LETTER OF CREDIT

AT A GLANCE

Why need Letter of credit

NORMALLY , THE SELLER WOULD LIKE TO ALLOW THE GOODS TO MOVE TO THE BUYER, BUT HE WOULD LIKE TO HAVE CONTROL OVER THE GOODS BY RETAINING DOCUMENTS OF TITLE TO THE GOODS WITH HIM TILL THE BUYER MAKES PAYMENT. ON THE OTHER HAND, BUYER WISH ES TO PAY THE SELLER FOR THE GOODS BUT NOT BEFORE THE GOODS ORDERED BY HIM ARE SHIPPED OR DESPATCHED & EVIDENCE OF THESE IS PRODUCED OR A DOCUMENT OF TITIL TO GOODS IS TRANSFERRED TO HIM. THIS IS A COMMON SITUATION OF MUTUAL BUT OPPOSING INTERESTS BETWEEN THE COMMERCIAL PARTIES. UNDER THESE CIRCUMSTANCES ,THE ONLY IDEAL WAY TO RESOLVE THE PROBLEM IS TO USE AN INDEPENDENT THIRD PARTY, WHO CAN ENSURE Y THE NTEREST OF BOTH THE PARTIES AND FACILIATATE THE EXCHANGE PROCESS TO THE SATISFACTION OF BOTH. HENCE BANK ACTS AS A AGENT, WHO CAN ENSURE THE INTEREST OF BOTH THE PARTIES NAMELY, DEFINITE CONSTRUCTIVE DELIVERY OF GOODS BY THE SELLER AND DEFINITE PAYMENT BY THE BUYER .THEREFORE LETTER OF CREDIT METHOD IS A MORE ACCEPTED AND COMMON METHOD OF SETTLING TRADE PAY.

WHAT IS LETTER OF CREDIT

An arrangement of Making Payment Against Documents. It is an arrangement whereby a Bank, acting at the request of a customer, undertakes to pay a third party by a given date according to agreed stipulations and against presentation of documents, the counter value of the goods supplied. Undertaking of a bank given on behalf of buyer to the seller is a tripartite contract is the letter of Credit. It is also known as documentary credit because credit is made available to the beneficiary against surrender of documents.

Type Of Letter of Credit

Mainly there are three type of Letter of Credit which Normally is in use : 1) Usance Letter Of Credit 2) Sight Letter of Credit 3) Revolving Letter of Credit

1. Usance Letter Of Credit :- In usance Letter of Credit Payment will be made on draft at a stated usance period requiring acceptance or payment by drawee at the end of such usance period or on due date as specify in draft. Usance period can be 30 ,45, 60,90 days etc.

2. Sight Letter of Credit :- In Sight Letter of Credit

states that the payment will be made by the bank at sight. On demand or on presentation, such credit is called Sight Credit. Draft is not needed if the lc is does not specifically call for the drawing for draft. Payment can be made only on presentation of specified documents.

3. Revolving Letter of Credit :- Revolving credit is

one where, under the terms and conditions of the credit, the amount is revived or reinstated without requiring specify amendment to the credit. The amount under the credit can revolve in relation to time or value. The basic principle of a revolving credit is that after a drawing is made, the credit reverts to its original amount for re-use by Beneficiary.

Following Banks are involve for process of Document u/LC

1. LC issuing Bank :- This bank acts on request of customer for purchasing of Goods. which creat letter of credit and undertakes to make payment. 2. Advising Bank: The basic responsibility of an Bank: advising bank is to advise the credit received from its correspondent branch only after checking the apparent authenticity of the credit established by the issuing bank. 3. Negotiating Bank : Beneficiarys bank where they negotiating/discounting the documents under letter of credit after dispatches the material.

4. Confirming Bank Bank in an exporters which Bank: guarantees that the letter of credit established by the importer will be honored once the conditions there in are fully complied with. The confirming bank undertakes this responsibility on an arrangement (called confirming bank) with the importers bank which issued the letter of credit 5. Re-imbursement Bank : LC opening bank is Renominate their local branch at the place of Beneficiary for make the payment on due date to negotiating bank. 6. Drawee Bank :The bank named in the Letter of Credit on which the drafts are to be drawn.

7. Accepting Bank : The bank named in a term (usance) Letter of Credit on which drafts are drawn that has agreed to accept the draft. By accepting the draft, the Drawee Bank signifies its commitment to pay the face amount at maturity to anyone who presents it at maturity. After accepting the draft, the Drawee Bank becomes the Accepting Bank.

Precautions : Following Precaution must be taken before sale of material under letter of credit :
1. Beneficiary's Name & Address : it should be 2. 3. 4.

5.

exactly as per Cos Registration. Date of Expiry for dispatches Date of Expiry for document submission to bank. Place of Expiry: Credit must be specify the place for presentation of Document. It should be always at the counter of Negotiating bank. All of above one more important things that is Validity of the Letter of Credit.

6. Material: It should be very clear about the name of Material which have to sold & exacts as mentioned in the letter of credit. No pre-pix or suffix are acceptable. 7. Amounts: The amount in words must accurately reflect the amount in figures if both are shown. 8. Recourse : Beneficiary can not consider the payment as final-until accepted by the issuing bank. The negotiating bank has the right of recourse to the beneficiary of the documentary credit if cover is not received from the issuing bank, unless the negotiating bank has agreed to negotiate without recourse to the beneficiary, or has confirmed the credit. 9. Lorry Receipt: Whether Lorry receipt require by approve transporter of Bank (IBA) or any local transporter is acceptable.

10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21.

Without recourse Tolerance Inco Terms Restriction of Negotiation : Always freely negotiable to any schedule bank in India. Place of Shipment Place of Final Destination Partial Shipment Trans shipment Bill of Exchange Drawee : Bank/applicant or Both Tenor: 90 days from the date of dispatch document Interest

Advantages of LC to Exporter
1. Guaranteed payment upon presentation of the

documents specified in the terms of the letter of credit. 2. Reducing the production risk, first of all, for the situations when the buyer cancels or changes his order. 3. The buyer cannot refuse to pay due to a complaint about the goods. 4. The importer must raise any complaints/claims about the delivered goods separately from the letter of credit, which provides the exporter with a significant advantage in resolving such issues

Advantages LC to Importer
1. 2.

3.

The use of a letter of credit allows the importer to avoid or reduce pre-payment. Certainty that the payment will be made only upon presentation of the documents confirming shipment of the goods. The seller must fulfill all terms of the contract, as indicated in the letter of credit (shipment of the goods, meeting delivery terms on stock, amount, and deadlines) in order to receive the payment.

T H A N K YOU

S.K.PRAMANIK