Domestic letters of credit, also known as letters of credit, are payment and settlement methods that are always applicable to domestic trade in the future. They are issued by the issuing bank to the beneficiary (the buyer) in accordance with the application of the applicant (buyer). A written commitment issued by the seller (seller) to pay a certain amount within a certain period of time against the documents specified in the letter of credit.
1. The buyer and seller stipulate in the trade contract that payment should be made using a documentary letter of credit.
2. The buyer notifies the local bank (issuing bank) to open a letter of credit with the seller as the beneficiary.
3. The issuing bank requests another bank to advise or confirm the letter of credit.
4. The advising bank notifies the seller that the letter of credit has been issued.
5. The seller will ship the goods after receiving the letter of credit and ensuring that it can fulfill the conditions stipulated in the letter of credit.
6. The seller submits the documents to the designated bank. This bank may be the issuing bank, or the paying, accepting or negotiating bank named in the letter of credit.
7. The bank reviews the documents according to the letter of credit. If the documents comply with the provisions of the letter of credit, the bank will make payment, acceptance or negotiation in accordance with the provisions of the letter of credit.
8. A bank other than the issuing bank sends the documents to the issuing bank.
9. After the issuing bank has verified that the documents are correct, it will reimburse the bank that has paid, accepted or negotiated according to the letter of credit in the form agreed in advance.
10. The issuing bank delivers the document after the buyer pays, and then the buyer takes delivery of the goods against the document.
Requirements for issuing a letter of credit
The requirements for applying for a letter of credit are clearly stipulated in the Uniform Practice, and the importer must clearly inform the bank of the requirements.
Instructions for issuing a letter of credit must be complete and clear. Applicants must always remember that a documentary letter of credit transaction is a document transaction, not a goods transaction. Bankers are not businessmen, so applicants cannot expect bank staff to fully understand the technical jargon involved in every transaction. Even if he writes all the terms in the sales contract into the letter of credit, he will not be completely protected if the beneficiary really wants to cheat. This requires banks to work together with applicants and use common sense to avoid issuing letters of credit that are burdensome to all parties. Banks should also be discouraged from applying the contents of letters of credit to letters of credit that have been issued in the past (combination) when issuing letters of credit.
1. Domestic L/C application process 1. L/C issuance (1) L/C issuance application. When an applicant for a letter of credit uses a letter of credit, he or she shall entrust the bank with which the applicant has an account to handle the issuance of the letter of credit. When applying for L/C issuance business, the L/C applicant shall fill in the L/C issuance application form, L/C applicant letter of commitment and submit relevant purchase and sale contracts. (2) Accept the issuance of certificate. The issuing bank decides whether to accept the issuance business based on the application for issuance, the letter of commitment from the L/C applicant and the purchase and sale contract submitted by the applicant. When the issuing bank decides to accept the business, it shall charge a deposit of no less than 20% of the issuance amount from the applicant, and may require the applicant to provide a mortgage, pledge, or issue a letter of guarantee from other financial institutions based on the applicant's credit status. The basic terms of the letter of credit include: name and address of the issuing bank; date of issuance; letter of credit number; irrevocable, non-transferable letter of credit; name and address of the applicant for issuance of the letter of credit; name and address of the beneficiary (the beneficiary is the one who has the right to receive the credit The person who certifies the payment, usually the supplier of the purchase and sale contract); the name of the advising bank (the advising bank is entrusted by the issuing bank to notify the beneficiary of the letter of credit); the validity period and location of the letter of credit (the validity period of the letter of credit is when the beneficiary notifies the bank The latest period for submitting documents shall not exceed 6 months; the valid location of the letter of credit is the document submission location specified in the letter of credit, that is, the location of the negotiating bank or the issuing bank); the document presentation period (the document presentation period is the submission of transportation The specific date on which the documents must be delivered after the goods are shipped (specified in the letter of credit on the document); the amount of the letter of credit; payment method (sight payment, deferred payment or negotiation); transportation terms; description of the goods (including name, quantity, price of the goods) etc.); document terms (must indicate the documents used for payment or negotiation, including at least invoices, transport documents or cargo receipts); other terms; the issuing bank's guarantee text. 2. Notify the advising bank that it should carefully review the letter of credit upon receipt. If the verification is correct, a letter of credit notification should be filled out and delivered to the beneficiary together with the letter of credit.
3. Negotiation Negotiation refers to the behavior of the negotiating bank designated by the letter of credit to pay consideration to the beneficiary after deducting the negotiation interest if the documents comply with the conditions. The negotiating bank must be the beneficiary's account bank designated by the issuing bank. Negotiation is limited to deferred payment letters of credit. The beneficiary can present the documents, the original letter of credit and the letter of credit advice to the negotiating bank during the document presentation period or the validity period of the letter of credit, and fill out the letter of credit negotiation/entrusted collection application form and negotiation voucher to request negotiation. 4. Payment The process is completed after payment. 2. The applicant has three main obligations towards the issuing bank: (1) The applicant must repay the loan paid to the beneficiary by the representative of the issuing bank who obtained the documents. Until he pays, the document serving as evidence of title still belongs to the bank. (2) If the documents are consistent with the terms of the letter of credit and the applicant refuses to "redemption", the deposit as guarantee or the frozen funds in the account will belong to the bank. (3) The applicant has the responsibility to provide the issuing bank with all the fees required for issuance of the certificate. The responsibilities of the issuing bank to the applicant: First, the issuing bank has the responsibility to issue the certificate as soon as possible once it receives detailed instructions for issuance of the certificate. Secondly, once the issuing bank accepts the issuance application, it must strictly follow the applicant's instructions. To sum up, the domestic letter of credit processing process is to issue the letter of credit first, then notify, then negotiate, and finally make payment.
Legal basis:
Article 44 of the Commercial Bank Law of the People's Republic of China
Commercial banks handle bill acceptance, exchange, and entrusted collection. Payments and other settlement services must be cashed in accordance with the prescribed time limit, and the receipts and payments must be recorded in the account. No orders, votes, or checks in violation of regulations must be refunded. Regulations on the time limit for encashment and payment recording shall be promulgated. Article 45 of the "Law of the People's Republic of China on Commercial Banks"
Commercial banks shall issue financial bonds or borrow money abroad in accordance with laws and administrative regulations. The provisions of regulations shall be submitted for approval