The Procedure of Lending Money



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The Procedure of Lending Money



In order to execute a loan, a bank must have funds to lend. This comes from paid-in capital, retained earnings of previous years, borrowed funds, and the largest, most important, resource – the bank’s customers’ deposits. The banker must always remember that the money he lends is not his bank’s own money. It is money deposited by the bank’s customers, whether in a demand or time account.

To evaluate the risk, the domestic or international banker must first obtain certain basic information that usually is forthcoming in a meeting with the potential borrower. The banker must learn how much money is being sought, the purpose of the loan, how long it is needed for, and how it will be repaid.

Each part of this information must bear a reasonable relationship to the other parts. For example, a businessman seeking credit to finance the importation of coffee should need financing for only ninety days, the normal period of time for the shipment to arrive, undergo processing, and be sold to a coffee company. It would be unreasonable for him to seek a five-year loan when he expects to sell within three months. On the other hand, it would be impractical for a businessman to borrow money to construct a new manufacturing plant and expect to repay the loan in six months.

Banks make loans only for worthwhile purposes: financing trade, expanding business, and so on. Once the banker has obtained the desired information from the applicant, he considers the risk involved. This means evaluating the three C’s of credit: character, capacity, and capital – the integrity of the borrower, his ability to repay, and the soundness of his financial position.

A potential borrower’s credit-worthiness is determined by previous loans and by his standing with credit rating bureaus or other banks. In the United States, as well as elsewhere, banks exchange credit information with each other.

The loan applicant’s ability to repay the loan depends to some degree on the purpose of the loan. If the source of repayment is from the sale of imported merchandise, the transaction is said to be self-liquidating. If the loan is for plant expansion, usually called capital expansion, the source of repayment is the income from increased sales.

Capital, the financial position of the borrower, is determined by examining the borrower’s financial statement. This usually consists of a detailed balance sheet and a profit and loss statement. The bank credit officer requests a company seeking credit to provide audited financial statements covering the previous three years.

The international credit officer must consider the economic and political outlook of the foreign country before loaning money to a foreign borrower. This, of course, involves an evaluation of the country’s balance-of-payments outlook. The credit officer then decides whether the bank will extend credit to the borrower. If the decision is negative, the credit applicant is entitled to a prompt acknowledgment by the bank so that he may either seek alternate financing or defer the proposed business transaction.

If a bank decides to make the loan, then the credit officer must first select an interest rate, which is the price for renting the money to the borrower. In computing the interest rate, the banker must consider the cost of the money to his bank. This includes the average interest rate his bank is paying its depositors, the bank’s operating costs, and the normal return that the bank expects. The bank must be able to cover possible loan losses and provide dividends to the bank’s shareholders.

The credit officer must charge amounts to compensate for risks greater than those assumed to prime-rate borrowers. The prime rate assumes a short-term loan. If the loan is a term loan, the risk is greater and must be compensated for in a higher interest rate. A bank usually considers the maximum term to be five years for normal commercial loans, although there has been competitive international pressure to extend this to as long as ten years.

If the borrower is foreign, the country risk may be greater than making a loan to a domestic borrower, and therefore the credit officer expects extra interest.

The credit officer must determine the most appropriate credit instrument to use. A promissory note is most customary. Generally, the bank wants partial payments at least semi-annually, but a promissory note can also be payable "on demand", rather than a certain period after the date of the note. "On demand" means that the note will have to be paid at such time when the bank demands this. Banker’s acceptances can be used for only certain types of transactions, involving international trade, United States domestic trade, and the storage of commodities. The maximum loan period is 270 days.

Another means of extending credit may involve advances, the discounting of accounts receivable, overdrafts (not usually done in the United States), or advances against collections. The credit officer must also decide whether to make an unsecured loan or a secured loan (secured by collateral assigned to the bank, such as securities or precious metals), or whether the unsecured loan should be guaranteed.

The banker makes an offer to the customer, who may or may not agree to all of the terms and conditions. After the bank and the borrower reach an agreement, the banker arranges for the borrower to sign the necessary documents and then disburses the funds to him.

For large loans, banks often form a syndicate, a device whereby one or more major banks form a consortium of banks, each of which disburses a portion of the loan. Often, one bank puts the deal together and carries the administrative burden during the life of the loan. This is the "lead bank". A syndicate may be desirable because of legal lending limits on banks, the general relationship of the total demand for credit compared to the supply of loanable funds, or the prudent banker’s desire to spread the risk.

