letter of credit.
To receive funds under a letter of credit, the supplier, having shipped the goods, submits a register of invoices, shipping documents and other documents stipulated by the terms of the letter of credit to the servicing bank. Documents confirming payments under the letter of credit must be submitted by the supplier to the bank before the expiration of the letter of credit and confirm the fulfillment of all conditions of the letter of credit. If at least one of these conditions is violated, no payments under the letter of credit are made.
When paying under a letter of credit, the supplier's bank (executing bank) is obliged to verify that the supplier complies with all the conditions of the letter of credit, as well as the correctness of the register of accounts, the compliance of the supplier's signatures and stamps on it with the declared samples.
If the terms of the letter of credit provide for the acceptance of an authorized buyer, then the presence of an acceptance inscription and the compliance of the signature of the authorized buyer with the sample submitted by him are checked.
Payment from a letter of credit in cash is not allowed. Banks are not responsible for the consequences of delay or loss of any documents in transit.
If the terms of the letter of credit provide for the acceptance of an authorized buyer, then these persons must submit to the nominated bank:
Passport or other equivalent document;
Take a signature sample, if the bank does not have one (to be filled in at the bank on the signature sample card);
Travel certificate or power of attorney issued by the organization that opened
letter of credit.
On the registers of invoices or on shipping documents accepted for payment at the expense of a letter of credit, the authorized person makes the following inscription:
Closing of a letter of credit in the executing bank is carried out:
upon expiration of the letter of credit (in the amount of the letter of credit or its balance);
on the basis of an application by the recipient of funds to refuse further use of the letter of credit before the expiration of its _ validity, if the possibility of such refusal is provided for by the terms of the letter of credit (in the amount of the letter of credit or its balance);
by order of the payer on the full or partial withdrawal of the letter of credit, if such withdrawal is possible under the terms of the letter of credit (in the amount of the letter of credit or in the amount of its balance).
Upon withdrawal, the letter of credit is closed or its amount is reduced on the day of receipt from the issuing bank of the payer's instruction on the full or partial withdrawal of the letter of credit.
In case of a partial withdrawal of a letter of credit, the executing bank puts the mark “Partial withdrawal” on the front side of the letter of credit, the amount indicated by numbers is circled and a new amount is put down. On the reverse side of the covered (deposited) letter of credit, an entry is made on the amount of the amount to be returned and the date of return, which is certified by the signature of the responsible executor, indicating the surname, as well as the bank's stamp.
The unused or withdrawn amount of the covered (deposited) letter of credit is subject to return by the executing bank by a payment order to the issuing bank simultaneously with the closing of the letter of credit or a decrease in its amount.
The executing bank must send a notification in any form to the issuing bank about the closing of the letter of credit.
All claims against the supplier, except for those arising through the fault of the bank, are considered by the parties without the participation of the bank.
In the event of claims arising from settlement transactions in the form of letters of credit, the responsibility lies with the issuing bank.
Settlement scheme for a covered letter of credit
letter of credit application;
on the basis of a letter of credit, funds are debited from the payer's account to the beneficiary's bank account
To account for a letter of credit, an off-balance account is opened and a memorial order is drawn up;
sending advice;
the beneficiary bank receives the letter of credit from the RCC and deposits the beneficiary's account;
notification to the recipient about the opening of a letter of credit;
Shipment of goods;
provision of documents stipulated by the terms of the letter of credit (in 4 copies);
A notice is sent to the payer's bank about the closing of the letter of credit.
Are you afraid of the risks associated with an advance payment for a transaction? Would you like to insure yourself as a client cooperating with a new supplier for the first time? Take advantage of a letter of credit - one of the most reliable and profitable banking instruments used when concluding contracts.
The letter of credit form of payment is beneficial for both the seller and the buyer. It can be used with equal success not only in domestic transactions, but also in foreign trade operations. Today, settlement services in the form of documentary letters of credit are provided by most major Russian banks.
