Letter of Credit

LETTER OF CREDIT

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Introduction

·       LC is a document that is issued by a financial institution (Bank) on behalf of a buyer.

·       It states about the credit amount a buyer has and the amount that the bank will honors to him

·       It gives the buyer prestige and financial backing in completing a transaction

 

LC Transaction Parties

·       Applicant (Party that arranges the LC)

·       Beneficiary (The party for which the LC has been made)

·       Issuing Bank (Applicants Bank that issue LC)

·       Advising Bank (Which advise the beneficiary that the LC was issued & authentic in nature)

·       Paying Bank (Bank nominated in the LC that will make the payment to the beneficiary)

·       Confirming Bank (That confirms the payment)

 

Flow of LC

·       Applicant approach to the issuing bank with an application to make LC in favors of beneficiary

·       Issuing bank issues a LC and send it to the Advising bank which is located in the beneficiary country

·       Advising bank advises the LC to the beneficiary

·       Beneficiary receives the LC and prepares the goods for export

·       Beneficiary hands over the documents along with transport documents to the Negotiating bank to be forwarded to the Issuing bank

·       Issuing bank reimburses the Negotiating bank with the amount LC and then Negotiating bank makes the payment to the beneficiary

·       Simultaneously, the negotiating bank forwards the documents to the Issuing bank to be released to the Applicant to claim the goods from the carrier

·       Applicant reimburse the Issuing bank for the amount, which it had paid to the negotiating bank

·       Issuing bank releases all documents along with the transport documents to the applicant

 

Types & Settlements of LC

·    Types

o   Revocable and Irrevocable

o   Unconfirmed and Confirmed

o   Transferable 

o   Revolving and Standby

·    Settlements

o   Sight payment

o   Deferred payments

o   Acceptance

o   Negotiating bank

 

Advantages & Risk Involved In LC

·       Advantages

o   Beneficiary is assured of payment

o   Credit risk is transferred from applicant to the Issuing bank

o   Minimization of collection time

o   Elimination of foreign risk exchange

·       Risk Involved

o   Risk of beneficiary not shipping goods as mentioned in the LC

o   LC method of payment is costlier than other methods

o   Beneficiary documents must comply with the terms & conditions of LC

o   Political risk on the Issuing banks

 

Video Description

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