 

 

Assignments

I. Answer the questions.

1. Where do bank’s lendable funds come from?

2. What are the three C’s of credit?

3. What is a potential borrower’s credit-worthiness determined by?

4. What does the loan applicant’s ability to repay the loan depend on?

5. What does a bank usually consider to be the maximum term for normal commercial loans?

6. What is the "lead bank"?

7. Why is a syndicate desirable for large loans?

II. Translate the following sentences into Ukrainian. Put questions to any two of them.

1. In order to execute a loan, a bank must have funds to lend.

2. Banks make loans only for worthwhile purposes: financing trade, expanding business, and so on.

3. Capital, the financial position of the borrower, is determined by examining the borrower’s financial statement.

4. This usually consists of a detailed balance sheet and a profit and loss statement.

5. The bank credit officer requests a company seeking credit to provide audited financial statements covering the previous three years.

III. Translate the following sentences into English.

1. Банкір завжди має пам’ятати, що гроші, які він надає у позику, не є власними грошима його банку.

2. Здатність того, хто звертається по позику, виплатити її залежить певною мірою від мети позики.

3. Перш за все слід вивчити економічні та політичні перспективи іноземної країни перед тим, як надати позику іноземному позичальнику.

4. Якщо банк вирішує надати позику, перш за все слід обрати відсоткову ставку, що є ціною за одержання грошей позичальником.

IV. Name the following definitions.

1. A type of lending whereby individual disbursements are not evidenced by notes, but by a master agreement.

2. A company’s financial condition on a stated date as viewed by independent auditors.

3. The part of a company’s overall statement that lists what the company owns and owes.

4. Money transferred to a person or company in return for a signed promise to return the money, with interest, by a stated future date.

5. The negative balance in a checking account that occurs when a bank pays checks for an amount greater than that which the customer has in the account.

6. The amount of money actually contributed to a company by its owners for the company’s use.

7. A loan not supported by collateral.

(Keys: unsecured loan, overdraft, paid-in capital, profit and loss statement, collateral, audited financial statement, loan)

V. Make a scheme to the procedure of lending money by the bank.

VI. Find in the text and translate all sentences with Infinitives; define functions of the Infinitives (a subject, attribute, object, adverbial modifier, part of a predicate).

VII. Make sentences with the Complex Subject / Complex Object basing on the text.

VIII. Sum up what the text says about commercial bank lending.

 

 

Text 3

Warm-up

1. Translate the following word combinations: overseas buyer, cash flow, export contract, national currency, foreign currency, international payment, to collect funds, same-day transaction, to be subject to a loss, in due course, at first sight, to save time, it is worth consulting.

2. Have you ever remitted money? What does the procedure include?

 

 

Vocabulary

remittance – грошовий переказ; денежный перевод

transfer – переказувати; переводить

clear the cheque – здійснювати кліринг чеків (розрахунок за чеками або векселями через розрахункову палату); осуществлять клиринг чеков

draft – переказний вексель, тратта; переводной вексель, тратта

draw / issue a cheque / draft – виписувати (виставляти) чек (тратту); выписывать (выставлять) чек (тратту)

delay – затримка, запізнення; задержка, опаздание

branch – представництво, філія; представительство, филиал

cancel out the profit – нейтралізувати прибуток; нейтрализовать прибыль

in bulk – оптом; оптом

in favour of – на чиєсь ім’я; на чье-то имя

warrant – гарантувати, доручати повноваження; гарантировать, поручать полномочия

Remitting the Money

There are several ways that a remittance from an overseas buyer can be transmitted to an exporter. An exporter’s most important consideration is the speed at which this can be done – the quicker it is achieved the better an exporter’s cash flow and the less the cost of any finance that may have to be raised to carry out an export contract.

In the contract where payment is on open account terms, payment by a cheque from an overseas buyer might seem the simplest method. But there are several disadvantages. The cheque will normally be drawn on the buyer’s overseas bank in that national currency. So an exporter could be subject to а loss when the foreign currency is exchanged into sterling: there could be delays due to exchange controls in a buyer’s country; there could be postal delays; and there may be delays while the exporter’s UK bank clears the cheque with the overseas buyer’s bank.

Payment could be made by a banker’s draft. An overseas buyer’s bank issues a cheque in favour of an exporter to be drawn on a bank in the UK. Exchange control problems in the buyer’s country are avoided, but there could still be delays in the post and in clearances between the exporter’s UK bank and any other banks in the chain of remittances.