Letter of credit: what is it in simple terms?
In simple terms, a letter of credit is a special account opened with a bank, where you can reserve funds when conducting transactions for the sale of goods or the provision of services (performance of work). With full observance by both parties of the conditions specified in the contract, the bank pays the required amount to the account of the recipient (beneficiary).
Thus, the bank acts as a guarantor and assumes responsibility for making payments. The supplier is 100% sure that the product / service will be paid for, and the buyer knows that he will be able to pay them on time and without debt.
Letter of credit form
It operates according to the following scheme.
- The parties conclude a contract, which stipulates the terms of the letter of credit settlement.
- The buyer submits to his bank (issuer) an application for opening a letter of credit account and deposits the amount necessary to cover the transaction (reserves funds).
- After the successful opening of the letter of credit, the issuing bank notifies the seller's bank (advising bank) about this.
- The advising bank notifies the seller of the opening of the letter of credit. The seller ships the goods and provides supporting documents to his bank.
- After checking the documents, payment is transferred to the seller's account by the issuing bank or advising bank (depending on the terms of the contract).
Irrevocable letter of credit
One of the main and frequently used types of documentary calculations. Unlike a revocable letter of credit, a confirmed or unconfirmed irrevocable letter of credit is not revoked or changed by either party (including the bank) without the prior consent of the seller/supplier. It is considered the most reliable form of letters of credit, as it completely frees a trade and money transaction from all possible risks, primarily financial ones.
If during the course of the transaction the supplier and the buyer come to a mutual agreement, the terms of the irrevocable letter of credit may be changed.
Letter of credit agreement
Any information that can subsequently be used when making a trade and money transaction and paying for it is stipulated and strictly recorded in the agreement on conducting a transaction that provides for this form of settlement:
- the name of the supplier and recipient,
- type of letter of credit used (irrevocable/revocable, covered/uncovered),
- the amount booked on the account to pay for the transaction,
- duration of the obligation
- commission amount,
- payment order,
- procedure in case of non-payment of debt under a letter of credit,
- rights and obligations of all parties.
Payment by letter of credit
Settlements by letters of credit provide for the transfer of funds to the seller's account only if all the conditions specified in the contract have been met. In particular, the transfer of money to the seller's account is made after the full shipment of the goods and the provision of all required documents to the bank. In the event that the terms of the letter of credit agreement have been violated, the payer (buyer) has the right to refuse payment and return the goods to the supplier.
Nuance: a letter of credit account is opened by the buyer for his own money or with the involvement of bank credit funds (if he has the right to lend).
Opening a letter of credit
To open a letter of credit account, a written application in the appropriate form is submitted to a banking organization. The statement states:
- number of the agreement under which the letter of credit is opened,
- name and details of the supplier,
- type, validity period, amount of money of the letter of credit,
- the way it is implemented
- list of shipped (provided) goods/services,
- name of the executing bank under the letter of credit obligation,
- a list of documents that will be used as the basis for the payment of funds to the supplier.
Comparison.ru advice: use a letter of credit form of payment if you need to conduct secure trade and money transactions with new and “problematic” business partners.
When concluding new transactions between individuals and individual entrepreneurs, organizations and enterprises, the question often arises: “How to insure against dishonesty of counterparties and avoid losing money or goods?”. This issue is especially relevant when payment for goods is made in advance. At the same time, the risks increase if the contract is concluded for a significant amount with foreign partners. The solution is simple - to use letters of credit in settlements. What is a letter of credit, not everyone knows. However, having studied all the intricacies of this type of settlement, clients feel more secure and confident in conducting large transactions.
Letter of credit: what is it in simple terms?
A letter of credit is a form of non-cash payment, which is carried out under the control of two banking organizations. The bank, which protects the interests of the buyer, transfers money to the account of the seller of products (services) only when the seller provides the bank with the necessary documents. The list of documents is compiled at the conclusion of the transaction and is written in the contract.
