letter of credit presentation

1. LETTER OF CREDIT
Presentation by:
Vipin Kumar
215114061
Note: Please view as a slide show

2. Letter of Credit is a legal document issued by banks to facilitate the
trade transaction between two parties.
It ensures the payment to the seller if the seller fulfills certain
obligations.
It is often used when the buyer and seller do not know each other.
Still confused;
Let’s go in detail

3. Let’s assume a situation . John (Seller) and Mohan(Buyer) enters into a contract.
They do not know each other. In this both are exposed to risk.
Seller Risk:- Risk of cancel or change in order
John is having the fear of not getting paid
Buyer Risk:- Risk of receiving the goods strictly as per order
Risk of inability to pay strictly as per contract
Don’t worry there is a
solutionLetter of Credit

4. Key Participants in LOC
Applicant Beneficiary Issuing Bank
Advisory
Bank/
confirming
bank
Applicant :- Applicant is the buyer of goods & services. This is the one
who initiates the process letter of credit
Beneficiary:- The person or company who will be paid for providing
goods & service to buyer
Issuing Bank:- The institution issuing the letter of credit. It promises
to pay on behalf of applicant
Advising Bank:- An advising bank, usually a foreign correspondent
bank of the issuing bank will advise the beneficiary. Generally
beneficiary choose local bank for advisory

5. Stages of LC
1.Issuance
Stage
2.Settlement
Stage
• Both Issuing bank and advising bank charges fees from their
clients
• Buyer is the client for issuing bank and beneficiary is the client for
advising bank
• The rules of LC for all countries are issued by The Uniform
Customs and Practice for Documentary Credits(UCP)

6. Applicant Beneficiary
Sale Contract
Letterof
Application
Issuing Bank Advising Bank
Issuing of Letter of Credit
AdvisingLetter
ofCredit
ISSUANCE STAGE
1. At applicant’s request, issuing bank issues LC
and transmits the same to advising bank
2. Advising bank authenticates LC and informs
beneficiary
3. No movement of money or goods takes place in this
stage

7. Applicant Beneficiary
Shipment
Issuing Bank Advising Bank
Presentation of
Documents
Presentation
ofDocuments
SETTLEMENT STAGE
5. Shipment documents are presented by
beneficiary to the advising bank
6. Advising bank presents the documents to issuing
bank
4. After receiving LC, beneficiary ships the goods

8. Applicant Beneficiary
Sale Contract
Letterof
Application
Issuing Bank Advising Bank
Issuing of Letter of Credit
AdvisingLetterof
Credit
WHOLE PROCESS
Shipment
Presentationof
Documents
Payment Release
Presentation of Documents
PaymenttoBeneficiary
DocumentsRelease
7. Issuing bank releases the payment to
advising bank which ultimately goes to
beneficiary
8. Issuing bank claims the amount from
applicant

9. Two major types of Letter of Credit:-
• Sight letter of Credit:- A letter of credit may also be at sight, which
is payable as soon as the documentation has been presented and
verified
• Term or Deferred letters of credit:- It is also called a usance letter
of credit and may be put off until a certain time period has passed
or the buyer has had the opportunity to inspect or even sell the
related goods.
.
The foreign buyer may demand credit period of 30
days, 60 days, 90 days, 120 days etc.
However as per government regulation, the total
period of credit should not exceed more than 180
days

10. MCQ
1. Beneficiary of an LC is :
a) Buyer
b) Seller
c) LC opening Bank
d) LC
Ans: b
2. The main role of LC advising banking is to:
a) Pay on behalf of LC issuing bank
b) Authenticates the LC issuing bank
c) Negotiate the bills drawn under LC
d) None of these
Ans: b
3. Primary liabilities to honor bills drawn
under LC, if documents are otherwise in
order is on:
a) LC opening bank
b) LC confirming bank
c) LC reimbursing bank
d) Buyer on whose behalf LC has been
opened
Ans: a
4. _______ sets the rules for issuance for LC:
a) LC issuing bank
b) Confirming bank
c) UCP
d) None of the above
Ans: c