The most common form of non-documentагу payment for exports is by mail transfer (International Money Transfer). An overseas buyer instructs a bank in the buyer’s country to transfer an amount of money to an exporter’s UK bank by airmail, and in due course, the exporter receives payment. Unfortunately this can be a slow process. However, the UK exporter’s bank branch can assist the exporter in reducing to the minimum any delays in mail transfers.

Although at first sight more expensive, the most effective way of making an international payment, because of the time saved, is by telegraphic transfer (Express International Money Transfer) or bank cable. Money is transferred by coded inter-bank telex and as long as the exporter makes it clear to the overseas buyer exactly which bank and account in the UK the remittance should be made to, the exporter should receive very speedy payment through the system.

Delays in remittance can cost money, even cancelling out the profit in any contract, especially when the exporter is paying interest on any financing or the exporter’s cash flow is severely affected. So it is worth the exporter consulting the UK bank about remittance procedures in open account contracts. The exporter should generally ask the overseas buyer to remit to a specified UK bank branch by telegraphic transfer. If the export business warrants it, the exporter can consider opening bank account to collect funds and transfer them in bulk to the UK by telex at regular intervals.

In a new development, major banks including Midland have set up a computer system for inter-bank transfers called SWIFT, the Society for Worldwide Interbank Financial Telecommunications. SWIFT can achieve same-day transfers between banks which are linked to the system.

Whether exporting companies are large or small, they have to rely on specialists to achieve the most efficient (and therefore least costly) method of receiving payment. It is here that banks can make one of their most important contributions to export business.

 

 

Assignments

I. Answer the questions.

1. What is an exporter’s most important consideration when remitting money?

2. How could payments be made?

3. What is the most common form of non-documentагу payment?

4. What is the most effective way of making an international payment?

5. What are the disadvantages of remittance procedures in open account contracts?

II. Translate the following sentences into Ukrainian. Put questions to any two of them.

1. There are several ways that a remittance from an overseas buyer can be transmitted to an exporter.

2. An exporter’s most important consideration is the speed at which this can be done – the quicker it is achieved the better an exporter’s cash flow and the less the cost of any finance that may have to be raised to carry out an export contract.

3. In the contract where payment is on open account terms, payment by a cheque from an overseas buyer might seem the simplest method.

4. Although at first sight more expensive, the most effective way of making an international payment, because of the time saved, is by telegraphic transfer (Express International Money Transfer) or bank cable.

III. Translate the following sentences into English.

1. Оплата може здійснюватися за допомогою банківського переказного векселя.

2. Найпоширенішою формою недокументальної оплати за експорт є поштовий переказ.

3. Затримки при грошовому переказі можуть багато коштувати, навіть анулювання прибутків від будь-якого контракту.

4. Незалежно від розмірів, компанії-експортери мають покладатися на фахівців, аби використовувати найефективніший метод отримання платежів.

IV. Make a scheme to the procedure of remitting money.

V. Make up an abstract of the text using the following:

The text begins with …, a review of … is given, special attention is paid to …, in conclusion …

VI. Find in the text and translate all sentences with infinitives; define functions of the infinitives (a subject, attribute, object, adverbial modifier, part of a predicate).

VII. Make sentences with the Complex Subject / Complex Object basing on the text.

VIII. Sum up what the text says about remitting the money.

 

Text 4

Warm-up

1. Translate the following word combinations: capital cities, provincial cities, to dispose of securities, financial intermediaries, legal framework, market rules, volume of transactions, daily papers, weekly journals, by word of mouth, to be known as, to be referred to as, to facilitate investment, to keep a register, to channel savings into.

 

 

Vocabulary

stock exchange – фондова біржа; фондовая биржа

issue – випуск; выпуск

back – забезпечувати, підтримувати; обеспечивать, поддерживать

securities – цінні папери; ценные бумаги

saving – заощадження ; сбережения

broker – брокер, комісіонер, маклер; брокер, комиссионер, маклер

jobber – джобер, дилер, комісіонер, маклер; джоббер, дилер, комиссионер, маклер

prevent – запобігати, попереджати; предотвращать

fraud – обман; обман

sharp practice – шахрайство; мошенничество

ready marketability – ліквідність, можливість реалізувати товар на ринку; ликвидность, возможность реализовать товар на рынке

