Letter of credit

1. LLETTERETTER OOFF CCREDITREDIT

2. DEFINATIONDEFINATION
• A letterof credit is a letterfrom a bank guaranteeing that a
buyer's payment to a seller will be received on time and forthe
correct amount. In the event that the buyeris unable to make
payment on the purchase, the bank will be required to coverthe full
orremaining amount of the purchase.
• Due to the nature of international dealings, including factors such as
distance, differing laws in each country, and difficulty in knowing each
party personally, the use of letters of credit has become a very
important aspect of international companies.

3. Parties involved in LCParties involved in LC

4. Process Flowchart

5. Process Flowchart

6. Process Flowchart

7. In a nutshell

8. THE EXAMPLE

9. Letter of Credit CharacteristicsLetter of Credit Characteristics
1.1. NegotiabilityNegotiability
2.2. RevocabilityRevocability
3.3. Transfer and AssignmentTransfer and Assignment
4.4. Sight and Time DraftsSight and Time Drafts
5.5. Standby Letter of CreditStandby Letter of Credit

10. Types of Letter of CreditTypes of Letter of Credit
1. Sight Credit : is the LC prescribes the condition of ‘ payment at sight ‘, in
this the beneficiary gets the benefit of immediate payment upon presentation
of the proper documents laid down as per the terms of LC at the paying bank.
2. Usance Credit : If the beneficiary decides to grant a period of credit to
importer after sight such a LC is called Acceptance Credit. The period of credit
is called Usance, in this type of LC the beneficiary draws a usance draft on the
buyer or issuing bank or confirming bank depending on the terms. This draft is
presented along with documents and the beneficiary is advised that the
amount in the draft will be paid to him on prefixed future date .

11. Types of Letter of CreditTypes of Letter of Credit
33.. Standby Letter of CreditStandby Letter of Credit
1.1. standby letter of credit is the one which is opened for non-performance of somestandby letter of credit is the one which is opened for non-performance of some
activity it is very much similar in nature to a bank guarantee. The main objective ofactivity it is very much similar in nature to a bank guarantee. The main objective of
issuing such a credit is to secure bank loans.issuing such a credit is to secure bank loans.
2.2. Unlike a traditional letter of credit where the beneficiary obtains payment againstUnlike a traditional letter of credit where the beneficiary obtains payment against
documents evidencing performance, the standby letter of credit allow a beneficiarydocuments evidencing performance, the standby letter of credit allow a beneficiary
to obtains payment from a bank even when the applicant for the credit has failed toto obtains payment from a bank even when the applicant for the credit has failed to
perform as per the terms.perform as per the terms.
3.3. Standby LC is payable only in case where an event had occurred but performance forStandby LC is payable only in case where an event had occurred but performance for
the event has not happened.the event has not happened.

12. Types of Letter of CreditTypes of Letter of Credit
– Irrevocable LCIrrevocable LC :: A letter of credit is deemed to be an irrevocableA letter of credit is deemed to be an irrevocable
credit, which can neither be amendedcredit, which can neither be amended nor cancelled without an expressnor cancelled without an express
agreementagreement of all the parties concerned. i.e. the applicant, issuing bank,of all the parties concerned. i.e. the applicant, issuing bank,
beneficiary and confirming bank (if any).beneficiary and confirming bank (if any).
– Revocable LCRevocable LC :: The concept of “ Revocable Credit “ which was inThe concept of “ Revocable Credit “ which was in
effect till UCPDC 500 (till 30effect till UCPDC 500 (till 30thth
June, 2007) has been withdrawn under theJune, 2007) has been withdrawn under the
latest revision.latest revision. Thus an LC can only be irrevocable in nature.Thus an LC can only be irrevocable in nature.

13. PAYMENT PROCEDURE
• PaymentPayment
• On presentation of the documents called for under the letter of credit,On presentation of the documents called for under the letter of credit,
provided they are in compliance with its terms, theprovided they are in compliance with its terms, the
advising/negotiating bank, in the case of an unconfirmed letter ofadvising/negotiating bank, in the case of an unconfirmed letter of
credit, may pay/negotiate the draft.credit, may pay/negotiate the draft.
• ReimbursementReimbursement
• The advising/confirming/negotiating bank will claim reimbursementThe advising/confirming/negotiating bank will claim reimbursement
from the issuing bank.from the issuing bank.
• SettlementSettlement
• On receipt of conforming documents, the issuing bank will also beOn receipt of conforming documents, the issuing bank will also be
responsible for checking documents and will charge the applicant’sresponsible for checking documents and will charge the applicant’s
account under the terms of the letter of credit application andaccount under the terms of the letter of credit application and
agreement forms, effecting reimbursement to the negotiating bank.agreement forms, effecting reimbursement to the negotiating bank.

14. AdvantagesAdvantages of Letter of Creditof Letter of Credit
1. The beneficiary is assured of payment as long as it
complies with the terms and conditions of the letter of
credit.
2. The credit risk is transferred from the applicant to the
issuing bank.
3. The beneficiary minimizes collection time as the letter
of credit accelerates payment of the receivables.
4. The beneficiary’s foreign exchange risk is eliminated
with a letter of credit issued in the currency of the
beneficiary’s country.

15. Risks involved
1. Since all the parties involved in Letter of Credit deal with the documents
and not with the goods, the risk of Beneficiary not shipping goods as
mentioned in the LC is still persists.
2. The Letter of Credit as a payment method is costlier than other methods of
payment such as Open Account or Collection
3. The Beneficiary’s documents must comply with the terms and conditions of
the Letter of Credit for Issuing Bank to make the payment.
4. The Beneficiary is exposed to the Commercial risk on Issuing Bank, Political
risk on the Issuing Bank’s country and Foreign Exchange Risk in case of
Usance Letter of Credits.

16. GENERAL DOCUMENTSGENERAL DOCUMENTS
UNDER DOCUMENTARY CREDITSUNDER DOCUMENTARY CREDITS
1.1. Commercial InvoiceCommercial Invoice
2.2. Packing ListPacking List
3.3. Bill of lading and other transport documentsBill of lading and other transport documents
4.4. Certificate of OriginCertificate of Origin
5.5. Inspection CertificateInspection Certificate
6.6. Bill of ExchangeBill of Exchange
7.7. Insurance DocumentsInsurance Documents

17. CREDITS
• HIMAL RUSTAGI (14030122063)
• SUYASH RAISINGHANI (14030122055)