P. 1
Standby Letter of Credit

Standby Letter of Credit

|Views: 7|Likes:
Published by Bilal Awan
MBA project Muhammad Bilal
MBA project Muhammad Bilal

More info:

Categories:Types, Research
Published by: Bilal Awan on Nov 06, 2011
Copyright:Attribution Non-commercial


Read on Scribd mobile: iPhone, iPad and Android.
download as DOCX, PDF, TXT or read online from Scribd
See more
See less






Standby |etter of cred|t

¡eLLers oI CredIL Iuve been u cornersLone oIInLernuLIonuI Lrude duLIng buck Lo LIe eurIy 1qoos.
ConLInue Lo pIuy u crILIcuI roIe In worId Lrude Loduy. ¡or uny compuny enLerIng LIe InLernuLIonuI
murkeL, ¡eLLer oI credIL Is un ImporLunL puymenL mecIunIsm wIIcI eIImInuLes cerLuIn rIsks.
A SLundby ¡eLLer oI CredIL (cuIIed¨S¡C or ¨¡C¨ ) ure wrILLen obIIguLIons oI un IssuIng bunk Lo puy
u sum oI money Lo u beneIIcIury on beIuII oI LIeIr cusLomer In LIe evenL LIuL LIe cusLomer does
noL puy LIe beneIIcIury. ¡L Is ImporLunL Lo noLe LIuL sLundby IeLLers oI credIL uppIy onIy
wIenever LIe IssuIng bunk`s commILmenL Lo puy Is noL conLIngenL on LIe exIsLence, vuIIdILy und
enIorceubIIILy oI IL`s cusLomer`s obIIguLIon; LIIs Is cuIIed un ¨ubsLrucL¨ guurunLee; LIuL Is, LIe
bunk`s obIIguLIon Is Lo puy regurdIess oI uny dIspuLes beLween ILs cusLomer und LIe beneIIcIury.
TIe Issuunce oI IeLLers oI credIL Is u prIvuLe LrunsucLIon und does noL resuIL In LIe Issuunce oI
uny pubIIc LrudIng securILIes.
SLundby ¡eLLer oI CredIL Is u IeLLer oI credIL wIIcI u bunk Issues on beIuII oI ILs cusLomer Lo
serve us u guurunLee Lo LIe beneIIcIury oI LIe IeLLer oI credIL LIuL LIe bunk's cusLomer wIII
perIorm u specIIIed conLrucL wILI LIe beneIIcIury. ¡I LIe cusLomer deIuuILs, LIe beneIIcIury muy
druw Iunds uguInsL LIe IeLLer oI credIL us penuILIes or us puymenLs, wIIcIever LIe Lerms oI LIe
credIL provIde.
TIe busIs oI u SLundby ¡eLLer oI CredIL Is LIuL IL muy be druwn on by LIe BeneIIcIury wIen LIe
AppIIcunL (Buyer) Ius IuIIed Lo perIorm In uccordunce wILI LIe underIyIng conLrucL beLween LIe
AppIIcunL und BeneIIcIury.
¡n sImpIe Lerms, u SLundby ¡eLLer oI CredIL Is ¨sLundIng by¨ Lo proLecL LIe BeneIIcIury In cuse LIe
AppIIcunL deIuuILs on un ugreed-upon conLrucL. SLundby ¡eLLers oI CredIL ure eILIer governed by
LIe UnIIorms CusLoms und PrucLIce Ior DocumenLury CredIL (UCP) or LIe ¡nLernuLIonuI SLundby
PrucLIce (¡SP) ruIes. UnIIke u DocumenLury ¡eLLer oI CredIL, LIe usuuI documenLs cuIIed Ior
under u SLundby ¡eLLer oI CredIL ure no more LIun u wrILLen demund (or sIgIL druIL) Irom LIe
BeneIIcIury, uccompunIed by ILs sLuLemenL LIuL LIe AppIIcunL Ius deIuuILed In perIormunce oI