The scheme of interaction between partners can be a little more complicated, it all depends on the type of letter of credit. Despite this, the banking organization acts as an intermediary, which, for a fee, ensures the execution of the transaction.
Benefits of a letter of credit for the buyer
Settlements under a letter of credit, in comparison with other forms of payment, have advantages for the buyer:
- money is transferred to the seller only after the delivery of the goods to the buyer - for this, it is necessary to provide the bank with all the necessary list of documents drawn up properly;
- if delivery is not made, the money is returned to the buyer within a predetermined time frame;
- the bank guarantees that the goods will be delivered in the agreed volume and assortment, as well as of proper quality, since the seller is obliged to provide bank employees with documents confirming the assortment, quality and quantity of goods;
- the risk of negative tax consequences of the transaction is reduced - the bank guarantees the correct execution of the documents accompanying the transaction, otherwise the bank will not transfer the money to the seller's account;
- settlements under a letter of credit can be provided by the bank on credit on favorable terms for the buyer - this allows you not to withdraw a large amount of funds from circulation to pay for the transaction.
Scheme of using a letter of credit
What is a letter of credit, we found out. Now let's see how transactions with this form of payment work in practice.
Stage 1. The seller and the buyer sign a contract (purchase / sale agreement, supply of goods, provision of services), under which the form of payment under the letter of credit is prescribed, as well as the conditions for its disclosure.
Stage 2. The buyer submits an application and a copy of the contract to the bank. Based on the documents provided, the banking organization opens a letter of credit. If necessary, the letter of credit can be confirmed by the seller's bank, if these requirements are provided for in the contract.
Stage 3. The coverage of the letter of credit is formed either at the expense of the client-buyer, or on the basis of a loan granted to this person by the issuing bank.
Stage 4. The seller delivers the goods, sends properly executed documents to the bank. After the bank checks that all conditions are met, a letter of credit is opened and the seller receives payment.
Stage 5 The buyer receives the goods and all accompanying documents.
This scheme is simple and transparent. The issued letter of credit for the supplier acts as a guarantee of payment, and for the buyer it reduces the risk of losing money, as in the case of an advance payment to an unknown counterparty. At the same time, the bank accompanies the transaction, checking its purity.
Types of letters of credit
The resolutions of the Central Bank of the Russian Federation stipulate the possibility of opening the following types of letters of credit:
- A covered (deposited) bank letter of credit - what it is, in simple terms, can be described as follows: the buyer opens a bank account and transfers funds to it in the amount necessary to cover the letter of credit. The issuing bank transfers the amount to the correspondent account of the financial institution where the seller's account is opened. This is the most common type of payment for letters of credit.
- Uncovered (guaranteed) letter of credit - the issuing bank does not transfer funds to the executing bank, but provides an opportunity to write off funds from the account opened with it, within the amount specified in the contract. The procedure and terms for debiting funds from the account of the issuing bank takes place in accordance with the existing interbank agreement.
- Revocable - a documentary letter of credit that can be revoked, modified or canceled by the bank on behalf of the payer without the consent of the supplier and even without prior notice.
- Irrevocable - a type of contract that can be canceled only after the executing bank receives consent to change the conditions from the supplier of the goods. There is no partial acceptance of the terms of an irrevocable letter of credit.
- Confirmed - a form of interaction that implies an additional guarantee of payment from a bank that is not an issuer. The financial institution undertakes to pay for the goods (services), even if the issuing bank refuses to make the payment. This form of interaction applies only to an irrevocable letter of credit. For confirmation, an additional payment of commission to the bank is required.
Additional varieties
Today, there are several other types of letters of credit. They are varieties of those described above.
A documentary letter of credit with a red clause is an agreement according to which the executing bank receives the authority from the issuing bank to make an advance payment to the supplier of the goods in the amount specified in the contract until the moment when the goods are fully delivered or the service is fully provided.