issuing houses – емісійний банк; емиссионный банк

the floor of the exchange – операційний зал біржі; операционный зал биржи

bargain – угода; сделка

market value – ринкова вартість, біржова ціна; рыночная стоимость, биржевая цена

be quoted – котируватися; котироваться

index number – індекс; индекс

share indices – індекси курсів акцій; индексы курсов акций

aggregate movements – сукупність змін (курсів); совокупность изменений (курсов)

portfolio – портфель цінних паперів; портфель ценных бумаг

base year – базисний рік; базисный год

Stock Exchange

Stock exchange is a market in which securities are bought and sold. There are stock exchanges in most capital cities, as well as in the largest provincial cities in many countries, and over twenty in Britain. The principal stock exchange in Britain is known as the Stock Exchange, and is located in Throgmorton Street in the City of London; the New York stock exchange is located in and is known as Wall Street. Continental European exchanges are often referred to as Bourses. The economic importance of stock exchanges is that they facilitate saving and investment, first through making it possible for investors to dispose of securities quickly if they wish to do so and secondly in channelling savings into productive investments. Ready marketability requires that new issues should be made or backed by reputable borrowers or institutions, that information should be available on existing securities, and that there should be both a legal framework and market rules to prevent fraud and sharp practice. Stock exchanges have their own rules and conventions, but their functioning depends also on the existence of a company and other law and financial intermediaries, such as the issuing houses.

The British Stock Exchange, founded in 1773, developed from informal exchanges in coffee houses in the City of London. It is managed by a council of members. There are some 3,500 members, who alone may deal or even enter the floor of the exchange.

Stock-brokers act as agents for the public and buy from and sell to jobbers. Members are formed into a declining number of companies and there are now only 192 broking firms and ninety-one jobbing firms at the London Exchange. Business is conducted entirely by word of mouth and although jobbers and brokers keep their own registers and may record details of a "bargain" (as all transactions are called) on the official list, they are not obliged to do so. Even today there are no official statistics of the volume of transactions, although prices at the exchange are widely available in the press. The market value of the securities quoted at the exchange is about ₤120 billion, of which rather more than half are foreign securities.

Index numbers indicating changes in the average prices of shares on the Stock Exchange are called share indices. The indices are constructed by taking a selection of shares and "weighing" the percentage changes in prices together as an indication of aggregate movements in share prices. Roughly speaking, a share index shows percentage changes in the market value of a portfolio compared with its value in the base year of the index. Index numbers are published by several daily papers and weekly journals.

 

 

Assignments

I. Answer the questions.

1. What is stock exchange?

2. What is the economic importance of stock exchanges?

3. Where is the principal stock exchange in Britain located?

4. What are the requirements to ready marketability?

5. What does the functioning of stock exchange depend on?

II. Translate the following sentences into Ukrainian. Put questions to any two of them.

1. The economic importance of stock exchanges is that they facilitate saving and investment, first through making it possible for investors to dispose of securities quickly if they wish to do so and secondly in channelling savings into productive investments.

2. Ready marketability requires that new issues should be made or backed by reputable borrowers or institutions, that information should be available on existing securities, and that there should be both a legal framework and market rules to prevent fraud and sharp practice.

3. Stock exchanges have their own rules and conventions, but their functioning depends also on the existence of a company and other law and financial intermediaries, such as the issuing houses.

4. The British Stock Exchange, founded in 1773, developed from informal exchanges in coffee houses in the City of London.

5. The market value of the securities quoted at the exchange is about ₤120 billion, of which rather more than half are foreign securities.

III. Translate the following sentences into English.

1. Фондова біржа – це ринок, на якому купуються та продаються цінні папери.

2. Індекси, які показують зміни в середніх цінах акцій на фондовій біржі, називаються індексами курсів акцій.

3. Індекс курсів акцій показує відсоткові зміни у ринковій вартості портфеля цінних паперів порівняно з його вартістю у базисному роцііндекса.

4. Індекси публікуються у декількох щоденних газетах та тижневих журналах.

IV. Choose the right answer.

1. The principal stock exchange in the USA is known as

a) the Stock Exchange,

b) Wall Street.

2. Ready marketability requires that new issues should be made or backed by

a) reputable borrowers or institutions,

b) financial intermediaries, such as the issuing houses.

3. Jobbers

a) act as agents for the public,

b) deal only with brokers, not with general public.

4. Jobbers and brokers

a) are obliged to keep records of concluded bargains,

b) are not obliged to record concluded transactions.

5. Share indices indicate

a) changes in the average prices at the Stock Exchange,

b) percentage changes in share prices within the last three years.

