Reducing risks in LC in Vietnam is what most overseas importers and exporters pay attension. All risks and mistakes in international payments related to logistics will lead to very serious consequences. Therefore, Vn Plastic would like to help you understand more deeply about this form of payment and how to best avoid them.
What is LC?
First of all, to know how to reduce risks in LC, we need to understand what LC is. LC stands for Letter of Credit. Under this payment method, the importer will ask the bank to open a Letter of Credit and commit to pay the exporter. The exporter must present payment documents in accordance with the terms and conditions specified in the LC.
LC payment process in Vietnam
When you understand the payment process, you will be more proactive and thus reduce risks in LC.
- Signing sales contract
- The importer makes an application to open the LC and submits the necessary documents to the bank. Make escrow (if any) as required for the bank to issue the LC to the exporter.
- The advising bank that issues the LC upon the request of the LC application sends it to its correspondent bank in the exporting country.
- The bank transfers the original LC to the exporter to evaluate their ability to perform LC and propose amendments (if any)
- The exporter delivers the goods in accordance with the provisions of the LC and the LC amendment documents (if any).
- The exporter prepares a set of documents in accordance with the provisions of the LC. Amendment documents (if any) are presented to the bank within the prescribed time limit.
- The correspondent bank, after checking the validity of the documents, sends it to the issuing bank.
- The issuing bank of the letter of credit checks the LC payment documents. If it is not in accordance with the provisions of the LC, refuse to pay and return the documents to the exporter. If in accordance with the provisions of the LC, proceed to pay or accept the draft. (For deferred L/C payment).
- The exporter receives the money
- The issuing bank hands over the documents to the importer and issues a claim against the importer.
Then, the importer checks the set of documents. If it is consistent with the provisions of L/C, then go to the bank to make payment procedures. The issuing bank endorses the set of documents to receive the goods. However, if it is not in accordance with the provisions of the L/C, the importer has the right to refuse to pay.
LC payment is considered the safest form of payment today. However, there are many things to pay attention to to Reduce risks in LC.
Risk of LC payment with importer
- Beneficiary fails to deliver and documents are tampered with
- The beneficiary delivers the goods but not according to the agreed quality and quantity.
- Goods delivered on time but arrived late
- Exchange rate risk when applying spot price at the time of payment
- Not able to get margin due to the bankruptcy of the issuing bank
Tricks to reduce risks in LC for importer
First of all, for the importer, some measures should be put in place to prevent the risk of poor quality or insufficient quantity of goods delivered by the seller, such as:
- Conduct surveys, select reputable export partners
- Specify the terms and conditions for the exporter to perform
- Requires the presentation of third-party inspection and pre-shipment inspection documents.
- Buy insurance for the goods and clearly agree which party will buy cargo insurance
- Applying forward rate when paying LC
Risks to the issuing bank of the LC
Banks also face many risks such as:
The first: credit risk. The bank can advance an amount. But it is unlikely that the money will be recovered. However, in the event that the importer is no longer able to pay, or goes bankrupt, then the issuing bank will have a loss associated with the credit risk.
The second: risk related to document errors. For example, for an issuing bank, there are several types of errors as follows:
Set of documents is incomplete, but the issuing bank does not detect it and still makes payments to the exporter.
The LC payment documents are complete but the issuing bank thinks that there is an error. So they do not pay the exporter. Thus, the bank is likely to be sued by the exporter.
The third: the issuing bank checks the documents but beyond the prescribed time limit and no longer has the right to refuse and make payment to the exporter. Another risk is related to fraud. For example, the exporter cheats documents to get payment, or the exporter colludes with the importer to commit fraud against the bank.
Therefore, when conducting LC payment procedures, many banks carefully check the records of importers and exporters (beneficiaries).
Tricks to reduce risks in LC for the issuing bank
- Carefully appraise customers before granting credit lines to ensure financial viability, requiring secured mortgages.
- Check customer information, goods, … make sure not on the list of embargoes, import restrictions.
- Check the Beneficiary’s reputation with available services such as AML, good customer list of importers
- Goods must be insured
- If the goods are delivered by sea, 3 copies of the original bill of lading must be requested, delivered to order and the endorsement is blank
- Request to own and control the goods
- Improve professional qualifications
- Regularly update new changes of ICC
Summary of ways to reduce risks in LC
Vn Plastic do hope that with the above ways to reduce risks in LC, you will get a better, more logical way of doing things. And if you find this article helpful, feel free to vote then share it. Thanks for reading.
P.s., if you need further help, feel free to contact us.