Documentary Letter of Credit (DLC, RDLC, IRDLC)

A Documentary Letter of Credit (DLC) is a highly structured SWIFT message. The SWIFT numbers are MT700 continued by MT701 – used by banks having an agreement on the exchange of DLCs (i.e. has “key” to each other) – or MT710 continued by MT711 – used by third-party banks – without such agreement.

A DLC has up to more than 70 different articles (“tags”) specifying different aspects of the credit making a DLC both highly structured and at the same time highly complex. Each article and the valid options are defined in ISBP 745 authored by ICC. The complexity is the main reason why some sellers will charge more for using DLC over SBLC+TT.

According to the latest version UCP by ICC UCP600, all DLCs are Irrevocable even not stated or even stated differently. A DLC cannot be revocable.

A DLC is a documentary credit, which means that payment is entirely solely conditional upon presentation of documents pre-listed in the DLC and their pre-listed content/value. The bank will not as such go out and check if the commodity outlined in the DLC is actually present somewhere in the physical world.

Documentary Letter of Credits might have the following main extensions:

  • DLC at Sight– means a DLC issued for future payment.
  • Revolving DLC– means a DLC with repeated payment ex. every month on the same conditions.
  • Transferable DLC– allows the DLC to be transferred from one bank to another bank (max. one transferring bank).
  • Divisible DLC– allows partial shipment and related payment.
  • Confirmed DLC– means that the advising (“Receiving”) bank or a third party confirming bank is confirming the credit to the beneficiary, which implies that the confirming bank guarantees the credit toward the beneficiary.
  • Deferred (issuance) DLC– means that the payment is executed a specified number of days after documents are presented.
  • Advance Payment (Red Clause DLC)– allows (partial) advance payment without presentation of documents.
  • DLC by Negotiation– means that the Nominated bank pays the beneficiary AFTER approval of payment by the Issuing Bank, Confirming Bank and Transferring Bank but BEFORE getting paid thru the lines back to the Issuing Bank or Reimbursing Bank.
  • DLC by Payment– means that the Nominated bank will not pay the beneficiary UNTIL it has received payment thru the lines back to the Issuing Bank or Reimbursing Bank.
  • Bank to bank DLC– means that one DLC received is the basis of issuing another DLC without the first DLC being transferred. Bank to bank DLC is much more flexible than Transferred DLC but also more risky for the bank doing the bank to bank setup, which means that the bank most likely will ask the applicant to apply for (full) credit line for the “next” DLC.

Parties/roles involved in DLC:

1. Applicant

The party applying for the letter of credit, i.e. usually the buyer.

During Issuing the Credit

  • Apply for DLC at the Issuing Bank.

During Execution of Payment

  • Reimburse/pay the Issuing Bank.

2. Issuing (Opening) Bank

The bank issuing the credit on behalf of the applicant, i.e. usually the applicant’s/buyer’s bank.

During Issuing the Credit

  • Opens the DLC to the Advising Bank or Transferring Bank – using SWIFT MT700/701 or if third-party bank MT710/711.
  • Eventually:
    • Requests confirmation from Confirming Bank by sending the DLC by SWIFT MT700/701 or MT710/711 to the Confirming Bank.
    • By SWIFT MT740 requests for Irrevocable Reimbursement Undertaking (IRU) from the Reimbursing Bank.

During Handling of Documents

  • Approves or disapproves payment in response to compliance or discrepancies advised by Negotiating Bank – eventually after examining the forwarded documents.
  • Advises payment by:
    • SWIFT MT752 to the Transferring Bank or Nominated Bank.
    • SWIFT MT756 to the Reimbursing Bank.

During Execution of Payment

  • Reimburses by SWIFT MT202 the Nominated Bank OR the Reimbursing Bank.
  • Gets paid by the Applicant.

3. Reimbursing Bank

The bank doing the payment on behalf of Issuing Bank. Might be required if the Issuing Bank requests the Transferring or Advising Bank to confirm the DLC.

During Issuing the Credit

  • Acknowledges or rejects the request for reimbursement undertaking – as the reply to the request from the Issuing Bank.
  • Advises the Transferring Bank, Confirming Bank or Advising Bank of irrevocable reimbursement undertaking.

During Handling of Documents

  • Gets advise from Issuing Bank to reimburse the Transferring Bank or Nominated Bank.

