Back-to-Back Documentary Credits

A back-to-back documentary credit is opened at the request of an exporter who is the beneficiary of an export documentary credit (master credit).
When the beneficiary of an export credit applies for a back-to-back credit, he assumes the role of a middleman between the actual supplier of the goods and the ultimate buyer.
The advantage of this type of credit is that it allows the middleman who may have limited financial resources, to buy goods from a supplier who would only sell on documentary credit terms. The middleman opens the documentary credit in favor of the seller for a smaller amount than the master credit. The difference between the master credit amount and the back-to-back credit is the middleman’s profit.
In back-to-back credit operations, the shipping documents tendered by the supplier are usually used by the middleman who secures payment under the export.  Documents that are submitted by the middleman would be the invoices and bill of exchange.  Also is helps the middleman not to disclose the supplier of the goods to the final buyer and vice versa. Otherwise, if the buyer knew the supplier, he would cut the middleman out of the transaction.
Requirements of the back-to-back credit differ from the master credit in the following areas:
The value of the back-to-back credit is less than that of the master credit.
Latest shipment date and expiry date on the back-to-back credit are earlier than those specified in the master credit.
The period allowed for presentation of documents is usually at least 7 days less than that allowed in the master credit.
Back-to-back credits are normally stated to expire at the counter of the issuing branch.
The main reason for this is to allow the middleman enough time to prepare his documents for presentation under the master credit. This is also required by the issuing bank of the back-to-back credit to have time to check the documents submitted by the supplier.
Banks open back-to-back credits only if they are satisfied that the terms and conditions of the master credit can be fully met by the beneficiary.
Consideration on opening:
Although a back-to-back credit is issued against security in the form of the master credit, there can be some disadvantages from the issuing bank’s point of view:
Amendments: If the master credit is not advised through the bank issuing the back-to-back credit, the issuing bank would not have control of subsequent amendments. In such cases, if the beneficiary does not notify the issuing bank on any change in the terms and conditions of the master credit, the issuing bank will run the risk that the terms and conditions of the back-to-back credit would not be identical with those of the amended master credit.
Discrepancies: Documents received under the issuing bank’s credit might bear discrepancies which the issuing bank’s customer will not accept.
Acts of God: The master credit might have expired before the arrival of documents under the back-to-back credit, for various reasons such as postal delay and delay in substituting invoices. In this case the back-to-back credit has to be paid by the issuing bank, while the master credit cannot be negotiated because of the non-compliance with master credit terms (unless the applicant of the master credit allows it). However, back-to-back credit expires at the counter of the issuing branch to reduce the possibility of this type of occurrence.
Insolvency of the back-to-back credit applicant: In this case, the issuing bank, after settling the back-to-back credit opened, would be unable to complete the second part of the transaction of substituting invoices for negotiation under the master credit. However, a power of attorney which is completed by the back-to-back credit applicant, gives the bank absolute power of substitute invoices and to draw and issue drafts under the master credit on behalf of the back-to-back credit applicant (it does not give absolute protection because the sales contract signed between the back-to-back credit applicant and the buyer would not show the bank’s involvement).


 
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