Letter of Credit

What is a Letter of Credit ???

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Structure of a L/C
Part1 Part2 Part3 Part4 Part5 Part6 Part7 3/5/13 Issuing Bank Name & Address Type of L/C
Documentary credit or L/C Number:

Receivers Bank Name & Address Revocable Irrevocable

Date of Issue Applicant Name & Address Credit Amount Tolerance

Port of Discharge
Additional Conditions/ Charges

Date & Place of Expiry Beneficiary Name & Address Pay back period to bank
Final Destination Period of Document submission

Applicant Bank Identifier Code

Currency Code & the Credit Amount Partial /Trans Shipment
Description of goods

Port of Loading Document Required

Latest date of Shipment Repayment terms

Parties to Documentary Credits

There are two Beneficiary.

commercial

parties

viz.

Applicant

&

1.

Applicant: The applicant is normally the buyer of the goods i.e. the importer who request his bank to issue a letter of credit in favor of a named beneficiary against tendering of certain specified documents. The Role of Applicant: Supply the bank with complete instruction.( To fill out standard application form). Issue instruction for amendments if any . Decide on discrepancies reported by the issuing bank to him. Arrange for funds at the payment time.

. .

. .

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Parties to Documentary Credits cont

2.Beneficiary

The beneficiary is normally the seller of goods who receives payment under documentary credit if he has complied with terms and conditions thereof . A credit issued in favor of the beneficiary to enable him or his agent to obtain payment once he performed his part of contract and submitted stipulated documents showing compliance with the terms and conditions of letter of credit In case of a transferable letter of credit , the credit is transferred to another party , the original beneficiary is known as first beneficiary the person to whom the credit is transferred is known as the second beneficiary .

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Parties to Documentary Credits cont

The Role of Beneficiary Establish the terms of payment when sales contracts is being Negotiated Assess the risk of non payment even when compliant documents are presented in the case of unconfirmed LCs. Provide the draft wordings to buyer regarding LC Terms Upon LC receipt from the advising bank to check whether it is in consonance with the sales contract and whether it is otherwise workable and acceptable to him . Request for LC amendments from buyer Provide copy of the credit to dispatch department and cargo agent to ensure correct documentation .

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Parties to Documentary Credits cont

3.Bankers

Issuing Bank : The issuing bank or the opening bank is one which issue the credit , i.e. undertake , independent of the Undertaking of the applicant , to make payment provided the terms and conditions of the credit have been complied with Advising Bank : The advising bank advises the credit to the beneficiary thereby authenticating the genuineness of the credit Confirming Bank : -

A confirming bank is the one which adds its guarantee to the credit . It undertakes the responsibility of payments / negotiation / acceptance under the credit in addition to that of 3/5/13the issuing bank .

Types of documentary credits

Revocable Documentary Credit This type of credit is one which can be cancelled , revoked or amended without the consent of the beneficiary or the applicant ( without prior notice to beneficiary ) up to moment of payment. Irrevocable Documentary Credit An irrevocable LC cannot be changed unless both buyer and seller agree.

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Stages in performance of Letter of Credit

Stage 1 Stage 2 Stage 3 Stage 4 Stage 5 Stage 6 Stage 7 Stage 8 Stage 9

:- Opening of Letter of Credit (Application for LC) :- Mailing of LC to Beneficiaries bank :- Examination of LC by Exporter :- Amendments to LCs :- Confirmation :- Shipment :- Collection of Documents :- Presentation of Documents :- Examination of Documents by Issuing Bank

Stage 10 :- Handling of Discrepant Documents Stage 11 :- Settlement of Payment .

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Payment Structure

1. Sight Credit In this the payment is release to Beneficiary on presentation of documents 2. Acceptance Credit In this beneficiary draws the bill of exchange on issuing bank and allows some time for acceptance 3. Deferred Credit Is same as Acceptance Credit except there is no bill of exchange .

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General documents need to be submitted for Payments/Goods release

Commercial Invoice Packing List Bill of lading and other transport documents Certificate of Origin Discrepancy letter(If required) Bill of Exchange

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