LIe ugreed-upon conLrucL. Becuuse LIe documenLs ure mucI Iess sLrIngenL, LIe rIsk oI u SLundby
¡eLLer oI CredIL resLs more IeuvIIy on LIe AppIIcunL LIun LIe BeneIIcIury. A SLundby ¡eLLer oI
CredIL, LIereIore, sIouId be Issued onIy wIen LIe AppIIcunL Ius no doubL us Lo LIe
LrusLworLIIness und InLegrILy oI LIe BeneIIcIury.
SLundby ¡eLLers oI CredILs ure used In u vurIeLy oI Iorms. MosL commonIy LIey ure used Ior BId
Bonds, PerIormunce Bonds, Advunce PuymenL GuurunLees, WurrunLy Bonds, und Lo secure
IInuncIuI obIIguLIons oI obIIgors. OILen suppIIers usk LIeIr buyers Lo provIde SLundby ¡eLLers oI
CredILs us securILy Ior goods soId on open uccounL. A ¡esser muy requesL u SLundby ¡eLLer oI
CredIL Irom u ¡essee Lo cover Ieuse obIIguLIons. TIese ure some oI exumpIes oI SLundby ¡eLLer oI
CredILs und, In LIe evenL oI u deIuuIL, LIe beneIIcIury couId demund puymenL Irom LIe IssuIng
bunk oI LIe SLundby ¡eLLer oI CredIL. ¡L Is uIso ImporLunL Lo recognIze LIe dIsLIncLIon beLween
GuurunLees und SLundby ¡eLLers oI CredILs. BoLI SLundby ¡eLLer oI CredILs und GuurunLees
obIIguLe LIe ¡ssuIng Bunk Lo muke puymenL Lo u beneIIcIury In LIe evenL oI u deIuuIL. However,
LIe dIsLIncLIon Is uLLrIbuLubIe Lo LIe ruIes und Iuws under wIIcI eucI InsLrumenL Is Issued.
TypIcuIIy GuurunLees ure Issued subjecL Lo IocuI Iuws wIIIe SLundby ¡eLLers oI CredILs ure Issued
subjecL Lo UnIIorm CusLoms und PrucLIce RuIes or ¡nLernuLIonuI SLundby PrucLIce RuIes
The foIIowing exampIe iIIustrates the use of a Standby Letter of Credit.
A Canadian shoe importer, Best Shoes Ìmporter Ìnc., has signed a one-year contract with a supplier in Brazil,
Brazilian Shoes Supplier Ìnc., agreeing to purchase on open account leather shoes valued at CAD $30,000/month.
Under the open account arrangement, payment must be made 30 days after the invoice date. To guarantee
payment by Best Shoes Ìmporter Ìnc., Brazilian Shoes Supplier Ìnc. requires that an Ìrrevocable Standby Letter of
Credit with an expiry date of one year from the date of issue be issued in its favor for CAD $30,000.
9art|es to the standby |etter of cred|tť
1) 1he App||cantť
1hls ls Lhe cusLomer of Lhe bank who applles Lo Lhe bank for Lhe sLandby leLLer of credlLŦ Pe musL
provlde collaLeral Lo Lhe bank or have sufflclenL credlL Lo lnduce Lhe bank Lo lssue Lhe lnsLrumenLŦ Pe also musL
pay Lhe bank a fee for lssulng Lhe lnsLrumenLŦ
(2) 1he Issu|ng 8ankť

1hls ls Lhe appllcanL's bank LhaL lssues Lhe sLandby leLLer of credlLŦ
(3) 1he 8enef|c|aryť
1hls ls Lhe parLy ln whose favor Lhe lnsLrumenL ls lssuedŦ