Revolving view - opens when the contract provides for several deliveries of approximately equal cost in parts over a certain period of time. A letter of credit is opened for an amount equal to one delivery, with the condition that after each payment, the original amount will be restored to the account. In parallel with this, the contract amount will cyclically decrease.
Transferable (transferable) letter of credit - makes payments not only in favor of the seller, but also in favor of third parties (suppliers). This type is used when the seller delivers through a supplier and is not the direct consignor. A third party, having shipped the goods to the specified address, provides the executing bank with the necessary documents, after which all the previously agreed payments are made in its favor.
Which type of letter of credit to choose?
As a rule, participants must independently determine the form of a letter of credit and coordinate it with the bank. The main factors influencing the choice of a letter of credit are the terms of the transaction and the interests of the parties. To do this, you need to understand exactly what a letter of credit is and which of its forms are used in our country.
At the moment, Russian legislation in matters of settlement of non-cash payments is somewhat behind our Western neighbors, so you can focus on the international rules for documentary letters of credit developed by the International Chamber of Commerce.
It should be borne in mind that not every bank is ready to agree to non-standard terms of a letter of credit. This is due, to a greater extent, to the lack of qualified specialists in this field. Therefore, before including non-standard conditions in the main contract, it is necessary to coordinate them with the banks of the recipient and payer of funds.
Participants of mutual settlements
In order to choose this form of payment, it is not enough to know what a letter of credit is. You also need to understand that, like any other form of cashless payment, it has its drawbacks.
In this transaction, not two parties participate, as in ordinary mutual settlements, but four. In addition to the seller and the buyer, the seller's bank and the buyer's bank are involved here, where a simple letter of credit is opened, an account and all basic operations take place. This introduces certain difficulties in the transaction.
Design difficulties
Settlement under a letter of credit implies strict requirements for documents and deadlines, as well as complication of the registration procedure. In addition to drawing up the main contract between the buyer and the seller, it is required to exchange documents between banks. Although this is now done electronically, it takes time to check all documents.
Expensive service
The cost of this type of payment is quite high. The bank charges a fee for all operations carried out with letters of credit. In addition, from the moment the letter of credit is opened, the money on the buyer's account is frozen, which is a guarantee of covering the letter of credit.
Conclusion
Despite all its shortcomings, this form of payment is reliable and convenient for all participants in the transaction. Having understood all the intricacies of the process, the client will no longer be able to refuse this type of payment.
A letter of credit is a conditional monetary obligation that a bank (issuing bank) accepts on behalf of the payer, to make payments in favor of the recipient of funds upon presentation of the latter documents that comply with the terms of the letter of credit, or to authorize another bank to make such payments.
The letter of credit is intended for settlements with one recipient of funds.
The terms of the letter of credit may provide for the acceptance of a person authorized by the payer.
GENERAL PROVISIONS ON PAYMENTS UNDER LETTER OF CREDIT
The legal basis for settlements under a letter of credit is enshrined in paragraph 3 of Chapter 46 of the Civil Code of the Russian Federation, as well as in the Regulation on non-cash payments in the Russian Federation No. 2-P.
When settling under a letter of credit, a bank acting on behalf of the payer to open a letter of credit undertakes to make payments in favor of the recipient of funds upon presentation by the latter of documents that meet all the conditions of the letter of credit, or authorize another bank to make such payments.
The executing bank may be the issuing bank, the receiving bank or another bank. The letter of credit is separate and independent from the main contract.
Banks can open the following types of letters of credit:
- covered (deposited) and uncovered (guaranteed);
- revocable and irrevocable (can be confirmed).