V. Make up an anbstract of the text.

VI. Make sentences with the Complex Subject / Complex Object basing on the text.

VII. Sum up what the text says about stock exchange.

 

 

Text 5

Warm-up

1. Make sure you know translation of the following word combinations: loan, Stock Exchange, round-the-clock operation, high quality security, a rise / fall in price, the difference of buying and selling prices, to act through a broker, securities, shares, broker, jobber.

2. What do you understand by securities?

 

 

Vocabulary

stock – (ам.) акція, акції; ам. акция, акции

bonds – облігації; облигации

gilts – урядові облігації та цінні папери з державною гарантією; правительственные облигации и ценные бумаги с государственной гарантией

trading – торгівля (цінними паперами); торговля (ценными бумагами)

transact business – вести справи; вести дела

quote price – встановлювати ціну, котирувати; устанавливать цену, котировать

bid – ціна, що пропонується покупцем; цена, предлагаемая покупателем

offer – ціна, що пропонується продавцем, продажна ціна; цена, предлагаемая продавцом

blue chips – першокласні цінні папери; первоклассные ценные бумаги

jobber’s turn – прибуток джобера; прибыль джоббера

speculator – біржовик; биржевик

bull – „бик”, біржовий спекулянт, що грає на підвищення; „бык”, биржевой спекулянт, играющий на повышение

bear – „ведмідь”, біржовий спекулянт, що грає на зниження; биржевой спекулянт, играющий на понижение

 

 

Securities Trading

Shares, stock and bonds form securities.

Bonds are documents which give details of a loan made to a company or government.

Securities issued by the government are called gilts or gilt-edged securities. This can also mean any high quality security without financial risk. Another way of describing these high quality securities is blue chips.

Securities of all kinds are traded at the Stock Exchange. Only Stock Exchange members are admitted to transact business at the Stock Exchange. There are two kinds of people dealing on the Stock Exchange Market. They are brokers and jobbers. An investor who wishes to buy or to sell securities must act through a broker. After the broker receives instruction from the investor or his client he approaches a jobber. Each jobber asks the broker his price. The jobber usually does not know if the broker wishes to buy or to sell and he quotes two prices:

- his buying price, or the bid;

- his selling price, or the offer.

The difference of the two prices is the jobber’s turn.

The existence of the Stock Exchange means that it is generally possible to buy or to sell securities at any time at the market place.

The speculator at the Stock Exchange who buys securities in expectation of a rise in their prices is a bull. The speculator wishing to sell securities in anticipation of a fall in their prices is a bear.

The biggest Stock Exchanges function in London, New York, Tokyo and Frankfurt-on-the-Mine, thus providing round-the-clock operation of the Stock Exchange Market.

 

 

Assignments

I. Answer the questions.

1. What are the types of securities?

2. What are bonds?

3. Where are securities of all kinds traded?

4. Who is admitted to transact business at the Stock Exchange?

5. Where do the biggest Stock Exchanges function?

6. What is a jobber’s turn?

II. Translate the following sentences into Ukrainian. Put questions to any two of them.

1. Only Stock Exchange members are admitted to transact business at the Stock Exchange.

2. There are two kinds of people dealing on the Stock Exchange Market: brokers and jobbers.

3. The jobber usually does not know if the broker wishes to buy or to sell and he quotes two prices: his buying price, or the bid, and his selling price, or the offer.

4. The speculator at the Stock Exchange who buys securities in expectation of a rise in their prices is a bull.

5. The speculator wishing to sell securities in anticipation of a fall in their prices is a bear.

III. Translate the following sentences into English.

1. Цінні папери, видані урядом, називаються урядовими облігаціями та цінними паперами з державною гарантією.

2. Торгівля цінними паперами усіх видів відбувається на фондовій біржі.

3. Інвестор, який бажає купити або продати цінні папери, повинен діяти через брокера.

4. Існування фондової біржі означає, що там можна купувати або продавати цінні папери у будь-який час.

5. Найбільші фондові біржі функціонують у Лондоні, Нью-Йорку, Токіо та Франкфурті-на-Майні, забезпечуючи таким чином цілодобову діяльність фондового ринку.

IV. Name the following definitions.

1. Shares, stock and bonds;

2. Securities issued by the government;

3. Buying price;

4. Selling price;

5. Difference of jobber’s buying and selling prices;

6. The speculator at the Stock Exchange who buys securities in expectation of a rise in their prices;

7. The speculator wishing to sell securities in anticipation of a fall in their prices.

V. Find in the text and translate all sentences with Infinitives; define functions of the Infinitives (a subject, attribute, object, adverbial modifier, part of a predicate).

