DOCUMENTARY CREDIT RISKS: RISK TO APPLICANTS

1.1 Short Shipment and Shipment of Inferior Goods
Goods may be short shipped or may be of inferior quality although the presentation of documents compiles with the terms and conditions of the credit. In this event the applicant may suffer a loss on the sale of the goods.To minimize the losses due to the reasons stated above it is important that the applicant makes every attempt to establish the bona fides and the track record of the supplier before entering in to a documentary credit transaction. In this respect some comfort may be obtained by obtaining a hank or credit agency status report on the supplier and also obtaining an independent pre shipment inspection of the goods.

1.2 Non- Delivery of goods
Goods may not be delivered because of fraud by the beneficiary. In such circumstances the applicant may be liable to pay the issuing bank for conforming documents and not be able to sell the goods as anticipated.

1.3 Goods received before the documents under the credit are received by the issuing bank
In these circumstances the applicant may have to take delivery of the goods under a shipping guarantee which may irrevocably bind the applicant to effect payment under the credit irrespective of any discrepancies in the documents received subsequently. Unless the goods are cleared from the port or airport speedily, the port/airport authorities may:
- levy charges, and the rate of charge of the levy may increase with the period for which the goods remain uncleared at the port/airport.
- have authority to confiscate goods after the expiration of a stated statutory period.

1.4 Goods Damaged or lost in transit
Where goods are lost or damaged in transit the owner of the goods at the time of such occurrence will look to their insurers for financial recompense. Applicants should ensure which party is responsible for arranging the insurance cover when agreeing to the terms of the sales contract with the beneficiary, and be satisfied that the level of cover arranged provides an appropriate level of protection.

1.5 Exchange Risk
In Letters of Credits where the currency is not that of the country of the applicant there may be a difference in exchange rates between the time the credit was issued and the time when settlement is made. In case where no Forward Exchange cover is available, the applicant may have to pay more than the anticipated price which may reduce the profit margin or sometimes incur a loss.

Forward foreign exchange contracts may provide a hedge against this risk where such cover is available to the Applicant although the exchange rate of the cover may turn out to be less attractive than the market rate available. This process may, however, lock in the prices and associated profits in a transaction.