Topics: International trade, Credit rating, Letter of credit Pages: 28 (8885 words) Published: January 15, 2013
Simplifying International Trade


SITPRO’s Letter of Credit Report 11 April 2003

Executive Summary
Numerous surveys have been carried out in the UK (including by SITPRO) suggesting the rejection rate of first time presentations against letters of credit is between 50-60%. These findings have led to much publicity about the costs and dangers of failure to present compliant documents with work being carried out by SITPRO and other organisations to help exporters improve their performance in the use of letters of credit. Although much work has been carried out rejection rates seem to remain static. SITPRO felt that in order to move forward it would be ideal to examine why letter of credit presentations are rejected and what are the most common discrepant documents. This work commenced in 2001, with this report intended to consolidate the information gathered so far and look at ways in which further work can be carried out to help UK exporters in letter of credit operations. In order to ascertain the extent of the problem of rejection rates of letters of credit the review also estimates the cost to UK business of non-compliant presentations. A list of the top ten discrepancies can be found on page 13, with more detail given in Appendix 1. It is interesting to note that some of the most common discrepancies are those which are the simplest to correct and within the control of the exporter: inconsistent data; late presentation and shipment and, perhaps most disappointingly, absence of documents. From this information it appears that some exporters are not giving the time or resource necessary to dealing with letters of credit, which is essential from the beginning of the contract negotiations through until correct documents have been presented and payment has been received. The review estimates that in 2000 the UK lost £113 million through non-compliant documents being presented under letters of credit. This is merely the amount that can be measured and does not include other factors such as lost opportunity and cash flow problems. This is an enormous amount of money to be taken out of often very narrow profit margins. It is recommended in the report, that further work is undertaken by SITPRO into the use of electronic letters of credit and their rejection rates. Additionally SITPRO has the opportunity to look at the use of WebElecTra (the web based export documentation software system) in letter of credit operations. The final section of the report looks at what can be done to counteract these problems and reduce the amount of money lost to UK business. Training, as ever, is an important part, but it is essential for UK business to take notice of the enormous sums of money that are being lost through what are often easily correctable mistakes. Consideration should be given as to whether the necessary expertise is available in-house. If not training (on the job training, external courses or, preferably, a combination of both) should be given to staff. Where this is not appropriate the use of external resources (e.g. a freight forwarder or other professional with expertise in letter of credit operations) should be considered. Reports of demonstrated best practice are given to assist those involved in letter of credit operations – these will be publicised and issued as widely as possible to raise awareness of these issues. However, it is essential that senior management understand and support the need for a structured plan in the use of letters of credit in order that problems are resolved at the earliest stage in the process, before the documents are even presented to the bank. Page 2

SITPRO’s Letter of Credit Report 11 April 2003

Section 1 - Introduction
Background The documentary letter of credit (also known as a documentary credit) has been used for more than 150 years to facilitate trade by providing payment against presentation of documents...
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