Documentation of Letters of Credit

1. Documentations
and Forms

2. Documents Required with
Letters of Credit
IN AS MUCH AS THE LETTER OF CREDIT IS A CONTRACTUAL OBLIGATION
AND SINCE THE EXPORTER (BENEFICIARY) MUST MEET THE CONDITIONS
SPECIFIED THEREIN, THE FOLLOWING DOCUMENTS ARE NORMALLY
REQUIRED TO ACCOMPANY LETTERS OF CREDIT.

3. Commercial Invoice
 The commercial invoice describes the
merchandise, the identifying marks for
shipment, the unit price and the total
amount, and such other details.

4. Insurance Certificate
 This is a certification by an insurance
company to the effect that the goods are
insured in accordance with the terms of
sale.

5. Consular Invoice
 This is similar to the commercial invoice
except that it is issued by consular
establishments.

6. Forwarding Receipts
 These receipts would indicate the position of the goods
for shipment. These may be composed of the bills of
lading as evidences that the merchandise is already in
the hands of the transporter for shipment. The bill of
lading may evidence shipment by mail, by air cargo, by
express or freight, and most often by ship. They may also
either be “on board” or “endorsed” bills of lading.

7. Export License
A license is issued when the exports
are restricted or by quotas.

8. Import License
 This is similar to the export license, except
that it would indicate import controls
perhaps through a system of priorities.

9. Exchange License
 When there are restrictions in the
movement of foreign exchange, such
license would be necessary to
accompany the letter of credit.

10. Acceptance
Credit

11. Acceptance Credit
 Banker’s acceptances are also popular, if not more
desirable sometimes, than letters of credit. These are also
used for financing imports and exports. It might do well
to look into the differences between the two types of
credit.

12. Acceptance Credit
 An acceptance is the annotating of a bank’s or a
merchant’s acquiescence to the performance of the
obligation usually the payment of a duly accepted draft.
When a bank, a trust company, or a person authorized
to do so accepts the obligation – it is termed a banker’s
acceptance; and when a merchant does the same, it is
termed as trade acceptance.

13. Acceptance Credit
 Acceptances are used widely in trade transactions and
they represent a means by which the seller may
immediately obtain cash although he sells his goods ion
credit. The underlying principle is much the same as the
letter of credit, which is the substitution of the bank’s
credit. But, where the substitution is for the buyer in the
letter of credit, in an acceptance, the credit substituted
is that of the seller.

14. Acceptance Credit
 Acceptance also strengthens the position of the holder
or a time draft because he is assured that the acceptor
will honor the same at maturity. Since the time element is
in effect advanced due to the acceptance being
negotiated prior to maturity, it benefits the persons
engaged in arbitrage and foreign exchange.

15. Bank’s Position
Before and After
Acceptance

16.  In assuming the obligation to honor the drafts at
maturity, the banks add to the acceptability of the draft
or bill of exchange.
 The most fundamental distinction between the position
of the bank as an issuer of a letter of credit and the bank
as an acceptor of a draft drawn under the terms of a
letter of credit is that the letter of credit is not negotiated
whereas the acceptance is fully negotiable.
 There might be some exceptions to permit the
negotiability of the letter of credit but in an acceptance,
it becomes not only implied but effective.

17.  The letter of credit partakes of the nature of the
contractual relationship between the bank and the
person to whom it is directed. For this reason, there might
still be room for interpretation.
 An acceptance, on the other hand, is a negotiable
instrument, which in the hands of a holder in due course,
is precisely in the same category as a promissory note
which has been negotiated. In such a case, there seems
to be no room for interpretation on avoidance of the
liability.

18. Creation of
Acceptance
Credit

19. As in all cases regarding credit transactions, the
Bangko Sentral has its own regulations as far as the
“power to accept” by the banks is concerned. Such
limitation is contained in the New Central Bank Act.

20. Some of the most common sources of
drafts for acceptance are as follows:
1. Importation and exportation of goods;
2. Domestic shipment of goods;
3. Drafts secured by documents conveying or
securing titles to readily marketable staples; and
4. Drafts drawn by foreign banks or bankers for the
purpose of furnishing dollar exchange. The
draft, of course, is either “time date” or “time
sight” bills.

