Letter of Credit

Definition
A Letter of Credit, simply defined, is a written instrument issued by a bank at the request of its customer, the Importer (Buyer), whereby the bank promises to pay the Exporter (Beneficiary) for goods or services, provided that the Exporter presents all documents called for, exactly as stipulated in the Letter of Credit, and meet all other terms and conditions set out in the Letter of Credit. A Letter of Credit is also commonly referred to as a Documentary Credit.

Parties involved
Applicant The applicant is normally the buyer of the goods . i.e. the importer who request his bank to issue a letter of credit in favour of a named beneficiary against tendering of certain specified documents . The Role of Applicant Supply the bank with complete instruction ( To fill out standard application form ) . Issue instruction for amendments if any Decide on discrepancies reported by the issuing bank to him Arrange for funds at the payment time .

Parties involved(cont.)
Beneficiary The beneficiary is normally the seller of goods who receives payment under documentary credit if he has complied with terms and conditions thereof . A credit issued in favour of the beneficiary to enable him or his agent to obtain payment once he performed his part of contract and submitted stipulated documents showing compliance with the terms and conditions of letter of credit . In case of a transferable letter of credit , the credit is transferred to another party , the original beneficiary is known as first beneficiary the person to whom the credit is transferred is known as the second beneficiary

Parties involved(cont.)
Issuing Bank The issuing bank or the opening bank is one which issue the credit , i.e. undertake , independent of the Undertaking of the applicant , to make payment provided the terms and conditions of the credit have been complied with Advising Bank The advising bank advises the credit to the beneficiary thereby authenticating the genuineness of the credit Confirming Bank A confirming bank is the one which adds its guarantee to the credit . It undertakes the responsibility of payments / negotiation / acceptance under the credit in addition to that of the issuing bank .

Parties involved(cont.)
Negotiating Bank A Negotiating bank is the bank nominated or authorized by issuing bank to pay , to incur a deferred payment liability , to accept drafts or to negotiate the credit Reimbursing Bank A reimbursing bank is the bank authorized to honour the reimbursement claims in settlement of negotiation with the paying or accepting bank .

Characteristics
Negotiability Revocability Transfer and Assignment Sight and Time Drafts

Standard forms of Documentation

Commercial Invoice Packing List Bill of lading and other transport documents Certificate of Origin Inspection Certificate Bill of Exchange Insurance Documents