How the letter of credit operates Letter of credit: It is a negotiable instrument used by the finnacial institution,used primarily in trade

finance.it signifies that redeeming the letter of credit will pay an exporter. Types of L/C: a) Sight l/c: In this kind of l/c,beneficiary is paid as soon as the paying bank has determined that all necessary documents are in order. b) Usance l/c:Under it, its a kind of delayed payment and the usance time is provided of 120 days. Now a days almost, all the l/cs are irrevocable and non-transferable. Involvement of banks: Applicant bank:The buyers bank Beneficiary bank:the sellers bank Advising bank:it helps the beneficiary to use the L/C. Confirming bank:confirms the l/c Negotiating bank:The bankwho examines and negotiates the document. The beneficiary bank can also play the role of confirming and negotiating bank. Working: if a buyer(say,STC) wants to buy or import any commodity(pulses),then the procedure is as under.. 1.To obtain a PBG(performance bank guarantee),which is 5% of total contract value. 2.To enter into the contract with the seller. 3.To get the import permit (license to imort) from govt. of india. 4.To get the commodity(pulses) insured against any damages,short qty. etc. 5.Now,to generate the letter of credit. The letter of credit will be generated by the buyer,then the buyer goes to the applicant bank. 1.The applicant bank (buyers bank) issues the letter of credit to the beneficiary bank(sellers bank). 2.In case,the beneficiary bank doesnt have the SWIFT(society for worldwide interbank financial telecommunication) facility with the applicant bank.Then,the advisory bank comes in between the two and advises the L/C to applicant bank on behalf on beneficiary bank. 3.the beneficiary bank gets the l/c and then examine all the terms and conditions stated in the L/C and approves it in order to receive the payment from buyer.if ,the seller finds any of the clauses unsatisfied or not as per his ability to fulfill it,then he directly asks the buyer for its amendment and the amended l/c again gets circulated in the same manner as above. 4.sometimes,another bank does the tasks of examining and authentication of the documents and charges in return of performing the authentication taks.such bank is called as negotiating bank. 5.also if the seller wants to get the l/c confirmed from other bank,then whosoever confirms the L/C is called the confirming bank.