Letter of credit 

Is a letter from a bank guaranteeing that a buyer's payment to a seller will be received on time
and for the correct amount. In the event that the buyer is unable to make a payment on the
purchase, the bank will be required to cover the full or remaining amount of the purchase.

PARTIES TO A LETTER OF CREDIT TRANSACTION

The opener/buyer/importer- A letter of credit is opened on the request of the buyer.

The issuer/opening or issuing bank: The issuer is actually the bank in the importer’s
country, issuing the letter of credit at the initiative of the importer.

The beneficiary/seller/exporter: The seller or exporter is the beneficiary in whose favor

the letter of credit is issued.

The confirming bank: The confirming bank will be situated in the exporter’s country. It
guarantees credit on the request of the issuing bank. The confirming bank is the primary
party to the credit and it undertakes all the obligations of the issuing bank. Even if the
issuing bank fails, the confirming bank is bound to honor its commitment.

Other parties involved:

The notifying bank: The notifying bank notifies the beneficiary that the credit is opened
in his favor. If the letter of credit is confirmed, the confirming bank advises the
beneficiary accordingly.

The paying bank: A draft or bill of exchange is drawn on the paying bank. The paying
bank may be the issuing bank, the confirming bank or the notifying bank.

The negotiating bank: The negotiating bank pays or accepts the draft of the exporter.
When no paying bank is specified in the letter of credit, the beneficiary may go to any
bank of his choice and present the draft and related documents under the credit. If the
bank agrees to negotiate the documents, it becomes an endorsee and bonafide holder of
the draft. It has recourse on the drawer of the bill until it is accepted and paid by the
drawer.

Reimbursing Bank : The bank authorized by the issuing bank to reimburse the drawee
bank or other banks submitting claims under the letter of credit.