If viewed based on Article 1 number 2 of Minister of Trade Regulation 94/2018 , a letter of credit is a credit or credit notification issued by a foreign exchange bank ( opening bank / issuing bank ) at the request of the importer who is its customer and addressed to the exporter as beneficiary through its correspondent bank ( advising bank ) abroad. However, now Permendag 94/2018 has been revoked by Permendag 33/2023 . Article 1 point 29 of Minister of Finance Regulation 1/2024 explains that an L/C is a written promise from the L/C issuing bank (issuing bank) acting at the request of the applicant (applicant) or on his own behalf to make payments to a third party or exporter or the exporter’s attorney (party appointed by the beneficiary/supplier) as long as it meets the L/C requirements.
L/C payment system, the bank acts as an intermediary to obtain payment from the importer after the exporter submits the required documents and the bank is responsible for matters relating to the documents and contents of the L/C. The exporter can ensure that payment for the goods will be paid by the bank appointed by the importer as long as the required documents are met and the importer can ensure that the exporter can only receive payment after the required documents are met. different from other foreign trade payment systems, namely documentary collection which is regulated in Uniform Rules for Collections (URC) 522. In the documentary collection payment system the bank does not play an active role in confirming documents submitted to it, so all risks related to documents are not the responsibility of the bank . One example of a risk that can occur is the bank issuing payment documents even though there has been no payment from the importer, thereby causing losses to the exporter.
documentary collection payment system tends to be easier than the L/C payment system because fewer documents are required and the fees charged by the bank tend to be cheaper than L/C. However, in this payment system, banks only act as intermediaries or payment collectors, not as payment guarantors.
L/C is a safer payment method than documentary collection because the bank acts as a guarantor. Meanwhile, in the documentary collection ,The bank only acts as a collector so the bank is not responsible for payment failures that occur. The L/C payment method helps exporters avoid the risk of default because of a guarantee from the bank.
Legal basis :
Minister of Finance Regulation Number 1 of 2024 concerning Procedures for Payment of Agreements in Foreign Currency whose Funds are Sourced from Pure Rupiah;
References:
- Martin Suryana, et al. The Existence of Business Law in Indonesia. Critical Notes in the Period & Post COVID-19 Pandemic, Jakarta: Genta Publishing, 2023 .
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