During Execution of Payment

  • Reimburses by SWIFT MT202 the Nominated or Transferring Bank.
  • Asks Issuing Bank for reimbursement.

4. Transferring Bank

The bank transferring the credit from issuing bank, i.e. re seller’s The transferring bank as such has no obligations towards the beneficiaries as the credit is being “redirected”

During Issuing the Credit

  • Accepts or reject by SWIFT MT730 to the Issuing Bank to transfer the DLC to the Advising Bank.
  • Transfers the DLC by SWIFT MT720/721 to the Advising Bank.

During Handling of Documents

  • Approves or disapproves payment in response to discrepancies advised by Negotiating Bank – eventually after examining the forwarded documents.

During Execution of Payment

  • Reimburses by SWIFT MT202 the Nominated Bank.
  • Pays the 1st Beneficiary.

5. Confirming Bank

The bank guaranteeing the payment to the beneficiaries. (If no confirming bank then the issuing bank is the guarantor.)

During Issuing the Credit

  • Accepts or rejects to confirm the DLC by replying to the request from the Issuing Bank or Transferring Bank.
  • Advises the Transferring Bank or Advising Bank of the confirmation – if approved – by forwarding the confirmed DLC using SWIFT MT700/701 or MT710/711.

During Handling of Documents

  • Approves or disapproves payment in response to discrepancies advised by Negotiating Bank – eventually after examining the forwarded documents.

During Execution of Payment

  • In the case the Transferring Bank, Reimbursing Bank or Issuing Bank is not paying as committed, the Confirming bank has to pay ass guarantor.

6. Advising Bank

The bank advises (“receives”) the credit on behalf of (end) beneficiary, i.e. usually seller’s bank.

During Issuing the Credit

  • Accepts or rejects the DLC by replying the Transferring Bank or Issuing Bank by SWIFT MT730.
  • Advises (notifies) the Beneficiary.

7. Nominated/Negotiating Bank

The bank to accept/approve/negotiate drawing of payment from the DLC upon presentation of documents, i.e. usually seller’s bank.

During Handling of Documents

  • Gets the documents for payment from the Remitting Bank – if not the same bank.
  • Examines the documents and concludes if discrepant or non-discrepant.
  • Advises the Confirming Bank, Transferring Bank, Issuing Bank and/or Advising Bank of the result of evaluation of the documents provided:
    • By MT754 if documents presented comply with the requirements of the DLC for payment.
    • By MT750 if documents presented are discrepant from the requirements of the DLC.

During Execution of Payment

  • Pays the End Beneficiary.

8. Remitting Bank

The bank to collect (“receive”) the documents required to draw payment from the DLC, i.e. usually seller’s bank.

During Handling of Documents

  • Collects the documents from the end Beneficiary.
  • In the case where Remitting Bank and Negotiating Bank are not the same: Sends the documents by courier to Negotiating bank.

9. Beneficiary

The party/parties to get paid from the DLC. If transferable DLC, the 1st beneficiary is the reseller, and the 2nd beneficiary is the seller or similar. One DLC can have several primary or secondary beneficiaries.

During Issuing the Credit

  • Gets advise from Advising Bank on the DLC being received.

During Handling of Documents

  • Presents documents to Remitting Bank.

During Execution of Payment

  • Gets paid by the Nominated Bank.

Note when using DLC:

  • A DLC at Sight is acting both as guarantee and payment as an irrevocable instrument for future payment against presentation of specified documents listing specified information/values.
  • A Revolving DLC requires a credit line for the accumulated value of all possible drawings, i.e. full contract value.
  • The (Negotiating) bank does not verify or validate the authenticity of the documents or the statements therein. The examination and conclusion from the banks are solely based on the documents presented without examining the reality of the physical world. If the documents have not obviously been tampered or are fraudulent, the documents will be accepted as genuine as the basis for legal payment.
  • Unless discrepancies are explicitly allowed, all and any deviation from conditions outlined in the DLC will permit all and any of the guarantors to refuse drawing – both in regards to documents not complying in any sense with the requirements listed, down to spelling errors (unless explicitly accepted) and to deviation in form of missing drawings from a revolving DLC or attempts to draw less than outlined within the acceptable tolerances.
  • A DLC is a bank to bank guarantee, not an account to account guarantee, i.e. the banks are accountable for payment and not as such the account holder.
  • Drafting a DLC is a job for experts. Minor errors might jeopardize the credit completely resulting in a lack of payment for the service or goods supplied.