(4) Conf|rm|ng 8ankť
1hls ls a bank (usually locaLed near Lhe beneflclary) LhaL agrees (conflrms) Lo pay Lhe beneflclary raLher
Lhan have Lhe lssulng bank pay Lhe beneflclaryŦ 1he beneflclary pays Lhe Conflrmlng 8ank a fee for Lhls
convenlenceŦ 1he Conflrmlng 8ank Lhen collecLs from Lhe lssulng 8ank Lhe amounL pald Lo Lhe beneflclaryŦ
(S) Adv|s|ng 8ankť
1hls ls Lhe bank LhaL represenLs Lhe beneflclaryŦ lL may accepL Lhe leLLer of credlL on behalf of Lhe beneflclary and
collecL on lL on behalf of Lhe beneflclaryŦ ln order for Lhe LransacLlon Lo be a bankŴLoŴbank LransacLlonţ Lhe
advlslng bank works for Lhe beneflclary Lo keep Lhe lnsLrumenL ln Lhe banklng sysLemŦ SomeLlmes Lhe
Advlslng 8ank also ls Lhe Conflrmlng 8ankţ buL noL alwaysŦ

1ypes of standby |ettersť
1he Lypes of sLandby leLLers of credlL are dlscussed belowť

(1) 9erformance Standbyť
1hls lnsLrumenL supporLs an obllgaLlon Lo perform oLher Lhan Lo pay money
lncludlng Lhe purpose of coverlng losses arlslng from a defaulL of Lhe appllcanL ln compleLlon of Lhe underlylng

(2) Advance 9ayment Standbyť
1hls lnsLrumenL supporLs an obllgaLlon Lo accounL for an advance paymenL made by
Lhe beneflclary Lo Lhe appllcanLŦ

(3) 8|d 8ond]1ender Standbyť

1hls sLandby supporLs an obllgaLlon of Lhe appllcanL Lo execuLe a conLracL lf Lhe
appllcanL ls awarded a bldŦ

(4) Counter Standbyť
1hls lnsLrumenL supporLs Lhe lssuance of a separaLe sLandby or oLher underLaklng by
Lhe beneflclary of Lhe counLer sLandbyŦ

(S) D|rect 9ay Standbyť
1hls lnsLrumenL serves Lo supporL paymenL when due of an underlylng paymenL
obllgaLlon Lyplcally ln connecLlon wlLh a flnanclal sLandby wlLhouL regard Lo defaulLŦ 1hls sLandby ls also used Lo
dlrecLly pay an obllgaLlon where Lhe only condlLlons of paymenL are Lhe passage of Lhe Lerm and presenLmenL of

(6) Insurance Standbyť
1hls lnsLrumenL ls an lnsurance or relnsurance obllgaLlon of Lhe appllcanLŦ
(7) Commerc|a| Standbyť
1hls ls Lhe mosL used sLandby and lL supporLs Lhe obllgaLlons of an appllcanL Lo pay for
goods or servlces ln Lhe evenL of nonŴpaymenL by a buslness debLorŦ

Descr|pt|on of a typ|ca| Letter of Cred|t transact|onť

1Ŧ An lmporLer (8uyer) and LxporLer (Seller) agree on a purchase and sale of goods where paymenL ls made by
LeLLer of CredlLŦ