VI. Make sentences with the Complex Subject / Complex Object basing on the text.

VII. Sum up what the text says about:

1) different types of securities,

2) brokers and jobbers dealing on the Stock Exchange Market,

3) bids and offers,

4) bulls and bears.

 

 

Text 6

Warm-up

1. Translate the following word combinations: international banking, means of facilitating international trade, times of economic and political uncertainty, agreed-upon shipment, international trading transaction, delivery date, multiple copies, to arrange payment, most widely used, to promote uniformity of terminology and practices, intermediate port, legal obligation, to comply with the terms, to submit documents.

2. What do you understand by the international trading transaction?

Vocabulary

letter of credit – акредитив; аккредитив

draw a draft – виписувати (виставляти) вексель (тратту); выписывать (выставлять) вексель (тратту)

catalyst – каталізатор; катализатор

delivery date – термін поставки; срок поставки

caution – застереження, обережність; осторожность

expiration date – термін придатності; срок годности

charges – витрати; расходы

prepay – передплатити; оплатить заранее

F.O.B. (f.o.b.) (=free on board) – ФОБ (франко-борт); ФОБ

C.I.F. (c.i.f.) (=cost, insurance and freight) – СІФ (вартість, страхування, фрахт); СИФ

underlying contract – основний контракт; основной контракт

bank application – заява (на отримання акредитиву); заявка (на получение аккредитива)

invoice – рахунок-фактура; счет-фактура

weight list – вагова відомість; весовая ведомость

bill of lading – коносамент, вантажна накладна; коносамент, грузовая накладная

marine insurance – морська страховка; морская страховка

packing list – упаковчий перелік товарів; упаковочный список товаров

inspection certificate – акт (сертифікат) огляду; акт (сертификат) осмотра

consular statement – виписка; выписка

certificate of origin – свідоцтво (сертифікат) про походження; свидетельство (сертификат) о происхождении

clearance – дозвіл; разрешение

damage – пошкодження; повреждение

ocean bill of lading – коносамент, вантажна накладна на перевезення морським шляхом; коносамент, грузовая накладная на перевозку морским путем

fee – збір, внесок; сбор, взнос

reimburse – відшкодовувати, компенсувати; возмещать, компенсировать

general average – загальна аварія; общая авария

jettisoning – викидання за борт вантажу (у випадку загрози аварії); выбрасывание за борт груза

sue – висувати позов, судитися;выставляьб иск, судиться

transshipment – перевантаження; перегрузка

stale – просрочений, застарілий; просроченный, устаревший

mislabeled – неправильно маркований; неправильно маркированный

Chamber of Commerce – Торгова Палата; Торговая Палата

negotiate – вести переговори, обумовлювати, обговорювати, передавати; вести переговоры, обусловливать, обсуждать, передавать

sight draft – тратта з оплатою по пред’явленні; тратта с оплатой по предъявлении

Letter of Credit (L/C)

The letter of credit is the most widely used instrument of international banking. It has had a long and successful history as a means of facilitating international trade, particularly during times of economic and political uncertainty.

The letter of credit is the bank instrument that assures the person selling merchandise of payment if he makes the agreed-upon shipment. On the other hand, it also assures the buyer that he is not required to pay until the seller ships the goods. It is thus a catalyst that provides the buyer and the seller with mutual protection in dealing with each other.

An international trading transaction begins when a buyer and a seller sign a contract that records all the elements of the transaction: the merchandise, price, delivery date, and method of shipment, as well as specifics of color, size, and so on.

Having worked out an agreement, the buyer and seller must arrange payment. The buyer will want possession before paying and the seller will want payment before making delivery. Since each party often has an incomplete knowledge of the other, there is a certain caution to their dealings.

At this point, the letter of credit can be extremely useful. The buyer requests his bank to issue a letter of credit in favour of the seller. Assuming that the credit risk is acceptable to the bank, it issues its letter of credit. The letter says, in essence, to the seller: “We, the bank, promise that we will pay you when you submit certain documents evidencing that you have made the agreed-upon shipment”. The bank has thus substituted its credit for that of the buyer, which might also be good but probably is not as well as known. The letter of credit also protects the buyer, for he knows that he will not be called upon for payment by his bank until the evidence shows that the shipment has actually been effected.

