International letters of credit
Securing obligations of counterparties under foreign trade contracts, improving security of international payments.
Letter of credit types
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
- A covered letter of credit – one secured by the payer's own funds
- An uncovered letter of credit – one not secured by funds of the payer as per the moment of opening
- A confirmed letter of credit implies adding payment obligation by a bank other than the issuing bank, where documents are provided meeting the letter of credit conditions.
Letter of credit transactions
PrivatBank performs the following operations involving international documentary letters of credit:
- Opening an import letter of credit – as instructed by the importing customer PrivatBank issues an international documentary letter of credit for the benefit of a foreign supplier company under the customer's foreign trade contract
- Advising a letter of credit – official notification by the bank as to opening, amending or cancelling a letter of credit opened by a foreign bank for the benefit of the exporting customer
- Executing a letter of credit – verification of documents under the letter of credit provided by the beneficiary (supplier of goods or services) followed by payment pricessing, provided the documents comply with the letter of credit conditions. In the event a letter of credit is not confirmed, payment is pricessed by the issuing bank on demand from the nominated bank.
In which cases is a letter of credit used?
In terms of foreign economic activity, companies are faced with a high level of risks having the following peculiarities:
- Difficulty of correct risk assessment due to territorial remoteness of the counterparty; difficulties associated with obtaining information about the counterparty and analysis of political and macroeconomic situation in its country
- Complexity of resolving economic disputes between the parties arising from the high cost of organising the arbitration process, different juridical personalities of parties to the contract, complexity of applying rulings of one State within the territory of another
- A great degree of foreign markets mobility caused by intense competition and fluctuations of market conditions
- A higher level of losses in case of a counterparty failure to fulfil obligations under penalties imposed by the State regulatory authorities for violation of currency laws
- Letters of credit are applied exactly with the purpose of reducing the risks caused by the above factors.
Most often, a letter of credit is used for payment settlements in the following cases:
- Business partners have established a new, untried business relationship
- The seller is not confident about the buyer's solvency, while the buyer is not confident as to the seller's capability to deliver goods/perform work/provide services
- The contract subject implies large-scale projects or tailor-made products.
Benefits of using an international letter of credit
- A letter of credit provides reliable insurance against many risks faced by a company engaged in foreign economic activity
- You gain a very flexible settlement instrument that can be used for settlements in a variety of transactions
- The rules of using letters of credit have been defined by an authoritative international organisation and are recognized all around the world. It is convenient both for customers and banks, as each party to a transaction has clear understanding of its rights, obligations and standard requirements imposed on all parties to a transaction
- A letter of credit is useful as a short-term financing instrument.
What are the benefits of opening an international letter of credit in PrivatBank?
If you decide to open an international letter of credit with PrivatBank, our specialists will provide you with expert assistance regarding the following:
- Drafting contracts which provide for documentary forms of payment
- Developing individual settlement schemes using letters of credit
- Developing non-standard schemes of documentary operations, such as transferable or standby letters of credit.
For consultancy on international documentary instruments put your question to the Head Office experts by emailing to firstname.lastname@example.org
All collections are to be forwarded to below address:
PJSC CB 'PRIVATBANK',
32 NABEREZHNAYA POBEDY STR., OFFICE 608,
49094 DNEPROPETROVSK, UKRAINE
ATTN: TRADE FINANCE DEPT.
We assume no responsibility for documents sent to any other address unless it is agreed with us by SWIFT.
Fees on operations with international letters of credit
- Letters of credit issued by the Bank
- Letters of credit advised by the Bank
|Letter of credit's issue or increase of its amount
For amounts exceeding USD 1 mln - USD 2,000;
minimum fee - USD 50
|Payment under letter of credit
For amounts exceeding USD 1 mln - USD 1,000;
minimum fee - USD 50
|Obligation fee under an uncovered transaction
min 3% per annum — covered by the pledge of rights on deposit;
min 4% per annum — covered by the pledge of property or real estate;
||Calculated as per fees of the courier service
|Advising of letter of credit
|0.1% For amounts exceeding USD 0.5 mln - USD 500; minimum fee - USD 50|
|Checking of documents under letter of credit
|0.2% For amounts exceeding USD 0.5 mln - USD 1,000; minimum fee - USD 50|
|Confirmation of the letter of credit||Covered by deposit with PrivatBank: 0.1%
For amounts exceeding USD 0.5 mln - USD 500; minimum fee - USD 50
Uncovered: min 2% annual (min USD 20 per month)
||Calculated as per fees of the courier service
Frequently asked questions
- 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 stipulating the obligation of the bank to pay the guaranteed amount to the beneficiary under the letter of credit in case of a guarantee event (i.e. failure of the standby letter of credit applicant to fulfil obligations to the beneficiary).
- What kind of checking is implied under 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 Credits (UCP600) requirements. In the event of establishing lack of compliance with the letter of credit conditions or detection of other discrepancies, the bank is entitled to refuse payment under the documents. 'Checking of documents' fee is charged under letters of credit received by PrivatBank (export letters of credit) in case if PrivatBank is a nominated bank.
- What is advising? Advising implies sending an official notification letter to another party to the letter of credit deal regarding performance of a certain operation (issue, amending, cancellation, etc.).
- What is 'obligation fee'? This implies a fee charged as remuneration to the bank for the risk and obligation provided (i.e. obligation to pay under the guarantee) with the obligation not covered by the customer's financial funds. As a rule, this fee is expressed in percent per annum.