2Ŧ 1he lmporLer compleLes an appllcaLlon requesLlng lLs bank (lssulng 8ank) Lo lssue a LeLLer of CredlL ln favor of
Lhe LxporLerŦ noLe LhaL Lhe lmporLer musL have a llne of credlL wlLh Lhe lssulng 8ank ln order Lo requesL LhaL a
LeLLer of CredlL be lssuedŦ
3Ŧ 1he lssulng 8ank lssues Lhe LeLLer of CredlL and sends lL Lo Lhe Advlslng 8ank by LelecommunlcaLlon or
reglsLered mall ln accordance wlLh Lhe lmporLer's lnsLrucLlonsŦ A requesL may be lncluded for Lhe Advlslng 8ank Lo
add lLs conflrmaLlon
4Ŧ 1he Advlslng 8ank wlll verlfy Lhe LeLLer of CredlL for auLhenLlclLy and send a copy Lo Lhe LxporLerŦ
SŦ 1he LxporLer examlnes Lhe LeLLer of CredlL Lo ensure
a) lL corresponds Lo Lhe Lerms and condlLlons ln Lhe purchase and sale agreemenLŤ
b) uocumenLs sLlpulaLed ln Lhe LeLLer of CredlL can be producedŤ and
c) 1he Lerms and condlLlons of Lhe LeLLer of CredlL may be fulfllledŦ
6Ŧ lf Lhe LxporLer ls unable Lo comply wlLh any Lerm or condlLlon of Lhe LeLLer of CredlL or lf Lhe LeLLer of CredlL
dlffers from Lhe purchase and sale agreemenLţ Lhe LxporLer should lmmedlaLely noLlfy Lhe lmporLer and requesL
an amendmenL Lo Lhe LeLLer of CredlLŦ
7Ŧ When all parLles agree Lo Lhe amendmenLsţ Lhey are lncorporaLed lnLo Lhe Lerms of Lhe LeLLer of CredlL and
advlsed Lo Lhe LxporLer Lhrough Lhe Advlslng 8ankŦ lL ls recommended LhaL Lhe LxporLer does noL make any
shlpmenLs agalnsL Lhe LeLLer of CredlL unLll Lhe requlred amendmenLs have been recelvedŦ
8Ŧ 1he LxporLer arranges for shlpmenL of Lhe goodsţ prepares and/or obLalns Lhe documenLs speclfled ln Lhe
LeLLer of CredlL and makes demand under Lhe LeLLer of CredlL by presenLlng Lhe documenLs wlLhln Lhe sLaLed
perlod and before Lhe explry daLe Lo Lhe ºavallable wlLh" 8ankŦ 1hls may be Lhe Advlslng/Conflrmlng 8ankŦ 1haL
bank checks Lhe documenLs agalnsL Lhe LeLLer of CredlL and forwards Lhem Lo Lhe lssulng 8ankŦ 1he drawlng ls
negoLlaLedţ pald or accepLed as Lhe case may beŦ
9Ŧ 1he lssulng 8ank examlnes Lhe documenLs Lo ensure Lhey comply wlLh Lhe LeLLer of CredlL Lerms and
condlLlonsŦ 1he lssulng 8ank obLalns paymenL from Lhe lmporLer for paymenL already made Lo Lhe ºavallable
wlLh" or Lhe Conflrmlng 8ankŦ
10Ŧ uocumenLs are dellvered Lo Lhe lmporLer Lo allow Lhem Lo Lake possesslon of Lhe goods from Lhe LransporL
companyŦ 1he Lrade cycle ls compleLe as Lhe lmporLer has recelved lLs goods and Lhe LxporLerhas obLalned

Case Study

8ank Alfalah LlmlLed ls a prlvaLe bank ln ÞaklsLan owned by Lhe Abu uhabl CroupŦ 8ank Alfalah was lncorporaLed
on !une 21ţ 1992 as a publlc llmlLed company under Lhe Companles Crdlnance 1984Ŧ lLs banklng operaLlons
commenced from november 1ţ 1992Ŧ 1he bank ls engaged ln commerclal banklng and relaLed servlces as deflned
ln Lhe 8anklng Companles Crdlnanceţ 1962.
equ|rements of open|ng a |etter of
cred|t |n 8ank A|fa|ahť
Money ls noL lnvolveŦLC ls non funded faclllLy and conLlngenL llablllLyŦ
lor openlng L/Cţ Lhe exporLer has Lo submlL Lhe followlng documenLsť
1Ŧ Þerforma lnvolce conLalns ť

O CuanLlLy
O ÞrescrlpLlon
O 8aLe(unlL)
O Crlgln (counLry of orlgln)
O lnco Lerms (lC8ţCl8ţCllţCnl)
O 8ank (nomlnaLe)
O lndenL
2Ŧ AppllcaLlon lor lmporL
3Ŧ Annexure 8
4Ŧ lnsurance of conslgnmenL
SŦ Þromlssory noLe
6Ŧ L/C Margln
7Ŧ L/C Commlsslon