The letter of credit specifies the documents to be submitted, the shipping requirements, and the expiration date. The seller then assembles the goods, prepares the documents, and makes the shipment. Then the seller draws a draft, as required in the letter of credit, attaches the documents to it, and presents everything to the bank for payment.

The amount of the letter of credit depends on whether the buyer or the seller is paying for the freight and insurance. If the price is quoted F.B.O., then the seller is obliged to pay only the charges (freight and insurance) necessary to put the goods on board the vessel; freight and insurance from then on are to be paid by the buyer. If the price is quoted C.I.F., then the seller must prepay the freight and insurance costs to the delivery port. He of course adjusts his price accordingly in the underlying contract.

The documentary requirements are designated by the buyer in his bank application for the letter of credit. The bank follows these in preparing its letter of credit.

A typical letter of credit may call for the following documents: an invoice, a bill of lading, marine insurance, a packing list, a weight list, an inspection certificate, and a certificate of origin (a consular statement of the country of origin).

Not all of these documents are required in every letter of credit transaction. Sometimes, other documents must be used. For example, food shipments coming into the United States require clearance by the Pure Food and Drug Administration. Multiple copies of each document are required, since the bank retains a set for its own records and the buyer needs copies for his records.

The ocean bill of lading is often considered to be the most important document required by a letter of credit. Uniformity of the law for ocean bills of lading was achieved at an international convention held at The Hague in 1921 and resulted in what are known as “The Hague Rules”.

The letter of credit usually requires evidence that the shipment is insured, either by the buyer or the seller. Marine insurance is a very specialized business. The prime risk, of course, is that the ship may sink and the cargo lost completely. Or pipes may leak, rupture, or sweat and thus damage the cargo. The vessel and cargo may also be damaged at an intermediate port during a strike, riot, or other civil commotion.

There is also the principle of maritime law which states that all of those who put cargo on board a vessel are joined in a common venture. If the vessel encounters a storm at sea and is in danger of sinking, the captain may decide to lighten the vessel by jettisoning cargo. If the vessel then survives and arrives at port, each shipper whose cargo arrives safely is assessed a common fee to reimburse those shippers whose cargo was jettisoned. This procedure is called general average, and it can be insured against.

The letter of credit specifies whether the order is to be shipped as a unit or whether partial shipments are permitted. It likewise indicates whether the goods must go from the exporting port to the importing port on one vessel or whether transshipment at some intermediate port is permitted. The buyer may take a risk by permitting this, since the cargo must await another vessel and serious delays may occur.

The letter of credit specifies the latest date, the expiration date, on which the documents can be presented. The shipment may take place at any time prior to that, but as soon as it does, the shipper must assemble the documents promptly and forward them to the bank. If he delays, the documents can be considered stale, and the bank can refuse to pay him.

Once the seller has made the shipment, he assembles the documents, prepares the draft drawn on the issuing bank, and presents it for payment.

Banks deal only in documents. They have no legal obligation to inspect the actual merchandise. If the buyer discovers that the merchandise has been mislabeled or the cartons are empty, he must sue the seller, not the bank.

The letter of credit negotiator must be extremely careful in his examination of the documents, since the bank pays the seller only when he complies with the terms in the letter of credit.

In order to promote worldwide uniformity of practices and terminology, the major trading countries have agreed on certain definitions and rules for the letters of credit. This is stated on the face of the letter of credit in the sentence, “This credit is subject to the Uniform Customs and Practice for Documentary Credits (1974 revision), International Chamber of Commerce Publication 290”. As a consequence, a bank can easily negotiate a foreign bank’s credits.

Once the documents are verified, the bank pays the sight draft presented by the seller and then notifies its customer, the buyer, that the documents have been successfully negotiated and that he must pay the bank in accordance with his application. After the payment has been completed, the bank releases the documents to the buyer, retaining only such copies as are needed for its files. The buyer now has the bill of lading, which he can present to the shipping company to receive his goods.

 

 

Assignments

I. Answer the questions.

1. What is the most widely used instrument of international banking?

2. When does an international trading transaction begin?

3. What does the letter of credit specify?

4. What does the amount of the letter of credit depend on?

5. What do “The Hague Rules” deal with?

6. What evidence does the letter of credit usually require?

7. What is the principal of maritime law?

II. Translate the following sentences into Ukrainian. Put questions to any two of them.

1. The letter of credit has had a long and successful history as a means of facilitating international trade, particularly during times of economic and political uncertainty.

2. The letter of credit protects the buyer, for he knows that he will not be called upon for payment by his bank until the evidence shows that the shipment has actually been effected.

