Documentary credits can work as a method of loan payment

Astate policy bank has recently entered into a loan contract with a foreign natural gas development and production enterprise for the provision of a huge loan. It is agreed in the contract that the loan will be granted in instalments to the enterprise for paying contracted service fees to its contractors in China, and that prior to each payment the contractors must provide an application for payment request and a commercial invoice as set out under the loan contract. After the application and the invoice are verified by the bank, it will then pay a loan instalment in accordance with the amount specified in the application.

Based on commercial consideration, the enterprise wished to switch the above method to the use of documentary credits for receiving subsequent loan instalments. This means the enterprise has the right to request the bank to issue a documentary credit for the benefit of the contractors after the bank accepts an application from the enterprise.

Such documentary credit is subject to the restrictions in the International Chamber of Commerce (ICC) Uniform Customs and Practice for Documentary Credits Publication No. 600 (UCP). The bank should pay to the beneficiaries upon acceptance of the letter of credit.

Zhen Qinggui is a senior partner in the Beijing office at Zhonglun W&D Law Firm; Li Zheng is a partner at the firm in Beijing