C|auses of Letter of Cred|tť
A leLLer of credlL conLalns varlous clauses promlnenL of Lhem areť
O 1ype of L/C
O AmounL
O uescrlpLlon Cf Coods
O 1ransŴshlpped / ÞarLŴshlpped or noLŦ
O CollecLlon Charges
O valldlLy Þerlod Cf L/C

lmporL Þrocessť

O An L/C form ls fllledŦ
O 1he cusLomer prepares lnsurance documenL from any lnsurance companyŦ
O lllled Lhe S8Þ AppllcaLlon form LhaL ls called Appendlx 8Ŧ
O Þerforma lnvolce ls ÞreparedŦ
O underLaklng from Lhe cusLomer on leLLer PeadŦ
O Þrepare four coples of lorm l (lorm l explaln Lhe deLall of lmporL LhaL are helpful for Lhe S8ÞŦ
O Approval lrom Area Cfflce
O Þrepare voucher and make enLrles ln Lhe sysLemŦ

O ÞreparaLlon of L/C
O 1hese forms are Lhen senL Lo Lhe SwlfL CenLre of 8ALŦ

SwlfL CenLre Machlneť

O lL ls Lhe fasLesL and Lhe safesL mode of flnanclal communlcaLlon ln Lhe worldŦ
O 1hese are accordlng Lo Lhe rules and regulaLlons of 'uCÞŴ300' [usL llke prudenLlal regulaLlons of S8ÞŦ
now Lhls ls recelved by Lhe exporLer's bankŦ
O When 8AL recelves shlpmenL documenLs and documenLs are elLher re[ecLed or accepLed wlLhln 7
O lf accepLedţ Lhe paymenL from Lhe lmporLer ls madeŦ
O An l8CA ls recelved of LhaL amounL and send Lo Lhe exporLer's bankŦ
O now durlng Lhese LransacLlonsţ boLh Lhe banks recelve proflL ln Lhe form of commlsslonŦ
O 8AL sLarLly recelves commlsslon / charges from Lhe lmporLerŦ
O Converslon of forelgn currency lnLo ÞaklsLan rupeesŦ
O ÞaymenL AgalnsL uocumenL (ÞAu)
ln case Lhe paymenL ls noL madeţ Lhen an accounL of ÞAu ls openedŦ 1he bank Lhe lssulng bank on Lhe cusLomer's
behalf of a leLLer of credlLţ pays Lhe negoLlaLlng or advlslng bankţ and deblLs Lhe ÞAu accounLţ Llll lLs paymenL by
cusLomerŦ unLll Lhe reallzaLlon of Lhe amounL a full seL of documenLs represenLlng LlLle Lo Lhe goods shlpped by
Lhe forelgn exporLerţ ls held by Lhe bank as securlLyŦ


Strong I|nanc|a| 9os|t|on
As we can see ln Lhe flnanclal sLaLemenLs of Lhe bankţ Lhe flnanclal poslLlon of Lhe
organlzaLlon ls very sound and lLs proflLablllLy ls ln lncreaslngŦ 1he Larnlng per share has been lncreased on a
raLe of abouL 30Ʒţ whlch ls a very poslLlve slgnŦ
n|gh|y Çua||f|ed Lmp|oyees

