II.

Basic procedure of DC
1. Parties involved in Documentary credit
Applicant of Letter of Credit (Buyers/Importer)
Applicant is one of the major parties involved in a Letter of credit
Applicant is the one who opens Letter of Credit. Normally, buyer of goods is the
Applicant who opens letter of credit. Letter of credit is opened due to his
instruction and necessary payment is arranged to open Letter of credit with his
bank. The applicant arranges to open letter of credit with his bank due to the terms
and conditions of business contract between buyer and seller.
Issuing Bank (Buyers bank)
Issuing Bank is one of the other main parties involved in an LC.
Issuing Bank is the bank who opens letter of credit. Letter of credit is created
by issuing bank who takes responsibility to pay amount on receipt of documents
from supplier of goods (beneficiary under LC).
Beneficiary party (Seller/Exporter)
Beneficiary is one of the main parties under letter of credit.
Beneficiary of Letter of credit gets the benefit under Letter of credit.
Beneficiary is the party who receives amount under letter of credit. The LC is
opened on Beneficiary partys favor. Beneficiary party submits all required
documents with is bank in accordance with the terms and conditions under LC.
Advising Bank (Sellers bank)
Advising bank is another party involved under LC
Advising bank, as a part of letter of credit takes responsibility to
communicate with necessary parties under letter of credit and other required
authorities. The advising bank is the party who sends documents under Letter of
Credit to opening bank.
Confirming Bank
Confirming bank as a party of letter of credit confirms and guarantees to
undertake the responsibility of payment or negotiation acceptance under the credit.
Negotiating Bank
Negotiating bank is one of the main parties involved under Letter of Credit.
Negotiating Bank, who negotiates documents delivered to bank by
beneficiary of LC. Negotiating bank is the bank who verifies documents and
confirms the terms and conditions under LC on behalf of beneficiary to avoid
discrepancies
Reimbursing Bank
Reimbursing bank is the party who authorized to honor the reimbursement
claim of negotiation/ payment/ acceptance.
Second Beneficiary
Second beneficiary who represent the first beneficiary or original beneficiary
in their absence, where in the credits belongs to original beneficiary is transferable
as per terms.
*Some of the parties in letter of credit mentioned above may act as functions of one
or more parties under Letter of Credit.
2. Procedure of Documentary credit
The procedure of LC has 3 basic groups of steps
- Issuance: Include buyer opening a LC at the issuing bank; Issuing banks
notification of the seller through advising bank.
+ Step 1: Buyer and seller agree on terms of sale
+ Step 2: Buyer open a LC naming seller as beneficiary
+ Step 3: Issuing bank send LC to advising bank
+ Step 4: Advising bank inform seller about the LC

ISSUANCE














- Amendment: The process of modifying the terms and conditions of a LC which
was issued.
+ Step 1: Seller request buyer make an amendment to the credit
+ Step 2: Buyer orders the issuing bank to issue the amendment
+ Step 3: Issuing bank amends the credit and informs advising bank
+ Step 4: Advising bank notifies the seller about the amendment



ISSUING BANK
(Buyers Bank
BUYER
(Applicant/Importer
SELLER
(Beneficiary/Exporter)
ADVISING BANK
(Sellerrs bank)
Order Credit
Notification
Contract
Documentary
Credit
AMENDMENT









- Utilization: The process of the sellers shipping goods, transfer of LC from seller
to buyer through banks, transfer of payment from buyer to seller through banks
+ Step 1: Seller ships the goods to buyer and receive transport document
from shipping firm
+ Step 2: Seller bring document package to the advising bank
+ Step 3: Advising bank reviews and checks these documents, then pays the
seller
+ Step 4: Advising bank send the document package to issuing bank
+ Step 5: Issuing bank reviews the document package again and pay
advising bank, then inform the buyer about the document package
+ Step 6: Buyer review the document package and make payment to issuing
bank
+ Step 7: Issuing bank sends the document package to buyer, buyer takes
possession of the shipment
BUYER
(Applicant/Importer
SELLER
(Beneficiary/Exporter)
ISSUING BANK
(Buyers Bank
ADVISING BANK
(Sellerrs bank)
Order
Amendment
Amendment
notification
Amendment
notification

Request
amendment
* The document package includes the negotiable transport document and other
documents (such as commercial invoice, insurance document) that required by
the buyer in the documentary credit.
3. Making payment of Documentary credit
There are 3 primary means of settlement: Settlement by payment, settlement by
acceptance and settle by negotiation. Different method of payment will cause
changes in the last group of steps, utilization, which was mentioned in part 3.
- Settlement by payment: With confirmed and irrevocable credit, the commercial
letter of credit is payable when the beneficiary presents the complying documents
and if the presentation takes place on or before the expiration of the commercial
letter of credit (With unconfirmed credit, the payment is made once the advising
bank has received the funds from issuing bank)
+ Step 1: Seller ships the goods to buyer and receive transport document
from shipping firm
+ Step 2: Seller bring document package to the advising bank
+ Step 3: Advising bank reviews and checks these documents, then pays the
seller
+ Step 4: Advising bank send the document package to issuing bank
+ Step 5: Issuing bank reviews the document package again and
pay/reimburses advising bank, then inform the buyer about the document package
+ Step 6: Issuing bank sends the document package to buyer
+ Step 7: Buyer pays or reimburses issuing bank
- Settlement by acceptance: An acceptance is a time draft drawn on, and accepted
by, a banking institution, which promises to honor the draft at a specified future
date. The act of acceptance is without recourse as it is a commitment to pay the
face amount of the accepted draft.
+ Step 1: Seller ships the goods to buyer and receive transport document
from shipping firm
+ Step 2: Seller bring document package to the advising bank, and a draft
drawn on the bank at the specified maturity date
+ Step 3: Advising bank reviews and checks these documents, then accepts
the draft and returns it to the seller.
+ Step 4: Advising bank send the document package along with a statement
that it has accepted the draft to issuing bank
+ Step 5: Issuing bank review the document package and at maturity of the
draft pays the advising bank
+ Step 6: Issuing bank sends the document package to buyer
+ Step 7: Buyer pays or reimburses issuing bank
- Settlement by negotiation: The buyer accepts the documents and agrees to pay
the bank after a period of time. Issuing bank makes the payment at the specific
time due to the credit.
+ Step 1: Seller ships the goods to buyer and receive transport document
from shipping firm
+ Step 2: Seller bring document package to the advising bank, and a draft
drawn on the bank
+ Step 3: Advising bank reviews and checks these documents, then pays the
seller
+ Step 4: Advising bank send the document package to issuing bank
+ Step 5: Issuing bank reviews the document package again and
pay/reimburses advising bank as agreed in the documentary credit
+ Step 6: Issuing bank sends the document package to buyer
+ Step 7: Buyer pays or reimburses issuing bank