When opening an uncovered (guaranteed) letter of credit the issuing bank grants the executing bank the right to debit funds from the correspondent account of the issuing bank maintained by it within the amount of the letter of credit or indicates in the letter of credit another method of reimbursement to the executing bank of the amounts paid under the letter of credit in accordance with its terms. The procedure for writing off funds from the correspondent account of the issuing bank under an uncovered (guaranteed) letter of credit, as well as the procedure for reimbursement of funds under an uncovered (guaranteed) letter of credit by the issuing bank to the performing bank, is determined by an agreement between the banks. The procedure for reimbursement of funds under an uncovered (guaranteed) letter of credit by the payer to the issuing bank is determined in the agreement between the payer and the issuing bank.
In the event of a change in conditions or cancellation of a revocable letter of credit, the issuing bank is obliged to send a corresponding notice to the recipient funds no later than the working day following the day of changing the conditions or canceling the letter of credit.
The terms of an irrevocable letter of credit are considered changed or an irrevocable letter of credit is considered canceled from the moment the executing bank receives the consent of the recipient of funds. Partial acceptance of changes in the terms of an irrevocable letter of credit by the recipient of funds is not allowed.
At the request of the issuing bank, an irrevocable letter of credit can be confirmed by the executing bank with the assumption of an obligation, additional to the obligation of the issuing bank, to make a payment to the recipient of funds upon presentation of documents corresponding to the terms of the letter of credit (confirmed letter of credit). The terms of the confirmed letter of credit are considered changed or the letter of credit is considered canceled from the moment the issuing bank receives the consent of the executing bank that confirmed the letter of credit and the recipient of funds.
The issuing bank informs the recipient of funds about the opening of a letter of credit and its conditions through the executing bank or through the bank of the recipient of funds with the consent of the latter.
Payment under a letter of credit is made in a cashless manner.
Transfer of documents on the opening of a letter of credit and its conditions, on confirmation of a letter of credit, on changing the conditions of a letter of credit or its closing, as well as on the bank's consent to accept (refuse to accept) the submitted documents, can be carried out by banks using any means of communication that make it possible to reliably identify the sender of the document.
The amount and procedure for payment for bank services in settlements under letters of credit are governed by the terms of contracts concluded with customers and agreements between banks participating in settlements under letters of credit.
PROCEDURE FOR WORKING WITH LETTER OF CREDIT IN THE ISSUING BANK
When making settlements under a letter of credit, the payer submits to the issuing bank two copies of the letter of credit application in which it instructs the issuing bank to open a letter of credit. The issuing bank develops the application form for opening a letter of credit independently.
The application for opening a letter of credit shall contain information corresponding to the details provided for in paragraph 2.10 of the Regulation on cashless payments in the Russian Federation No. 2-P, as well as the following information:
- name of the issuing bank;
- name of the bank - recipient of funds;
- name of the executing bank;
- type of letter of credit (revocable or irrevocable);
- terms of payment for the letter of credit;
- the list and characteristics of the documents submitted by the recipient of funds, and the requirements for the execution of these documents;
- closing date of the letter of credit, the period of submission of documents;
- name of the goods (works, services), for the payment of which a letter of credit is opened, the term for the shipment of goods (performance of works, provision of services), consignor, consignee, destination of the cargo.
To make settlements under a covered (deposited) letter of credit, the letter of credit shall indicate the number of the account opened by the executing bank for making settlements under the letter of credit. The specified account is opened at the request of the issuing bank, drawn up in any form on the basis of an application for opening a letter of credit. The number of the specified account is brought by the executing bank to the attention of the issuing bank, and by the issuing bank - to the attention of the payer.
If the executing bank is a bank that does not serve the beneficiary, the "Beneficiary's account number" field of the letter of credit shall contain the details of the bank that serves the beneficiary and the beneficiary's account number.
When opening an uncovered (guaranteed) letter of credit, the field "Account No. (40901)" in the letter of credit is not filled in.
