2. What is a Letter of Credit?
First there is a Seller and Buyer who want to conclude a
business transaction. Now, they might or might not
know each other or might or might not trust each other
in terms of financial obligations.
Because of the time it takes for cargoes shipped from
foreign ports to reach their destination, importers have
to find a way of guaranteeing payment to exporters
before the goods are received.
The answer is a Letter of Credit – an instruction by the
importer’s bank to an overseas bank to pay the
exporting company in advance.
The issuing
bank is the
Bank that
issues the
Letter of
Credit on
behalf of
the
Customer/
Buyer
3. What are the Terms and
Conditions of a L/C?
1. Description of the goods the Buyer wants to buy from the
Seller
2. Quantity of the goods
3. Technical description if any
4. Documentary requirements (bills of lading, commercial
invoice, packing list, etc)
5. Details of the consignee (generally the issuing bank will be
shown as the consignee and they will have control of the cargo
until such time they receive the money from the buyer)
6. Details of who must be notified of the arrival of the shipment
7. Latest date of shipment
8. Sometimes the Buyer also nominates the shipping line that is to
be used
9. Which shipping ports are to be used
10. What mode of transport is to be used
The Buyer
sets a list of
terms
and
conditions
under which
he would
like to buy
and ship the
cargo from
the Seller.
4. What happens next?
1. The L/C is then issued by the Buyer’s bank (known as the
issuing bank) and is generally sent to the Advising bank
whose responsibility is to authenticate the letter of credit
as to avoid fraud and who will also notify the Seller that a
L/C was issued and available to him.
2. The Seller than proceeds to prepare his goods and
documents based on the L/C.
3. Once the shipment has been accomplished, the Seller will
take the copies of all the documents as per the
instructions on the L/C to his bank. His bank checks the
veracity and correctness of the submitted documents
against the L/C specifications.
4. Once the bank is satisfied that the documents and
shipment are in accordance with the L/C, they pay
the Seller the money that is due to him as per the price
agreed between him and the Buyer.
An Advising
bank
responsibility
is to
authenticate the
letter of credit
issued by the
issuing bank as
to avoid fraud
and also notify
the Seller that a
L/C was issued
and available to
him.
5. The nominated bank, then sends all the documents to
the issuing bank who cross verify the same and once
they are satisfied with the conditions, they reimburse
the receiving bank the money that they paid to the
Seller.
The issuing bank then advises the Buyer that the
shipment has been effected and that they are in
possession of all the documents. The entries to pay the
issuing the bank the money that has been reimbursed
by them to the receiving bank is then processed.
After these entries have been processed, the issuing
bank then endorses the bill of lading so that the cargo
can be released to the Buyer.
So begins and ends the process of a Letter of Credit..
What happens next?
The nominated
Bank is a
secondary bank
requested by the
issuing bank to
undertake the
task of accepting
drafts or
incurring a
deferred
payment.
Sometimes the
Advising Bank
agrees to
perform similar
roles.
6. The nominated bank, then sends all the documents to
the issuing bank who cross verify the same and once
they are satisfied with the conditions, they reimburse
the receiving bank the money that they paid to the
Seller.
The issuing bank then advises the Buyer that the
shipment has been effected and that they are in
possession of all the documents. The entries to pay the
issuing the bank the money that has been reimbursed
by them to the receiving bank is then processed.
After these entries have been processed, the issuing
bank then endorses the bill of lading so that the cargo
can be released to the Buyer.
So begins and ends the process of a Letter of Credit..
What happens next?
The nominated
Bank is a
secondary bank
requested by the
issuing bank to
undertake the
task of accepting
drafts or
incurring a
deferred
payment.
Sometimes the
Advising Bank
agrees to
perform similar
roles.
