Risks In The Payment Of Documentary Credit.
Documentary credit can be paid primarily cash using funds from the issuing bank or a designated financial institution in the country of the exporter. Additionally, it can be done using a legal instrument transferring funds from the issuing bank. It can also be paid using payment overdue at a later time making adjustments to the exchange rates.
Once the credit is submitted and accepted, the exporter will submit all documentation that proves that the delivery was done according to the documentary credit. This bank will forward this information to the buyer. The bank will proceed to the payment of the merchandise if the transaction and the shipment were done according to what the documentary credit dictates.
Let us now talk about the risks of documentary credit.
Documentary credit involves taking a few risks as well. One is the complications that the documents may involve and another is the risk of not receiving a payment.
The first risk has to do with decryption. Documentary risks are related to discrepancies that may exist between what actually arrive at the port or airport and what the letter of credit indicates. The importer risks receiving products of a quality different from what was expected. Fraudulent transactions and errors in the decryption of the documents may also be mentioned as possible risks.
When in doubt during the verification of the documents, the banker of the beneficiary or its equivalent must question the buyer to obtain an agreement, despite possible irregularities in the documentary credit. However, if the banker is responsible for checking documents, it is not of non-conformity of goods received with those announced in the documents.
There are also risks of non-payment.
Issuing banks commit to payment to the seller even if the buyer does not have the funds. Therefore banks take risks when the seller has insolvency. Additionally, the bank is responsible for transferring the funds from the buyer to the seller.
Banks will generally take measures to protect themselves from importers' insolvency. When an issuing bank agrees to grant documentary credit to an importer, it assumes the responsibility for the payment and has also reviewed the financial records of the payer. Banks may block funds of the importer's account in case of nonpayment.