21. The Trust Receipt

22. The Trust Receipt
 One of the most important documents used in
connection with letter of credit financing is the trust
receipt. This is availed of when the buyer or importer is
momentarily out of cash and arranges to have the
goods released under trust receipt. There is, therefore,
created a fiduciary relationship.

23. The Trust Receipt
 The title of the property is retained by the bank and the
buyer is allowed to dispose of the goods. However, the
buyer obligates himself to turn over the proceeds of sale
to the bank.
 Upon full payment of the goods, the importer is released
from his liability under trust receipt.

24. BSP’s Current Policies
on Letter of Credit
IN LINE WITH SECTION 8 OF THE BANGKO SENTRAL’S CIRCULAR NO.
1389, AS AMENDED, SALE OF FOREIGN EXCHANGE FOR TRADE
TRANSACTIONS MUST BE SUPPORTED BY THE FOLLOWING MINIMUM
DOCUMENTARY REQUIREMENTS

25. 1. Importation under Sight L/C (Reimbursing bank debits
the account of the local banks on negotiable date):
a. copy of import L/C;
b. original transmittal letter of foreign negotiating bank
to local bank covering the import documents;
c. telex from negotiating bank of cable negotiation
done;
d. proof of debit to the local bank’s account abroad;
e. copy of original commercial invoice;
f. copy of original first bill of lading; and
g. copy of report to BSP on L/C opening and L/C
negotiation

26. 2. Importation under Sight L/C but with documentary
discrepancies, which are sent on collection basis (local bank
remits payment to the negotiating bank after obtaining the
client’s conforme to the discrepancies.):
a. copy of the import L/C;
b. original transmittal letter of foreign negotiating bank
to local bank covering the import documents;
c. copy of authenticated/tested message of outgoing
remittance;
d. copy of original commercial invoice;
e. copy of original first bill of lading;
f. copy of report to BSP on L/C opening and L/C
negotiation; and
g. proof of debit to the local bank’s account abroad

27. 3. Importation under Usance L/C:
a. copy of import L/C;
b. original transmittal letter of foreign negotiating bank
to local bank covering the import documents;
c. copy of the accepted draft;
d. copy of original commercial invoice;
e. copy of original first bill of lading;
f. copy of authenticated/tested message of outgoing
remittance;
g. proof of debit to the local bank’s account abroad;
h. copy of report to BSP on L/C opening and L/C
negotiation

28. 4. Importations under OA/DA:
a. for DA – accepted draft;
b. copy of original commercial invoice;
c. copy of original first bill of lading;
d. copy of BSP registration of OA/DA;
e. original transmittal letter of foreign bank to local
bank covering the import documents for DA
transactions;
f. copy of report to BSP on OA/DA transactions
booked;
g. copy of authenticated/tested message of outgoing
remittance; and
h. proof of debit to the local bank’s account abroad

29. 5. Importations under DP:
a. original transmittal letter of foreign collecting bank to
local bank covering the import documents;
b. copy of original commercial invoice;
c. copy of original first bill of lading;
d. copy of authenticated/tested message of outgoing
remittance; and
e. proof of debit to the local bank’s account abroad

30. 6. Importations under Direct Remittance (pre-payments
not allowed):
a. copy of original commercial invoice;
b. copy of original first bill of lading (foreign exchange
sale should not be beyond 15 calendar days from BL
date);
c. copy of authenticated/tested message of outgoing
remittance; and
d. proof of debit to the local bank’s account abroad

31.  Remittance of payment to the beneficiary should be
made immediately after sale of foreign exchange.
 The bank must indicate the amount of foreign exchange
sold below the phrase “FX SOLD” which should be
stamped on the face of all original copies of the
negotiable bill of lading and duly signed by the bank’s
authorized signatory.

32.  In addition, importer-client and bank must accomplish
and submit notarized certifications, in the attached
format, signed by the importer-client’s responsible officer
and the bank’s officer with the rank of at least vice-
president, respectively.

33.  Where the importer buys foreign exchange as payment
for importations made through another
(opening/booking) bank, the importer-client must submit
to its foreign exchange selling bank(s) a notarized
application to purchase foreign exchange together with
the requirements provided under Circular Letter dated
31 March 1998.