Credit risk - letter of credit risk management

1. CREDIT RISK ~ Letter of
Credit Risk Management
Presented By –
Isha Joshi
(BBA-FT IV sem)

2. CASE
 In October, a French company (seller) and a Shanghai
company (buyer) have set up a contract of selling 200
sets of electronic computers (1000 USD each)
 Payment shall be made according to the irrecoverable
letter of credit
 The delivery should be made on December at Port de
Marseille
 On November 15, Bank of China Shanghai Branch
(issuing bank) made a $ 200,000 irrevocable letter of
credit according to the instruction of the buyer and
commissioned a French bank in Marseille to notify and
negotiate this letter of credit

3.  On December 20, the seller loaded the 200
computers on board and got the bill of lading,
insurance policies, invoices and other
documents as required by the letter of credit
 Then it went to the Marseille bank for
negotiation
 Upon review, the documents are consistent;
therefore the bank had paid $ 200,000
immediately to the seller

4. ISSUE
 At the same time, 10 days the cargo ship left the
harbor of Marseilles, the cargo, along with all the
goods, sank into the sea in a heavy storm
 By that time the issuing bank had received the whole
set of the documents and the buyer had already
known the total loss of the goods
 Bank of China Shanghai Branch intends to reimburse
the negotiating bank to pay the purchase price of $
200,000 on the grounds that its customers cannot
expect the goods

5. QUESTIONS RAISED
 When would the risk of the consignment be
transferred from the seller to the buyer ?
 Whether Issuing bank would exempted from
the payment obligations due to the total loss
of the goods, If so, on what basis?
 How to compensate the loss of the buyer?

6. SOLUTION
 The Risk shall be transferred from the seller to the buyer
since the goods were loaded on board at the port of
shipment.
 The issuing bank has no right to refuse payment. According
to the International Chamber of Commerce Uniform Customs
and Practice for Documentary Credits, the letter of credit
transactions are independent from the sales contract. And the
Bank is only responsible for document examination. As long
as the documents are in line with the terms of the credit, the
banks are required to assume its payment obligations.

7. The buyer could claim compensation
from the Seller’s insurance company
with other relevant insurance
documents and proof of the sinking of
the cargo ship.

8. THANK YOU