Domestic enterprises, encountering foreign trade restrictions for the first time, had to restructure their supply chains, while banks followed their clients by offering new methods for settling payments under foreign trade contracts. Once this stage had passed, during the ongoing reorientation of Belarusian exports to new markets and the establishment of relationships with new trading partners, documentary banking operations became a tool to help reduce the risks of non-fulfillment of obligations by the parties involved in foreign trade transactions. Irina Chuvakhina, Director of the Documentary Operations Department at Priorbank JSC, spoke about the specific features of their application.
Documentary operations are banking financial services that facilitate settlements between parties to trade agreements and are designed to minimize various types of risk. These are not traditional bank payments, where a client submits a payment order and the bank executes the transaction accordingly. In the case of documentary operations, the bank acts as an intermediary between the seller and the buyer, using specific instruments and making payments only when certain agreed-upon conditions have been met by one of the parties.
Documentary operations include bank guarantees, letters of credit, and documentary collections.
Of course, fr om a general perspective, such operations are not considered simple. Business entities are often discouraged by the complex and unfamiliar terminology, and even more so when bank employees begin to explain in detail how a particular instrument works.
At the same time, documentary operations can resolve a wide range of issues related to the execution of foreign trade transactions, as this is precisely wh ere the risks of non-delivery of goods or non-payment for shipped products often arise.
It is also worth noting that some domestic enterprises have studied this subject quite well and have been using banking trade finance instruments in practice for a considerable time. Initially, many were compelled to use documentary operations because it was required by a foreign counterparty. Later, having studied all the nuances of this approach, they began to develop their own sales or procurement policies using banking instruments – including in the domestic market.
Documentary operations can be applied in any field of activity. The most common is the trade of goods and services, but they are also frequently used in real estate transactions, company share buyouts, construction, and many other sectors and areas.
Now, let’s take a closer look at each of the mentioned documentary operations individually.
BANK GUARANTEE
What Is It?
A bank guarantee is a security banking instrument. By issuing such a guarantee, the bank assumes a financial obligation to pay the party in whose favor the guarantee is issued, in the event that the bank’s client – who requested the guarantee – fails to fulfill their obligations under a sales contract or another type of agreement (the underlying transaction).
Distinctive Features of a Bank Guarantee
A bank guarantee is an independent financial obligation of the bank. This means that regardless of any changes to the terms of the underlying transaction or the financial condition of the client at the time the obligations are due, the bank is required to make payment under the guarantee – provided that the demand for payment is submitted in accordance with the terms of the guarantee. This is the clear advantage for the beneficiary of the bank guarantee. To receive payment, there is no need to present any court rulings, additional documents, or written explanations beyond those explicitly listed in the guarantee itself.
A bank guarantee is more cost-effective than traditional lending because the bank does not use its own financial resources until the moment of payment. Accordingly, the client does not need to pay for credit resources, interest rates, or deal with repayment.
A guarantee can secure any obligations under the underlying contract.
The most common type of bank guarantee is a payment guarantee.
A performance guarantee is also commonly used. This banking instrument secures the delivery of goods, and in the event of non-delivery, the beneficiary of the guarantee has the right to claim the amount specified in the bank guarantee to cover expenses related to the planning and procurement of the goods.
Clients also actively obtain advance payment guarantees. This is typical for enterprises that make an advance payment, while the supplier is obligated either to deliver the goods or to return the funds in the event of non-delivery. If the goods are not delivered and/or the advance is not refunded, the client has the right to request payment from the bank under such a bank guarantee.
Bank guarantees can also be issued with the involvement of a foreign bank if the counterparty of the Belarusian enterprise is located abroad. In such cases, it is common for the foreign counterparty’s servicing bank to issue the guarantee under a counter-guarantee from the Belarusian bank. This helps address trust issues in international trade, especially when different jurisdictions are involved.
When drafting a bank guarantee, the currency amount and validity period must be specified. The validity period should be sufficient to allow the beneficiary, after the expiration of the underlying obligations, to decide whether to submit a payment demand, prepare it, and present it to the guarantor bank.
What to Pay Attention To?
Before drafting a guarantee, it is essential to carefully consider which specific obligations the guarantee is intended to secure and to clearly articulate them in the text of the guarantee. At the same time, the terms of the guarantee must not contradict the terms of the underlying contract. If any changes are made to the underlying agreement, the terms of the guarantee must be adjusted accordingly. If this work is not done – i.e., if the terms of the underlying contract differ from those of the guarantee – it is clear that both the beneficiary and the client for whom the bank issued the guarantee may encounter serious problems.
LETTER OF CREDIT
What Is It?
A letter of credit is a non-cash form of payment. When a letter of credit is opened, the bank assumes a financial obligation to pay upon presentation of documents confirming that the beneficiary has fulfilled their obligations to the bank’s client, on whose behalf the letter of credit was issued.