In the event of a change in the conditions or cancellation of a letter of credit, the payer submits an appropriate order to the issuing bank. In accordance with the specified order, the issuing bank sends a message to the executing bank about changing the conditions or canceling the letter of credit. The specified order of the payer, the message of the issuing bank about changing the conditions or canceling the letter of credit may be sent in the form of a document on paper, drawn up in any form and executed by the signatures of persons entitled to sign settlement documents, and an imprint of the seal, or in the form of an electronic document in in accordance with the terms of the agreement between the payer and the issuing bank (for the specified order of the payer) or the agreement between the issuing bank and the executing bank (for notifying the issuing bank about changing the conditions or canceling the letter of credit to the executing bank).
The recipient of funds may be notified of changes in the conditions or cancellation of the letter of credit by the issuing bank through the executing bank or through the bank of the recipient of funds.
The transfer of funds to the executing bank in order to increase the amount of the covered (deposited) letter of credit is carried out by a payment order of the issuing bank, drawn up on the basis of the payer's order to increase the amount of the letter of credit. At the same time, as the beneficiary's account number, the account number entered in the "Account No. (40901)" field of the letter of credit when it was opened is indicated, and the data allowing to identify the letter of credit, including the date and number of the letter of credit, are included in the "Purpose of payment" field of the payment order.
The procedure for increasing the amount of an uncovered (guaranteed) letter of credit is determined by agreement between the issuing bank and the executing bank.
Upon receipt from the executing bank of documents under a letter of credit, the issuing bank checks the compliance of the submitted documents and their details with the terms of the letter of credit on the basis of the documents themselves (hereinafter referred to as verification by external signs).
The term for verification of documents should not exceed seven working days following the day of receipt of the documents, unless otherwise provided by an agreement between the issuing bank and the executing bank.
When it is established that the documents do not conform to the terms of the letter of credit, the issuing bank has the right to refuse to accept them or to first request the payer about the possibility of accepting the specified documents. In case of refusal to accept the specified documents, the issuing bank is obliged to notify the bank from which the documents were received, or the recipient of funds, indicating in the notification the discrepancies that are the reason for the refusal.
When establishing discrepancies on the external features of the documents accepted by the executing bank from the recipient of funds, the terms of the letter of credit, the issuing bank has the right to demand from the executing bank the return of the amounts paid to the recipient of funds at the expense of the coverage transferred to the executing bank (under the covered (deposited) letter of credit), the restoration of the amounts debited from the correspondent account opened with the executing bank, or refuse to reimburse the executing bank for the amounts paid to the recipient of funds (under an uncovered (guaranteed) letter of credit).
The issuing bank is obliged, no later than the working day following the day of return of the unused balance or the amount of the reduced or canceled covered (deposited) letter of credit, to credit the corresponding amount to the payer's account from which the funds were debited to cover the letter of credit.
Arbitration practice
See Information Letter of the Presidium of the Supreme Arbitration Court of the Russian Federation dated January 15, 1999 No. 39 "Overview of the practice of resolving disputes related to the use of letters of credit and collection forms of payment".
PROCEDURE FOR WORKING WITH LETTER OF CREDIT IN THE PERFORMING BANK
The executing bank immediately informs the recipient of funds of the receipt of the letter of credit in a manner agreed with it, followed by written confirmation in any form no later than the business day following the day the letter of credit is received from the issuing bank. If the executing bank is not a bank serving the recipient of funds, the executing bank has the right to inform the recipient of funds about the receipt of a letter of credit through the bank of the recipient of funds.
If there is doubt about the correctness of the details in the letter of credit, the executing bank has the right to send a request in any form to the issuing bank. Details in the letter of credit shall be specified within the validity period of the letter of credit. In this case, the executing bank may preliminarily notify the recipient of funds or the bank servicing the recipient of funds about the opening of a letter of credit in favor of the recipient of funds.
To receive funds under a letter of credit, the recipient of funds submits to the executing bank four copies of the register of accounts of form 0401065 (Appendix 21 to the Regulation on non-cash payments in the Russian Federation No. 2-P) and the documents stipulated by the terms of the letter of credit.
