In cross border trade companies are exposed to counterparty default risk. From the early 19th century onwards the above-referred banking instruments are used by the parties with the hope of assured payment by the banks.
Contrary to the expectations in most of the cases letters of credit transactions are stuck in between. Either exporter has received a letter of credit with risky conditions or importers have opened letters of credit with ambiguous conditions. In some of the cases, LC transaction is held up because of the different practices followed by document examiners in issuing banks. Ultimately parties are not able to get the desired benefit of these instruments.
Bank guarantees(BG) - known as ‘demand guarantees’ - are subject to Uniform Rules for Demand Guarantee URDG 758. Some of the domestic guarantees are subject to the Indian Contract Act 1872 (amended). Recently due to the amendment of Section 28 of the Indian Contract Act, there is a need for incorporating the ‘claim period’ by default. Court also intervenes in bank guarantee transactions.
Standby letters of credits (SBLC) are receiving fairly good response nowadays. Whether SBLC is subject to ISP 98 or still subject to UCP 600? When SBLC can be used in lieu of LCs or BGs?
These are some of the issues in the market. COVID 19 has added anxiety to trade payments. Some transactions are held in the midway. Some transaction could not be completed because of certain events beyond the control.