Are the rules for documentary credits still fit for purpose?

02 December, 2019David Morrish

Documentary credits act as a guarantee of payment, provided that the documents presented comply with the terms of the credit. But lots of exporters – especially smaller ones – get their documents wrong which means they may not get paid. What more can be done to help?

Cranes in a port

The international rules that govern documentary credits have been around for about 80 years and every country in the world subscribes to them.

You can be a document checker in the USA, Australia, Africa or the UK. You’re all working to the same set of rules – the Uniform Customs and Practice (UCP).

But despite the ubiquity of these rules, lots of exporters are getting their documents wrong.

What happens when documentary credits are incorrect?

In most cases, importers accept incorrect documents and the documentary credit will be paid. But even then, there’s a delay in getting payment which could cause businesses real cash flow problems.

A second possibility is the importer may accept the documentary credit, but because the goods are late they’ve lost their buyer. So, they’ll ask for a discount, which means the exporter gets paid less.

In extreme circumstances, if the issuing bank sees that the buyer, their customer, is now insolvent and can’t afford the goods, it will reject the documents even if the buyer still wants them – which means the goods aren’t sold at all.

International Chamber of Commerce

Every six months the International Chamber of Commerce (ICC) Banking Commission gets together to discuss issues such as this. In October, I took part in the Banking Commission Technical Meeting in Paris where we discussed how to resolve this issue.

We considered what more the ICC could do collectively to educate and guide practitioners. Among the many suggestions that came up, we looked at:

  • offering more workshops, seminars and podcasts
  • issuing more guidance papers to explain certain points
  • having a different set of rules for simple documentary credits
  • and providing low-cost, more accessible online training.

One of the suggestions was to issue standard templates for simple documentary credits. It’s a great concept, but is there a risk of lowering standards?

How much detail do documentary credits need?

What importers really need to know is that the goods have been checked and when they’re likely to receive the goods. And they want to be confident the goods described on the invoice and the shipping document match what they’ve ordered.

You can make a letter of credit as simple or as complex as you like – within reason – but still comply with the rules.

Under the Uniform Customs and Practice (UCP) 600 rules, you can have a letter of credit running into several pages. You can include any specifics that someone really wants, such as the performance of a machine, testing certificates, inspection certificates etc.

But the more detail you put in – and the more documents you call for – the more difficult it is for the exporter to get it right. There are more trip wires.

In many cases, you don’t need all that detail.

If it’s a simple export – let’s say it’s £20,000 or £50,000 worth of goods – you might only need two or three documents. And you can restrict the wording in those. Let’s say, invoice, shipping document, inspection certificate.

You could keep the goods description simple. This would give the exporter – particularly small to medium enterprises – a much higher probability of getting everything right.

There’s no risk of lowering standards, so long as the importer understands they’ve got less flexibility in the documentation they can use.

So would guidance and templates work?

By using standard rules with guidance, which is my preference, you could still keep it simple. Combined with a template, you could demonstrate what a simple documentary credit might look like, which would help small exporters get things right.

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