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A letter of credit is an agreement which is separate from the sales contract or other document having the effect of an agreement on which it is based.
There are the following basic types of documentary letters of credit
PrivatBank performs the following operations involving international documentary letters of credit:
In terms of foreign economic activity, companies are faced with a high level of risks having the following peculiarities:
Letters of credit are applied exactly with the purpose of reducing the risks caused by the above factors.
If you decide to open an international letter of credit with PrivatBank, our specialists will provide you with expert assistance regarding the following:
Service | Fee |
---|---|
Letter of credit's issue or increase of its amount | 0,2% (min 100 USD, max 2000 USD) |
Payment under letter of credit | 0,15% (min 100 USD, max 1000 USD) |
Obligation fee under an uncovered transaction | min 2% per annum — covered by the pledge of rights on deposit; min 3% per annum — covered by the pledge of property or real estate; min 3.5% per annum covered by other kind of pledge or uncovered. (min USD 20 per month) |
Sending of payment documents between banks | Calculated as per fees of the courier service |
Amendment | 50 USD |
Service | Fee |
---|---|
Letter of credit advising / amount increase advising | 0,15% (min 100 USD, max 500 USD) |
Examination of documents under a letter of credit | 0,2% (min 100 USD, max 1000 USD) |
Acceptance of a letter of credit | With a coverage in PrivatBank - 0,15% (min 100 USD, max 500 USD) Without coverage – from 2% per annum (not less than 20 USD per month) |
Sending of payment documents between banks | Calculated as per fees of the courier service |
Advising of amendment | 50 USD |
What is a letter of credit used for?
A documentary letter of credit is an instrument for settlements and risk mitigation widely used in the international trade.
A letter of credit for importer is:
A letter of credit for exporter is:
Which basic document governs the work with an international documentary letter of credit?
The basic document recognized by all countries, banks and participants of foreign economic activity is currently the Uniform Rules and Practices for Documentary Letters of Credit, ICC publication No. 600, version 2007 (UCP600).
The rules developed by the International Chamber of Commerce apply to all documentary letters of credit (including standby letters of credit, to the extent that the rules can be applied thereto) and are binding upon all stakeholders in the absence of explicit agreement on contrary. They are included in each documentary letter of credit by direct reference therein stating that this letter of credit is subject to the Uniform Rules and Customs for Documentary Letters of Credit.
What is a standby letter of credit?
A standby letter of credit is essentially a bank guarantee issued in the form of a letter of credit and the bank’s commitment to pay the guaranteed amount to the beneficiary under the letter of credit in case of a guarantee event (i.e. failure of an applicant of standby letter of credit to fulfill obligations towards the beneficiary).
What is the term of receiving proceeds under export letter of credit after documents are submitted?
The term of receiving proceeds depends on many conditions of a letter of credit (which bank is a nominated bank, which terms and other instructions on money transfer are specified by issuing bank, etc.):
Which should be the list of documents in a letter of credit?
A letter of credit shall imply the list of documents sufficient for the seller to confirm fulfillment of terms and conditions of the contract.
The list of documents usually includes:
The specific list depends on shipment terms, type of transport, requirements to documents for customs clearance of this type of goods. It is recommended to include in the list the documents issued by independent third-party organizations (carriers, chamber of commerce and industry, insurance company, inspection service) – this will reduce the probability of document forgery and gives additional confirmation of parameters of the goods shipped (quantity, quality, etc.).
It shall also specify:
Which will be our expenses under a letter of credit?
While working with a letter of credit, the banks shall charge certain fees for various transactions under the letter of credit (opening, advising, modifying, checking the documents, sending messages, etc.).
The total amount of banking fees under a letter of credit depends on many factors:
What is needed to open a letter of credit?
To open a letter of credit with financial coverage it is necessary:
The procedure for opening a letter of credit without the financial coverage is more complicated, since it is necessary to provide documents for assessment of financial position, execution of a contract for opening a letter of credit and security contracts.
How to properly prepare the payment section of the contract, draft letter of credit?
In payment section of the contract, it is recommended that the conditions of the letter of credit (terms, participating banks, list of documents, etc.) be fully stated so that after opening there is no need to make changes in the letter of credit that takes some time and increases banking fees. It is sometimes advisable to include in the contract a schedule with a draft letter of credit (with all its conditions).
When does the 180-day period commence for settlements in the form of a letter of credit?
Opening a letter of credit constitutes the bank’s commitment to pay for properly executed documents, rather than the fact of money transfer outside Ukraine. Until payment, an amount of money transferred to the bank as coverage for the letter of credit is kept on your special coverage account. The report of legally established payment period (180 days) commences on the date of payment by the issuing bank under the letter of credit, rather than on the date of issuing the letter of credit.
What is advising?
Advising means sending an official notification letter to another party to the letter of credit deal regarding performance of certain transaction (issue, modification, cancellation, etc.).
What kind of checking is implied in the “Checking of documents” fee?
This implies the bank’s checking of documents provided by the seller and confirming shipment of goods, their quantity, quality and other parameters for compliance with all conditions of the letter of credit and the Uniform Customs and Practice for Documentary Letters of Credit (UCP600) requirements. In the event of non-compliance with the conditions of the letter of credit or other discrepancies, the bank is entitled to refuse payment under the documents. A fee for checking of documents is charged for letters of credit received by PrivatBank (export letters of credit), if PrivatBank is a nominated bank.
What is a “commitment fee”?
This is a fee charged as remuneration to the bank for risks and assumed commitment (i.e. commitment to pay under the letter of credit) not covered by the customer's financial funds. As a rule, this fee is expressed in percent per annum.