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ROLE OF

LETTER OF CREDIT
IN
INTERNATIONAL TRADE FINANCE

Prepared By

Muhammad Yasir
MTO (HR)
National Bank of Pakistan
What is a Letter of Credit?
• Document and undertaking issued by a bank
• At the request of the applicant (buyer, importer)
• In favor of a beneficiary (seller, exporter)
• Substitutes the bank’s name and credit risk for
that of the applicant (buyer, importer)
• Guarantees payment of a customer’s draft up to a
stated amount for a specified period
if certain conditions are met
Letter
of Credit Governed by
Summary of a UCP 600
contract between
seller and buyer with
the bank(s) as
referee.
WHY HA VE A L ETT ER OF
CREDIT?
IF I SHIP GOODS,
WILL YOU PAY?

IF I PAY, WILL YOU


SHIP THE GOODS?

SOLVES ISSUES OF MUTUAL MISTRUST BY USING


BANKS AS ARBITERS
NEGOTIATE L/C TERMS BEFORE
ENTERING A CONTRACT
TRADE FINANCE
IMPORT LETTER OF CREDIT

1) NBP ISSUES ITS LETTER OF CREDIT


TO THE EXPORTER’S BANK ABROAD

2) EXPORTER SUBMITS SHIPPING DOCUMENTS


TO THE FOREIGN BANK

3) FOREIGN BANK REVIEWS AND SENDS


DOCUMENTS TO NBP

4) NBP REVIEWS THE DOCUMENTS AND IF


DOCUMENTS COMPLY WITH THE L/C, NBP
PAYS

THE PROCESS LOOKS LIKE THIS. . . . . . . . . . . . . . .


LETTERS OF CREDIT
WHO ARE THE PLAYERS?

NBP’s FGN
CUSTOMER BANK
IMPORTER CUSTOMER
(Buyer)
CONTRACT EXPORTER
(Seller)

FOREIGN BANK
NBP L/C
(ISSUING BANK) (ADVISING BANK)
(MAY CONFIRM)
IMPORT L/C PROCESSING
DOCUMENT FLOW

FGN
NBP’s
BANK
CUSTOMER
CUSTOMER
IMPORTER
CONTRACT EXPORTER
(Buyer) D
(Seller)
O
C
U
M
E
FOREIGN BANK
NBP
N
L/C T
S
(ISSUING BANK) (ADVISING BANK)

PAYS documents
Export Letter of Credit Process
NATIONAL BANK
located in the
Pakistan

Letter of Credit (Sight/Time)

Documents
Advising /
Issuing / Opening Confirming Bank
Bank located
overseas
Documents
Application

Documents
L/C
Beneficiary
Seller
Goods Exporter

Applicant / Buyer
Importer Contrac
t
TRADE FINANCE
LETTER OF CREDIT DOCUMENTS

BANKS DO NOT DEAL IN THE MERCHANDISE WHICH


THE LETTER OF CREDIT COVERS

BANKS DEAL ONLY IN


THE BANK’S COMMITMENT IN
THE LETTER OF CREDIT

THE L/C SAYS WHAT IT MEANS & MEANS WHAT IT SAYS

KEY ELEMENTS
• AMOUNT
• EXPIRY
• LATEST SHIPMENT DATE
• DOCUMENTS REQUIRED

PAYMENT WILL BE MADE ONLY WHEN


ALL TERMS AND CONDITIONS ARE MET
RESOLVE UNCLEAR ITEMS PRIOR TO SHIPMENT
THE DOCUMENTS
REQUIRED BY
THE LETTER OF CREDIT

ALL DOCUMENTS MUST CONFORM TO THE LETTER


OF CREDIT AND BE CONSISTENT WITH EACH OTHER

THREE FORMS OF DOCUMENTS:

1 FINANCIAL DOCUMENTS
TRANSPORT DOCUMENTS
2
3 COMMERCIAL DOCUMENTS
1 FINANCIAL DOCUMENTS:

• Bill of Exchange

• Promissory Note

• Trust Receipt

• Delivery Order
2 TRANSPORT DOCUMENTS:

• Bill of Lading

• Airway Bill

• Air Consignment Note

• Postal Parcel Receipt

• Truck Receipt

• Railway Receipt
INVOICE PKG. ORIGIN
INSURANCE
LIST CERT.

3 COMMERCIAL DOCUMENTS:
• COMMERCIAL INVOICE
• PACKING LIST
• INSURANCE CERTIFICATE
• CERTIFICATE OF ORIGIN
• INSPECTION CERTIFICATE
• WEIGHT NOTE
• CERTIFICATE OF ANALYSIS
• BLACK LIST CERTIFICATE etc.
Importance of L/C for Exporter
• Dependence on Credit worthiness of a bank
instead of importer

• If the credit is confirmed by a bank in the


exporter’s country, the exporter is neither
subject to commercial not to country risk

• If the credit is irrevocable, it can’t be


cancelled without the exporter’s consent
and notice of revocation can be rejected by
the exporter if received after shipment

• The documents and therefore the goods


will not be released until payment or
commitment to payment is made (In terms
of L/C)

• Where credit has been allowed the


accepted bill of exchange can be used to
obtain the finances
Importance of L/C for Importer
• The importer can negotiate better
terms as the exporter is assured
of payment

• Importer is assured that no funds


will be released unless title
documents and received correct
and in order

• Protection is provided under


UCP for documentary Credit
Thanks!

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Question ???