The first copy of the register of accounts is drawn up with the signatures of persons entitled to sign settlement documents and with a seal. If the executing bank is a bank servicing the recipient of funds, the same details shall be entered in the lines "Executing bank" and "Beneficiary's bank" of the register of accounts. If the executing bank is not a bank serving the recipient of funds, the line "Executing bank" of the register of accounts shall contain the details of the bank to which the recipient of funds submits documents under a letter of credit. The register of accounts and the documents stipulated by the terms of the letter of credit must be submitted within the period specified in the letter of credit, but within the validity period of the letter of credit. The fourth copy of the register of accounts is issued with an imprint of the bank's stamp, the date of receipt of the documents and the signature of the accountant and serves as a receipt for receipt of the documents.
The executing bank is obliged to check, by external signs, the conformity of the documents with the terms of the letter of credit, as well as the correctness of the registration of the register of accounts. The term for verification of documents should not exceed seven business days following the day of receipt of the documents, unless otherwise provided by an agreement between the issuing bank and the executing bank.
When the compliance of the specified documents with the terms of the letter of credit and the correctness of registration of the register of accounts by the executing bank is established, payment under the letter of credit is made. All copies of the register of accounts accepted by the bank shall bear the stamp of the bank, the date of acceptance and the signature of an accountant. When executing a revocable letter of credit, the executing bank makes payment in full, if by the time of submission of documents it has not received an order from the issuing bank to cancel the letter of credit, in part of the amount of the letter of credit - upon receipt from the issuing bank of an order to reduce the amount of the letter of credit.
When it is established that the specified documents do not conform to the terms of the letter of credit, the executing bank has the right to refuse to accept them, immediately notifying the recipient of funds and the issuing bank and pointing out the discrepancies that are the reason for the refusal. The recipient of funds has the right to re-submit the documents stipulated by the letter of credit before the expiration of its validity.
When paying under a letter of credit, the amount indicated in the register of accounts is credited (transferred) to the account of the recipient of funds by the payment order of the executing bank.
The first copy of the payment order, together with the first copy of the register of accounts, is placed in the documents of the bank as a basis for debiting funds from an account intended for accounting for amounts under a covered (deposited) letter of credit, or as a basis for debiting funds from a correspondent account of an issuing bank opened in an executing bank, under an uncovered (guaranteed) letter of credit.
The executing bank sends to the issuing bank the second copy of the register of accounts with the documents required by the terms of the letter of credit, as well as the third copy of the register of accounts for use in the issuing bank and for delivery to the payer.
If the terms of the letter of credit provide for the acceptance of a person authorized by the payer, the latter is obliged to submit to the executing bank either a power of attorney issued by the payer (if the authorized person is an individual) or a copy of the agreement (if the authorized person is an organization).
The person authorized by the payer on all copies of the forms of the register of accounts fills in the following details:
"Accepted at the expense of a letter of credit dated ________________ No. ____________ (date) by the Authorized ________________________________________________________ (full name, passport details of an individual or organization name) LIABILITY OF THE BANK FOR VIOLATION OF THE TERMS OF THE LETTER OF CREDIT
Responsibility for violation of the terms of the letter of credit before the payer is the issuing bank, and before the issuing bank by the executing bank.
In the event of an unreasonable refusal of the nominated bank to pay funds under a covered or confirmed letter of credit, liability to the recipient of funds may be assigned to the nominated bank.
In case of incorrect payment by the executing bank of funds under a covered or confirmed letter of credit due to violation of the terms of the letter of credit, the responsibility to the payer may be assigned to the executing bank.
CLOSURE OF LETTER OF CREDIT
Closing of a letter of credit in the executing bank is carried out:
- upon expiration of the letter of credit (in the amount of the letter of credit or its balance);
- if the recipient of funds refuses to use the letter of credit (in full or in part) before its expiration, if this is allowed by the terms of the letter of credit, by sending an application to close the letter of credit to the executing bank. The terms of the letter of credit may provide for obtaining the consent of the payer and (or) the issuing bank to refuse to use the letter of credit by the recipient of funds. Refusal to use a confirmed letter of credit is possible with the consent of the confirming bank;
- upon withdrawal of a letter of credit (in full or in part) by the issuing bank, including at the request of the payer or after obtaining the consent of the recipient of funds under an irrevocable letter of credit.
