5. The American banker is likely to extend dollar credits more readily and quickly and with better adaptation to needs than he will foreign currency credits, which can be opened only according to prearranged negotiations with foreign correspondents and always with extreme care to maintain his credit rating with his correspondent.
In addition to the consideration of profit other factors such as advertising, prestige, etc., influence the bank in issuing dollar rather than foreign currency credits.
Terms of Issue The terms of issue are stated in a signed agreement attached to the letter of credit. Under such agreement the taker agrees: . To place with the bank funds sufficient to cover the draft and the commission at a certain per cent, f day if it is a dollar credit or, say, 12 days if it is a foreign credit, before maturity of the accepted drafts.
2. To insure in a company satisfactory to the bank at his own expense, for the bank's benefit, against risk of fire or sea, all goods purchased or shipped pursuant to the letter of credit. , 3. To put in the bank's name title to all property purchased or shipped under the credit until the bills as well as any other due indebtedness are paid, and to authorize the bank to take possession of the goods and dispose of them to best advantage and to charge all expense to the customer.
4. To provide additional security if the market value of the merchandise depreciates below an amount sufficient to cover the acceptance plus commission and interest.
5. To provide collateral of stocks, bonds, warehouse receipts, or other security satisfactory to the bank in case the bank surrenders the documents representing the goods against trust receipt, to be held until the terms of the credit have been fully satisfied.
Other clauses are introduced as to responsibility for errors in cabling, continuance of the obligations despite changes in the composition of the parties to the agreement or in the user of the credit, and the correctness or genuineness of the documents.
The three common conditions under which a bank will under take to issue such credits and bind itself to accept drafts under them are: 1. On the unsecured promise of the applicant to place with the bank proper and full funds before maturity of the several drafts drawn and accepted.
2. On like promise of the applicant, but secured by pledge of securities.
3. Under guaranty by a third party of acceptable character that the applicant will keep his promise.
Factors to be Considered in Arranging a Commercial Credit Obviously, the credit title of the applicant is the chief factor in deciding under which arrangement the credit will be issued. Before a bank issues a letter of credit it must satisfy itself that the moral and financial standing of the applicant warrants the extension of a commercial credit, for it involves the granting of credit secured by merchandise in transit; and since the value of this security may fluctuate widely during the period of the drafts drawn under the credit, the bank must weigh not only the kind of merchandise to be shipped but also the credit title of the appli cant. Bankers dislike to go to court and seek to recover by legal process from the merchandise security, or even from the customer, the payments made under acceptances.
A line of credit is generally extended for commercial credits only, distinct from the line that covers loans and discounts; but the extension of such a line does not always mean that the bank will deliver documents to the applicants up to the full amount.
When documents are delivered on acceptance, the bill becomes an unsecured credit instrument. The drawer and first discounter of the bill, therefore, consider the credit standing of the drawee and acceptor, to whom they look for payment of the draft; and the credit grantor considers this fact also, when he issues the credit to the taker or establishes a line of acceptance credit for him.
The issuing banker must also know definitely the nature of the proposed transaction so that he can determine whether it will be completed within the period of the credit and is reasonably cer tain by itself to produce funds at the maturity of the draft, with which to pay the obligation assumed by the taker of the credit. He must also determine whether, under the Federal Reserve Act and the rules and regulations of the Federal Reserve Board, it is an eligible transaction for his bank. In addition he must decide whether the commission he can charge is adequate, all things considered. The rate of commission charged by different banks for the issuance of commercial credits varies according to several factors, chief among which are the credit title of the customer himself, the tenor of the drafts to be drawn under the credit, the nature of the shipments, the service done by the bank as to insur ance, etc. The rate is a matter of negotiation between bank and applicant.