1he bank has hlghly quallfled and skllled workforce and lL has succeeded Lo aLLracL Lhe besL
banklng professlonals from across Lhe counLry due Lo lLs growlng pace and sound repuLaLlonŦ
Conduc|ve Lnv|ronment
1he managemenL of Lhe bank ls very much concerned wlLh Lhe developmenL of and
lmprovemenL of Lhe worklng envlronmenLŦ 1he bank has sLaLe of Lhe arL and purpose bullL branches where all
Lhe modern Lechnologles are provlded Lo geL Lhe efflclency of Lhe workforce and Lhe cusLomer saLlsfacLlonŦ
GovtŦ Support and Lncouragement
As Lhe owners of Lhe bank belong Lo uAL and Lhe Lype of Lhelr lnvesLmenL ln ÞaklsLan ls a
forelgn lnvesLmenLţ Lhe govLŦ ls fully supporLlng Lhe bank managemenL due Lo lLs pollcy Lo maxlmlze Lhe forelgn
lnvesLmenL ln Lhe counLryţ Lo geL Lhe economlc prosperlLyŦ
Iastest Grow|ng I|nanc|a| Inst|tut|on
uue Lo lLs successful buslness pollcles and Lhe sLrong flnanclal poslLlon Lhe bank has achleved
Lhe repuLaLlon of fasLesL growlng flnanclal lnsLlLuLlon ln Lhe counLryŦ lL has greaLly lncreased Lhe cusLomer's
confldence ln Lhe bank
nuge Lxpans|on 9|an
uue Lo lLs sLrong flnanclal poslLlon Lhe bank has undergone a huge expanslon plan Lo compeLe
wlLh Lhe exlsLlng bank all over Lhe counLry and wlLh Lhe passage of Llme Lhe branch neLwork ls expandlng aL a very
good paceŦ
¥oung and Lnerget|c Workforce
As Lhe bank ls a newer one ln Lhe counLryţ Lhe bank has an advanLage over lLs compeLlLors
because Lhe ma[orlLy of lLs workforce ls young and noL very much over agedŦ 1hus Lhe bank ls geLLlng maxlmum
ouL puL from lLs young and energeLlc workforce by spendlng comparaLlvely less on Lhelr remuneraLlonsŦ
Is|am|c 8ank|ng D|v|s|on

1he bank ls one of Lhe ploneers of Lhe commerclal banks who have sLarLed Lhe lslamlc 8anklng
along wlLh Lhelr convenLlonal banklngŦ 1he bank has a separaLe neLwork of lLs lslamlc 8anklng ulvlslon whlch has
16 branches across Lhe counLry and Lhls neLwork ls also expandlng aL a very good paceŦ
Wa|ver of charges
CurrenLly Lhe mlddle managemenL of bank AlŴlalah ls Lhe blg reason for walver of chargesŦ 8ank AlŴ
lalah looslng a loL of lLs lncome llkes (Cheque book chargeţ onllne chargesţ sLaLemenL chargesţ and oLher Lhlngs)
because of managemenLŦ 1hls ls a weakness of bank AlŴlalahŦ
Inexper|enced workforce
As Lhe ma[orlLy of Lhe workforce conslsLs of young professlonalţ Lhey lack ln Lhelr experlenceŦ And
someLlmes lack of experlence becomes a hurdle whlle servlng Lo Lhe cusLomersŦ lL ls Lhe polnL where Lhey feel
dlfflculLy whlle compeLlng Lhe oLher bankţ whlch have a very experlenced workforceŦ
Cver work Load on Lmp|oyees
lL was observed ln Lhe branch LhaL as compared Lo huge buslness Lhe bank ls deallng lnţ Lhe noŦ of
employees ls lesser and Lhus Lhere ls an lncreased workload on Lhe employeesŦ uue Lo Lhls Lhe efflclency of Lhe
employees ls reducedŦ
Lmp|oyees are not very much Mot|vated
As dlscussed beforeţ Lhe workload ls hlgh and Lhe employeesţ especlally Lhe credlL deparLmenLţ
have Lo do laLe slLLlngs Lo compleLe Lhelr LasksŦ Cn Lhe oLher hand Lhe bank has revlsed lLs salary lncremenLs pollcy
Lo decrease Lhe lncremenL raLeţ as a resulL a decreased moLlvaLlon level of employees ls observedŦ
ap|d|y Grow|ng Lconomy
AL presenL Lhe ÞaklsLan's Lconomy ls growlng on a very fasL paceŦ 1he rapld growLh of economy has
resulLed ln Lhe lncrease ln Lhe growLh raLe of all economlc secLors especlally ln Lhe banklng secLor whlch ls growlng aL
a fasLesL speed Lhan ever and ln fuLure Lhe growLh ls expecLed Lo lncrease even a hlgher raLeŦ
Increased Interest ates
1he S8Þ has revlsed Lhe lnLeresL pollcy and Lhe lnLeresL raLes have been llnked wlLh Lhe kl8C8 raLesŦ uue
Lo whlch Lhe banks lnLeresL raLe has been subsLanLlally lncreased whlch wlll greaLly lncrease Lhe banks' proflLablllLyŦ

