Letters of Credit (L/C) are a documentary credit issued by a bank on behalf of a buyer of goods to a seller. The bank promises to pay the seller once they provide documents showing the goods were shipped according to the terms of the L/C. L/Cs allow banks to act as intermediaries, assuring payment for the seller while also assuring the buyer only pays once the goods are received. There are different types of L/Cs including standard, revolving, and standby credits. L/Cs provide advantages of guaranteed payment for sellers and assurance goods will be delivered for buyers, but do not ensure quality of goods or resolve other disputes.

1. Letters of Credit (L/C)
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2. What is L/C ?
 A documentary credit is the written promise of a bank,
undertaken on behalf of a buyer, to pay a seller the
amount specified in the credit provided the seller complies
with the terms and conditions set forth in the credit.
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3. How does L/C function ?
 Banks act as intermediaries to collect payment from the
buyer in exchange for the transfer of documents that
enable the holder to take possession of the goods.
 The seller is assured that payment will be made by a
party independent of the buyer so long as the terms and
conditions of the credit are met.
 The buyer is assured that payment will be released to
the seller only after the bank has received the title
documents called for in the credit.
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4. Types of Credits
Letter of
Credits
Standard Specialized
credits credits
Revocable Revolving Credits
(cancellable)
Red Clause Credits
Irrevocable
(non-cancellable)
Standby Credits
Confirmed
(Buyer’s bank & another
bank guarantee payment) Transferable Credits
Un-Confirmed
(Only buyer’s bank Back-to-back Credits
guarantees payment)
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5. Issuance of L/C
1.
Buyer / Purchase & Beneficiary /
Importer Sales Exporter
Agreement
2. 4.
Request Advice of L/C
for a L/C
3.
Request to
Buyer / Advising /
Advice &
Importer Confirming Bank
confirm L/C
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6. Payment under L/C
1.
Buyer / Shipment of Beneficiary /
Importer Goods Exporter
2. 3.
Documents Payment
3.
Payment 2.
Documents
3.
Buyer / Payment Advising /
Importer 2. Confirming Bank
Document
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7. Advantages & Disadvantages to
the Importer
Advantages
 Importer is assured of payment to exporter only if all terms &
conditions of L/C would be met
 Importer is able to negotiate more favorable trade terms with
the exporter
Disadvantages
 L/C doesn’t guard import from exporter shipping inferior
quality and / or lower quantity of goods
 Its importer’s responsibility to ascertain reputation of
exporter.
 It is important for important to have line of credit before the
bank could issue L/C
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8. Advantages & Disadvantages to
the Exporter
Advantages
 Risk of payment relies upon the creditworthiness of the
Issuing bank & not on creditworthiness of the importer
 If L/C is not issued as agreed, exporter is not obligated to
ship against it.
Disadvantages
 Importers might be unable to open L/C due to the lack of
credit facilities with their bank
 Documents must be prepared and presented in strict
compliance with requirements stipulated in L/C & cannot
modify it.
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9. Key points for Buyer in L/C
 Beneficiary name
 Credit amount
 Validity period for presentation of the document
 Beneficiary bank name
 Payment type availability
 Desired documents
 Notify address
 Merchandise description
 Confirmation order
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10. Common Defects in L/C
 L/C date expired prior to its presentation
 Inconsistent description of goods
 Changes included in the invoice not authorized in the
credit
 Mismatch of amount mentioned in invoice and draft
 Ports of loading and destination are wrongly mentioned
 Key documents are unattached or have wrong
information
 Invoice or statement is not signed by appropriate
authority
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11. Limitations of L/C
 L/C doesn’t ensure that the goods actually shipped are
as ordered.
 L/C doesn’t insulate buyers and sellers from other
disagreements or complaints arising from their
relationship.
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12. For queries on L/C
Get in touch
Genex Logistics
(Genex LogiSolutions Pvt. Ltd.)
681, Sec 16B, Pocket B,
Dwarka, New Delhi - 110075
Tel: +91-11-28035020
Mobile: +91-9810404438
Email: info@genexlog.com
Website: www.genexlogistics.in
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13. Thank You!!
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