CREDIT RISK ~ Letter of Credit Risk Management

Presented By –Isha Joshi(BBA-FT IV sem)

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

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

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

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?

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.

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.

THANK YOU