Magazine article Business Credit

Are Bankers Killing the Golden Goose?

Magazine article Business Credit

Are Bankers Killing the Golden Goose?

Article excerpt

Many (perhaps most) non-banking people involved in the export business might suggest that the first half of the title is, indeed, an oxymoron. This is an unfortunate. Ideally, a letter of credit should be "friendly" to use and serve a specific purpose.

Corporate users I visit tell me that they are frankly sick and tired of sitting through letter of credit seminars offered by bankers who, at some point in the program, will proudly proclaim, "We find that 70 to 80 percent of L/C documents presented are discrepant with the original letter of credit."

Rough translation: "We got you again. Now pay extra: a discrepancy fee ($25 to $100), plus fees for outgoing cables, or special handling." The quick payment that was hoped for is now off--delayed until the approval from the buyer, his bank, or your bank--a process that typically takes a minimum of several days--usually a week or more. In addition, if the L/C was confirmed, you will still pay the confirmation fee. But the confirmation is off. You get nothing in the way of credit protection for your money.

If that isn't enough, you may also have noticed that the total cost for trading under a letter of credit is typically much higher than the alternatives (open account, draft, cash in advance) and getting higher all the time.

Something has to be done. The L/C seminars (some free, some very expensive) offering sure-fire advice on preparing documents (free of discrepancies, one would hope) don't seem to be working. Neat checklists, clear and concise instructions, worksheets, and workbooks all have had some impact, but the bottom line is that discrepancies remain too high. At a recent meeting in New York, the question was posed, "Has UCP 500 had a noticeable impact on discrepancy reduction in L/C document presentations?" Neither corporate users nor any of the bankers present had noticed any change. This lack of any noticeable improvement reflects very poorly on those preparing the documents (shippers and forwarders), foreign buyers, and the banking industry itself.

Who's To Blame?

To be sure, the exporters are half to blame for the current state of affairs. They are often guilty of sloppy document presentation, no follow up, little concern for the big picture, and for the lack of a stable work force that has the experience required to handle either the day-to-day or the unusual tasks encountered in document preparation. Forwarders, often the preparers and presenters of documents on behalf of the exporter, have not, as a group, done a good job of preparing error-free documents. Furthermore, there has been less than a huge cry from the corporate community demanding radical improvement.

Also to blame are importers (or their banks) who play cash management and cash flow games to slow outgoing payments or, in some cases, wiggle out of paying altogether (usually due to insolvency or financial problems on the part of the importer). Examples of the commercial and sovereign risks exporters still suffer under L/Cs abound. Some of the horror stories told at meetings of international credit managers are about severe delays because clean document presentations in the PRC, for example, are rejected due to "found" discrepancies--or for no reason at all. The PRC's banks often issue credits which specify adherence to UCP-500, even though the PRC itself is not a signatory of UCP-500.

And the exporters' banks may be partially to blame as well. Some have been known to use discrepancies to get out of confirmations that appeared prudent when offered, but seemed not to be such good ideas once documents were presented for payment. While this might be a very unusual scenario, a more common one is banks relying on discrepancy fee income to meet certain financial goals. In those cases, there is little incentive to reduce discrepancies.

Let's tell it like it is. Bankers are in an excellent leverage position vis-a-vis the exporter under an international trade transaction conducted under a letter of credit. …

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