3. The seller then assembles the goods, prepares the documents to be submitted, and makes the shipment.

4. A typical letter of credit may call for the following documents: an invoice, a bill of lading, marine insurance, a packing list, a weight list, an inspection certificate, and a certificate of origin (a consular statement of the country of origin).

5. Banks deal only in documents and have no legal obligation to inspect the actual merchandise.

III. Translate the following sentences into English.

1. Акредитив – це найпоширеніший інструмент міжнародної банківської справи.

2. Якщо ціни котуються ФОБ, покупець повинен оплатити лише витрати (фрахтові та страхові), необхідні для завантаження товарів на борт судна; фрахт та страховка відтоді мають сплачуватися покупцем.

3. Якщо ціни котуються СІФ, покупець повинен передплатити фрахтові та страхові витрати до порту доставки.

4. Вантажна накладна на перевезення морським шляхом часто вважається найважливішим документом, який вимагається за акредитивом.

5. Якщо покупець з’ясовує, що товар неправильно маркований або упаковка є порожньою, він повинен висувати позов продавцю, а не банку.

IV. Name the following definitions.

1. The bank instrument that assures the person selling merchandise of payment if he makes the agreed-upon shipment.

2. If the price is quoted to be this, then the seller is obliged to pay only the charges (freight and insurance) necessary to put the goods on board the vessel; freight and insurance from then on are to be paid by the buyer.

3. If the price is quoted to be this, then the seller must prepay the freight and insurance costs to the delivery port.

V. Find in the text and translate all sentences with Infinitives; define functions of the Infinitives (a subject, attribute, object, adverbial modifier, part of a predicate).

VI. Make sentences with the Complex Subject / Complex Object basing on the text.

VII. Sum up what the text says about the letter of credit.

Text 7

Warm-up

1. Translate the following word combinations: letter of credit, underlying contract, specified time, to draw funds, partial shipments, to comply with regulations, foreign subsidiary, parent company, to go out of business, to fit the needs of the customer, at the buyer’s request.

 

 

Vocabulary

beneficiary – бенефіціарій, вигодонабувач; бенефициарий; прибылеполучатель

sight letter of credit – вексельний акредитив; вексельный аккредитив

revocable letter of credit – відзивний акредитив; отзывный аккредитив

irrevocable letter of credit – безвідзивний акредитив; безотзывный аккредитив

acceptance – акцептування, прийняття; акцептирование, принятие

deferred letter of credit – відстрочений акредитив; отсроченный аккредитив

red clause letter of credit – акредитив з червоною умовою; аккредитив с красным условием

transferable letter of credit – переказний акредитив; переводной аккредитив (с правом передачи)

revolving letter of credit – револьверний акредитив; револьверный аккредитив

back-to-back letter of credit – компенсаційний акредитив; компенсационный аккредитив

standby letter of credit – акредитив стендбай (резервний); аккредитив стендбай (резервный)

promissory note – простий вексель; простой вексель

statement – витяг з банківського рахунку; выписка из банковского счета

advised letter of credit – акредитив з повідомленням (гарантією); аккредитив с извещением (гарантией)

confirmed letter of credit – підтверджений акредитив; подтвержденный аккредитив

be amended – бути переглянутим; быть пересмотренным

be cancelled – бути скасованим; быть отмененным

usance draft payable – тратта з оплатою у зазначені торговельним звичаєм терміни; тратта с оплатой в указанные торговым обычаем сроки

negotiate – тут: передавати; здесь: передавать

accept the draft – акцептувати тратту; акцептировать тратту

banker’s acceptance – банківський акцепт, акцептований банком вексель; банковский акцепт, акцептированный банком вексель

maturity – строк погашення; срок погашения

discounted amount – дисконтна сума; дисконтная сумма

usance – узансна; узансная

receipt – розписка про отримання; расписка о получении

trust receipt – зберігальна розписка; сберегательная расписка

transferee – індоссат, правонабувач; индоссат, правополучатель

proviso – умова; условие

be reinstated – поновлювати (у правах); восстанавливать (в правах)

advance – аванс, підвищення; аванс, повышение

agent’s fee – плата за послуги; плата за услуги

credit standing – кредитоспроможність; кредитоспособность

principal – комітент; комитент, основной капитал

bond – боргове зобов’язання; долговое обязательство

honour the draft – акцептувати тратту; акцептировать тратту

draw on – тут: використовувати; здесь: использовать

 



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