The Uniform Customs and Practice
for Documentary Credits (UCP) is a set of guidelines established by the
International Chamber of Commerce (ICC) that governs the use of letters of
credit (LC) in international trade. The UCP provides a standardized framework
for banks, importers, and exporters to ensure smooth and reliable payment
transactions. Here are the complete guidelines for the UCP process for a letter
of credit:
Agreement and Terms:
a. Buyer and seller agree to use a
letter of credit as the payment method for the trade transaction.
b. Both parties agree on the terms
and conditions of the letter of credit, including the amount, expiry date,
shipping documents required, and any specific instructions.
Issuing the Letter of Credit:
a. The buyer applies to their bank
(the issuing bank) to issue the letter of credit in favor of the seller.
b. The issuing bank reviews the
buyer's creditworthiness and, upon approval, issues the letter of credit based
on the agreed terms and conditions.
Advising the Letter of Credit:
a. The issuing bank sends the
letter of credit to a correspondent bank in the seller's country (the advising
bank) or directly to the seller.
b. The advising bank authenticates
the letter of credit and notifies the seller of its existence and terms.
Preparing the Shipment:
a. The seller prepares the goods for
shipment as per the terms specified in the letter of credit.
b. The seller arranges for
necessary documentation, such as commercial invoice, packing list, bill of
lading, insurance policy, and any additional documents required by the letter
of credit.
Presenting Documents:
a. The seller submits the required
shipping documents to the advising bank or the issuing bank, depending on the
terms of the letter of credit.
b. The documents typically include
the commercial invoice, packing list, bill of lading, insurance certificate,
certificate of origin, inspection certificate, and any other specified
documents.
c. The presenting bank reviews the
documents to ensure they comply with the terms and conditions of the letter of
credit.
Document Examination:
a. The issuing bank examines the
presented documents to verify their compliance with the letter of credit requirements.
b. The bank checks for
discrepancies or inconsistencies that may invalidate the documents.
c. If any discrepancies are found,
the issuing bank may reject the documents or request amendments from the
seller.
Payment or Negotiation:
a. If the documents comply with
the letter of credit terms, the issuing bank makes payment to the seller or
negotiates the documents.
b. Negotiation involves providing
financing to the seller against the presented documents.
Transfer of Documents and
Title:
a. The issuing bank transfers the
documents to the buyer or the buyer's bank (the nominated bank) if the letter
of credit allows for a deferred payment or acceptance.
b. The buyer receives the
documents and reviews them for compliance.
Payment Settlement:
a. The buyer makes the payment to
the issuing bank or the nominated bank as per the terms of the letter of
credit.
b. The bank releases the documents
to the buyer upon payment settlement.
Shipment and Delivery:
a. The goods are shipped by the
seller to the buyer's location or as agreed upon in the contract.
b. The buyer receives and inspects
the goods to ensure they meet the agreed-upon specifications.
It is important to note that the
UCP guidelines provide a framework for the process, but specific details and
variations may exist depending on the terms agreed upon between the parties and
the specific requirements of the letter of credit.
It is recommended to consult with
trade finance professionals, such as banks or trade consultants, to ensure
compliance with the UCP guidelines and to navigate the letter of credit process
effectively.