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Commercial Banking

Letter
Of
Credit
Documentary Letter of Credit

A letter of Credit is a
commitment on the part of
buyer bank to pay or accept
draft drawn upon it provided
draft do not exceed a
specified amount.
Factors involved in International
Business
• The exporter are uncertain of the importers
capacity to pay.
• The importer hesitate to pay until goods are
shipped.
• In case of non-payment exporter need legal
course for recovery.
• There should be an intermediately to act
between importers and exporters.
Commercial Bank Role
• It help the exporters and importers of goods.
• It provided the documentary link between
the two parties of trade.
• It give confidence and guarantee on the
payment and shipment activities.
• It brings the confidence between the
importers and exports.
• The importers and exporters bank can
undertake the obligation to pay to the
exports for the purchase made by the
importers and this is usually done
through Letter of credit.
• Letter of Credit is a kind of agreement
for trade in which the commercial
bank remain as the guarantor of the
two parties of the trading.
• Letter of Credit is issued by the importers bank.
• Guarantee Payment to the exporters upto
specified amount provided in the terms and
condition of L/c.
• Letter of Credit is a document issued by
importing country bank in favor of exporting
country bank under international law of trading
known as UNIFORM CUSTOM & PRACTICE.
• Letter of Credit is a kind of cheque issued on
behalf of importers and in favor of exporters to
honor the payment mentioned in the L/c.
Four parties involvement

Account Party 1
The buyer or the importer on whose
account and request the letter of credit
is opened.
Issuing Bank

• The bank which issue or


opens a letter of credit at
the request of the
importer
Exporter or Seller
The seller or the party in whose
favor the Letter of Credit is
drawn is the third party and
known as
Beneficiary
Paying or Negotiating Bank
The paying bank in the exporters
country on which the draft is
drawn is called the
PAYING
OR
NEGOTATING BANK
Opening of Letter of Credit
Application for a Letter of Credit
The first step in financing under an importer letter
of credit
The importer has to prepare the application on
prescribe bank form giving details of his
request.
The information should be based on the invoice
issued by the exporter.
Security of the application

• Bank secure the application value by a


collateral or cover against risk.
• The bank examine the details of request as
well the capacity of the importer as well as
credibility of exporter
• Bank give line of credit to the importer to
avail the facility.
Margin

• The importer is asked by the


banker to deposit with the bank
in the form of cash or securities
proper margin depending upon
his credit worthiness.
• Opening of Letter of Credit
• Handling of the Documents
• Payment by the importers
• Liability of issuing bank
Types of Letter of Credit
• Irrevocable
• Revocable
• Confirm
• Unconfirmed
• Clean Letter of Credit
• Fixed Credit
• Revolving Letter of Credit

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