The refund of the amount to the issuing bank under the covered (deposited) letter of credit is carried out by the executing bank by payment order simultaneously with the closing of the letter of credit upon the expiration of the letter of credit or on the day the document serving as the basis for closing the letter of credit is presented.
The procedure for revocation of an uncovered (guaranteed) letter of credit is established by an agreement between the issuing bank and the executing bank.
On the closing of the letter of credit, the executing bank must send a notification to the issuing bank, drawn up in any form and executed with an imprint of the bank's stamp, the date of compilation and the signature of an accountant.
"In response to a request for a new version of Regulation No. 2-P "On non-cash payments in the Russian Federation", the Department of Payment Systems and Settlements told us the following.
Ordinance No. 1442-U provides for a new version of chapters 4-6 of Regulation No. 2-P, which govern settlements under letters of credit in rubles. Both the current and the new version are based on the norms of Chapter 46 "Settlements" of the Civil Code of the Russian Federation, which establishes the rules for settlements under a letter of credit. At the same time, the changes take into account the modern Russian practice of using a letter of credit form of payment, as well as international standards, which are set out in the Uniform Customs and Practice for Documentary Letters of Credit of the International Chamber of Commerce (UCP).
The norms of the current edition, which provided for the participation in settlements under letters of credit of the issuing bank serving the payer, and the executing bank serving the recipient of funds, in Instruction No. 1442-U were supplemented with norms establishing the possibility of using other settlement schemes and methods for fulfilling obligations by banks, namely:
- it is possible to involve in the execution of a letter of credit a third bank that is not a bank servicing the recipient of funds and acting as a nominated bank. This does not contradict the norms of paragraph 3 of Chapter 46 of the Civil Code of the Russian Federation, since they do not contain a direct indication that the executing bank must necessarily be the bank servicing the recipient of funds;
- the procedure for drawing up a letter of credit has been changed. According to the current wording, a letter of credit is drawn up by the payer and submitted to the issuing bank. At the same time, in accordance with the Civil Code of the Russian Federation, the issuing bank undertakes to make payments to the recipient of funds or to authorize the executing bank to make such payments. Based on this, in the new edition of chapters 4 - 6 of Regulation No. 2-P, the issuing bank is obliged to transfer funds under a covered letter of credit and transfer the terms of a letter of credit by drawing up a letter of credit on the form 0401063 by the issuing bank on the basis of the payer's application for opening a letter of credit ;
- clarified the procedure and terms for checking documents by the executing bank and the issuing bank. In accordance with Ordinance No. 1442-U, the documents submitted by the recipient of funds are checked by banks for compliance with the terms of the letter of credit on external signs within a period not exceeding seven business days;
- it is possible to use, by agreement between banks, various methods of reimbursement of funds by the issuing bank to the executing bank when the latter executes an uncovered (guaranteed) letter of credit, for example, by granting the right to a third bank in which a correspondent account of the issuing bank is opened, to write off funds under a letter of credit on the basis of requirements of the executing bank, as well as by issuing a guarantee of payment of the issuing bank or a third bank in favor of the executing bank. In the current wording, only the case of debiting funds under a letter of credit by the executing bank was provided for from the correspondent account of the issuing bank leading it;
- it is allowed to use electronic means at all stages of settlements under a letter of credit. Instruction No. 1442-U contains a rule according to which the transfer of documents on opening a letter of credit and its conditions, confirming a letter of credit, changing the conditions of a letter of credit or closing it, as well as on the bank's consent to accept (refuse to accept) the submitted documents can be carried out by banks of any type links that allow you to reliably identify the sender of the document.
