Documentary credit process with a notifying bank

After the issue and notification of a documentary credit, the next step is its actual processing. As we saw in the previous post – Documentary credit – Definition, main actors, how it works – the exporter’s bank can play two roles: 1) It may just notify the exporter that there is a documentary credit in his favor, in which case it plays the role of a notifying or advising bank or 2) It can confirm the documentary credit and therefore plays the role of a confirming bank. Depending on the role played by the exporter’s bank, the documentary credit process will be different, particularly with respect to when the beneficiary receives the funds.

In this post, we examine what happens after the exporter receives the documentary credit from his bank acting as a notifying bank. The main steps of the documentary credit process with a notifying bank are highlighted in the following diagram.

Image of a Documentary credit process with a notifying or advising Bank
Documentary credit process with a notifying or advising Bank

Each step of this documentary credit process is explained below.

5. Shipment of goods

The exporter ships the goods as agreed in the contract. He receives from the carrier the certificate of acceptance and the proof of shipping.

The goods are of several types. As example we can mention:

  • consumer goods that may or may not be perishable
  • the goods that can be incorporated into another that will be used for the manufacture of another product.
  • industrial machinery
  • etc.

The shipping conditions and times depend on the types of goods. Furthermore, it is important to clarify the responsibilities between the parties. This prompted the International Chamber of Commerce to create the Incoterms (International Commercial Terms) in 1936. These are international rules that facilitate communication and clearly define the responsibilities between the parties involved in international trade. We will come back to Incoterms in a future article.

6. Delivery of documents

Once the goods have been dispatched, the exporter collects all the documents mentioned in the contract and gives them to his bank. There are among others:

  • Commercial documents: invoice, packing list, certificate of origin, etc
  • Technical documents: certificates of analysis, sanitary or phytosanitary certificates issued by public authorities; supervision, control and quality certifications issued by specialized companies (Bureau Veritas, SGS, Lloyds), asn.
  • Transport documents: bill of lading (B/L), air waybill (AWB), sea waybill (SWB), asn.
  • Financial documents: commercial paper and other instruments used to collect the payment.
  • And so on.

All documents in the application for opening must be returned to the bank. Otherwise, the exporter runs the risk of not being paid because of non-compliance.

7. Sending of documents

After receiving the documents, the notifying bank verifies that they comply and correspond to those listed in the opening of the documentary credit. It is not responsible for verifying its authenticity, even if it can report any defect or problem detected. In the case of a missing document, it must notify its client, the exporter.

If the documents are complete, then the bank sends them to the importer’s bank by simple, fast or ultrafast mail (UPS, DHL). It is obvious that the bank keeps copies of the documents in the form of scans or photocopies.

8. Payment (by the issuing bank)

After receiving the documents, the issuing bank (importer’s bank) checks them thoroughly. If they are complete (all documents are present) and compliant (There is nothing suspicious), it proceeds to the payment:

  • Payment at sight: the issuing bank transmits to its correspondent the funds intended for the beneficiary, the exporter.
  • Deferred Payment: The issuing bank indicates its intention to pay at maturity.
  • Payment by acceptance: the bank accepts a bill of exchange drawn on itself by the exporter. Payment will be made at the end of the term. The bill of exchange is usually transmitted with the documents of the goods.

The funds transfer that is carried out, with the help of a payment instrument, constitutes the payment of the documentary credit. The importer’s bank makes the payment, most of the time, by issuing a SWIFT MT202 message.

9. Payment (by the notifying bank to the exporter)

The funds are made available to the exporter by his bank after receiving payment from the issuing bank. For the notifying bank, regardless of whether the payment is on demand, deferred or by acceptance, it will only pay the customer after the receipt of the money.

10. Delivery of documents

The importer’s bank gives the complete and correct documents to his customer. With these documents, he can now take possession of the goods and perform their customs clearance.

11. Payment

The final step of this documentary credit process may vary depending on the importer’s ability to pay right away or not.

The importer can immediately repay the sums paid by his bank to the exporter. But that’s not what happens in the majority of cases. The importer has indeed incurred a lot of expenses for payment and clearance of the goods. It is often not possible for him to immediately pay his bank in return for the documents received. The bank grants him a credit which he repays with the money earned by selling the goods if all goes well. This explains why the bank must study his client’s file and situation before accepting the issuing of a documentary credit.

In the next article, we consider the documentary credit process with a confirming bank.

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