Mega 9ro[ects I|nanc|ng
As Lhe lncrease ln overall buslness acLlvlLy ln Lhe counLryţ Lhe lnvesLors are launchlng varlous Lypes
of Mega Þro[ecLs especlally ln houslng and LexLlle Lhe bank has a greaL opporLunlLy Lo flnance Lhese pro[ecLs aL very
proflLable LermŦ
nuge Demand for Consumer I|nanc|ng
1he lncrease ln per caplLa lncome and overall economy has resulLed lnLo a greaL demand for Lhe
consumer flnanclng especlally for home flnance and car flnanclng and lL ls sald LhaL Lhls Lrend wlll lncrease more ln
fuLureŦ 1he bank can earn a loL by focuslng on lLs consumer flnanclng secLlonsŦ
Merger w|th U8L
AfLer Lhe prlvaLlzaLlon of unlLed 8ank LlmlLedţ Lhe managemenL of Lhe 8AL has purchased Lhe ma[orlLy
shares of Lhe u8Lţ and lL ls plannlng Lo merge Lhese Lwo banksŦ As u8L ls Lhe second largesL bank ln Lhe counLryţ Lhls
merger can make Lhe bank Lhe largesL bank of Lhe counLryŦ
Grow|ng 1rend of Is|am|c 8ank|ng
1here ls a very good growLh Lrend ln Lhe lslamlc banklng ln Lhe counLry and ln Lhe world as wellŦ 8AL has
Lhe advanLage of havlng full fledged lslamlc 8anklng neLwork and Lhe growLh ln Lhls parLlcular fleld can be very
frulLful for Lhe bankŦ
Spend|ng 9ract|ces of Mass
As Lhe ÞaklsLanl's are known for Lhelr exLravaganL pracLlcesţ and Lo fulflll Lhelr funds requlremenLs Lhey
don'L heslLaLe from geLLlng loans from banksŦ 1hus Lhere ls a very good scope for Lhe bank Lo run successful buslness
ln such clrcumsLancesŦ
Uncerta|nty of Lconomy
AlLhough Lhe economy ls growlng aL a good paceţ buL Lhere are many facLors whlch resulLs ln Lhe
uncerLaln poslLlon of Lhe economyŦ Such as pollLlcal uncerLalnLyţ W1Cţ lncrease ln poverLy eLcŦ eLcŦ As a resulL Lhere
are permanenL LhreaLs of fuLure rlsks and losses for Lhe bankŦ
n|gh ate of Inf|at|on
1he lnflaLlon raLe of Lhe counLry has gone above Lhe 10ƷŦ 1hls can resulL lnLo an unfavorable slLuaLlon for
Lhe bankŦ And especlally when Lhe ownershlp of Lhe bank ls uAL basedţ Lhe neL spread for Lhem can subsLanLlally