For example, a bank client needs to pay Company X for equipment. The bank opens a letter of credit stating that it will pay the supplier a specified amount in a specified currency upon presentation of an invoice showing the value of the equipment, transport documents confirming shipment, and other documents listed in the letter of credit – such as an insurance certificate or a certificate of origin.
Upon receiving the documents, the bank checks them for compliance with the terms of the letter of credit. If they meet the requirements, the bank makes the payment. If not, the bank refuses to pay until it receives the client’s consent to proceed.
A letter of credit can be either covered or uncovered. In a covered letter of credit, the client immediately transfers funds to the bank, which are blocked until payment is made. An uncovered letter of credit means the client provides the funds only when the required documents are received and payment is due.
Distinctive Features of a Letter of Credit
The essence of a letter of credit lies in the fact that, just like with a bank guarantee, the bank assumes financial obligations to the beneficiary of the letter of credit –regardless of whether the client provides the funds or not. If the client fails to provide the funds, or if the funds are seized by the tax authorities to cover debts, the bank still pays the supplier using its own financial resources. This is the key benefit for the supplier. For the bank’s client, the letter of credit is advantageous because the business entity does not make an advance payment – it pays only when the shipment has taken place and the supporting documents have been submitted to the bank.
What to Pay Attention To?
When opening a letter of credit, it is essential to clearly define the conditions for payment and specify the set of documents to be submitted to the bank as proof of shipment or delivery. These details must align with the terms of the sales contract as well as the delivery conditions under Incoterms. It often happens that the Incoterms delivery terms say one thing, while the documents required under the letter of credit say another – resulting in inconsistencies and misalignment.
To ensure the transaction is successfully completed, it is important to consider the planned shipment date, the time needed to collect and submit the documents to the bank, and the expected payment period.
DOCUMENTARY COLLECTION
What Is It?
Documentary collection is very similar to a letter of credit. The key difference is that documentary collection does not constitute a financial obligation on the part of the bank. In other words, regardless of whether the client has the funds or not, the bank is not obligated to make any payment. It merely acts as an intermediary.
Let’s look at how documentary collection works through an example.
An exporter ships goods to another country. The cargo travels by sea, and for such transportation, bills of lading are issued – these are documents of title. Whoever holds the original bill of lading has control over the cargo.
The exporter collects the necessary documents and submits them to their bank under a documentary collection arrangement, with the condition that the documents will be handed over to the buyer only upon payment. The bank accepts the client’s application, checks the completeness of the documents, and sends them along with a cover letter to the buyer’s bank by mail. Until the buyer makes the payment, they will not receive the documents and therefore cannot take possession of the goods.
Distinctive Features of Documentary Collection
The main advantage for the client initiating a documentary collection is the control over the flow of documents through the bank. For the counterparty, the benefit lies in payment for the goods in exchange for the documents of title.
Clients of Priorbank actively use documentary collection when trading with countries in Southeast Asia. There is also experience working with African nations.
This banking instrument is especially useful when the buyer is unable to open a letter of credit. As a result, when choosing between payment upon delivery and a letter of credit, documentary collection can serve as an intermediate solution.
What to Pay Attention To?
Since all documents in a documentary collection are sent in paper form, the bank involved in such a transaction must realistically assess its ability to deliver the documents to the destination country, as well as take into account delivery timeframes.
Like letters of credit and guarantees, documentary collections are governed by international rules established by the International Chamber of Commerce (ICC). All participants in a documentary transaction – both banks and their clients – are required to follow these rules when they are applied to the operation. Therefore, despite differences in national laws and approaches to international trade, documentary operations follow common, standardized rules and practices that are continuously refined in response to the evolution of global commerce.
Timely Changes
Given that documentary operations remain complex and not fully understood by many businesses, banks must regularly and thoroughly educate their clients on this topic.
Educational programs are being developed by the Association of Trade Finance Professionals, established in 2023 in Minsk. Companies need to be shown, through real-life examples, the competitive financial advantages of using documentary instruments and how these tools meet specific business needs.
Belarusian banks are actively following their clients and responding promptly to the demands of the time. Last year, our Association – which includes six banks from the Republic of Belarus – was accepted as a member of the International Chamber of Commerce (ICC). This gave us the opportunity to participate in ICC Banking Commission meetings, allowing us to receive timely updates on global changes in documentary operations and to hear the ICC’s position on contentious issues.
The National Bank of the Republic of Belarus, the country’s financial regulator, also closely monitors the financial market. It listens attentively to the needs of domestic banks, analyzes operational challenges, and considers necessary innovations. Representatives of the National Bank are frequent participants in the Association’s meetings – either joining discussions on specific issues or presenting concrete initiatives.
To keep pace with the times, Belarusian banks must unite their efforts in developing trade finance, jointly discuss challenges, and formulate solutions. The doors of our Association are open to all banking institutions in Belarus. In the future, our roundtable colleagues may also include the country’s largest exporters and importers, as well as legal firms, because hearing diverse perspectives – on time—is just as important.
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