1rend of Mergers
1here ls a Lrend of mergers among Lhe banks Lo become promlnenL ln Lhe markeL and Lo geL Lhe
maxlmum markeL shareŦ 1hls Lrend can resulL lnLo Lhe unlon of some leadlng banks whlch can glve Lough Llme Lo Lhe
bank and lL wlll become dlfflculL for Lhe bank Lo compeLe wlLh LhemŦ
9r|vat|zat|on of 8anks
uue Lo lLs prlvaLlzaLlon pollcyţ Lhe govLŦ ls prlvaLlzlng Lhe sLaLe owned banksŦ 1he change ln managemenL
may resulL ln Lhe lncrease ln Lhe efflclency and producLlvlLy of Lhe banksŦ 1hus lL can become a LhreaL for Lhe bankŦ
|sk of Defau|ts
As dlscussed earller LhaL Lhere ls a Lrend of launchlng mega pro[ecLs ln Lhe counLryŦ And every one ls
lnvolved ln Lhls Lrend wlLhouL Laklng any measure for Lhe successfulness of Lhese pro[ecLsŦ 1hls can resulL lnLo Lhe
fallure of Lhls project whlch can make lL dlfflculL for Lhe banks Lo recover Lhelr funds from Lhese defaulLersŦ

So we concIude LIuL IeLLer oI Ior uII kInd oI InLernuLIonuI Lrude IeLLer oI credIL pIuys un
ImporLunL roIe becuuse LIe buyer und seIIer ure quILe dIsLunce Irom eucI oLIer, u
probIem oILen urIses us Lo wIen Lo muke LIe deIIvery oI LIe goods und wIen Lo muke LIe
puymenL Ior LIe deIIvery. TIIs probIem Is ubsenL In LrudIng wILIIn LIe nuLIonuI
boundury us boLI LIe buyer und seIIer cun meeL eucI oLIer und seLLIe LIe deuI. However,
In InLernuLIonuI Lrude, neILIer LIe exporLer nor LIe ImporLer cun reIy compIeLeIy upon
eucI oLIer. A IeLLer oI credIL Is un eIIecLIve InsLrumenL LIuL noL onIy soIves LIe probIem
buL uIso ucLs us u meuns oI IInunce Ior LIe buyer. TIIs meLIod Is u compromIse beLween
LIe buyer und LIe seIIer becuuse IL uIIords cerLuIn udvunLuges Lo boLI LIe purLIes. TIe
exporLer Is ussured oI receIvIng puymenL Irom LIe IssuIng bunk us Iong us IL presenLs
documenLs In uccordunce wILI LIe IeLLer oI credIL. ¡L Is ImporLunL Lo poInL ouL LIuL LIe
IssuIng bunk Is obIIguLed Lo Ionor druwIngs under LIe ¡JC regurdIess oI LIe buyer`s
ubIIILy or wIIIIngness Lo puy. On LIe oLIer Iund, LIe ImporLer does noL Iuve Lo puy Ior
LIe goods unLII sIIpmenL Ius been mude und LIe documenLs ure presenLed In good
order. However, LIe ImporLer sLIII musL reIy upon LIe exporLer Lo sIIp LIe goods us
descrIbed on LIe documenLs, sInce LIe IeLLer oI credIL does noL guurunLee LIuL LIe goods

purcIused wIII be LIose InvoIced und sIIpped. So, LIe usuuI LIme oI puymenL under u
IeLLer oI credIL Is wIen sIIpmenL Ius been mude, wIIIe LIe goods ure uvuIIubIe Lo LIe
buyers uILer puymenL. TIe rIsk Lo LIe exporLer Is very IILLIe or none, dependIng on credIL
Lerms, wIIIe LIe rIsk Lo LIe ImporLer Is LIuL Ie Ius Lo reIy on LIe exporLer Lo sIIp goods
descrIbed In LIe documenLs. Becuuse oI uII LIe proLecLIon und beneIILs IL uccords Lo boLI
LIe exporLer und ImporLer, IeLLer oI credIL Is u crILIcuI componenL oI muny InLernuLIonuI
Lrude LrunsucLIons.



You're Reading a Free Preview

/*********** DO NOT ALTER ANYTHING BELOW THIS LINE ! ************/ var s_code=s.t();if(s_code)document.write(s_code)//-->