Letter of Credit1

8/4/2019 Letter of Credit1

1/13


2/13

Negotiability : Letters of credit are usually negotiable. The issuingbank is obligated to pay not only the beneficiary, butalso any bank nominated by the beneficiary.

Revocability : A revocable letter of credit may be revoked or modifiedfor any reason, at any time by the issuing bank withoutnotification.

Transfer and Assignment : The beneficiary has the right to transfer or assign theright to draw, under a credit only when the creditstates that it is transferable or assignable.

Sight and Time Drafts : All letters of credit require the beneficiary to present adraft and specified documents in order to receivepayment. A draft is a written order by which the party

creating it, orders another party to pay money to a 3 rd party.

Standby Letter of Credit : The standby letter of credit serves as a secondary payment mechanism. A bank will issue a standby letterof credit on behalf of a customer to provide assurances

of his ability to perform under the terms of a contractbetween the beneficiary.


3/13

Advantages & disadvantages of letter of credit

Advantages of Letter of Credit:1. The beneficiary is assured of payment as long as it complies with the terms andconditions of the letter of credit. The letter of credit identifies which documentsmust be presented and the data content of those documents. The credit risk istransferred from the applicant to the issuing bank.

2. The beneficiary can enjoy the advantage of mitigating the issuing banks

country risk by requiring that a bank in its own country confirm the letter of credit. That bank then takes on the country and commercial risk of the issuingbank and protects the beneficiary.

3. The beneficiary minimizes collection time as the letter of credit accelerates

payment of the receivables.

4. The beneficiarys foreign exchange risk is eliminated with a letter of creditissued in the currency of the beneficiarys country.


4/13

Disadvantages of Letter of Credit.

1.Since all the parties involved in Letter of Credit deal with the

documents and not with the goods, the risk of Beneficiary notshipping goods as mentioned in the LC is still persists.

2.The Letter of Credit as a payment method is costlier than othermethods of payment such as Open Account or Collection

3.The Beneficiarys documents must comply with the terms andconditions of the Letter of Credit for Issuing Bank to make thepayment.

4.The Beneficiary is exposed to the Commercial risk on IssuingBank, Political risk on the Issuing Banks country and ForeignExchange Risk in case of Usage Letter of Credits


5/13

PURPOSE OF LETTER OF CREDIT

In International trade, the buyer and the seller who are located in differentcountries may not know each other and hence many times the problem of BuyersCreditworthiness hampers the trade between the buyer and the seller.

The main objectives of the buyer and the seller in any international trade andcontradictory in terms of Buyer will always try to delay the payment while theseller would like to receive funds at the earliest.To mitigate this problem, Selleralways request Buyer to arrange for a Letter of Credit to be issued by BuyersBank.

Upon issuance of Letter of Credit, the Buyers bank replaces its ownCreditworthiness to that of the Buyer, it undertakes to reimburse the Seller for thevalue of the Letter of Credit Irrevocably provided two underline conditions arefulfilled by the Seller:1.All the documents stated in the LC are presented;

2.All the terms and conditions of the LC are complied with


6/13

Documents Necessary for LettFollowing are some documents which are essential for letter o

Commercial Documents : Invoice, Packing list.

Financial Documents : Bill of exchange, Mutually ac

Official Documents : Embassy legalization, Licenscertificate,

Origin certificate.

Shipping Documents : Insurance certificate, transpolegal documents.

Transport Documents : Bill of lading, lorry or truck re

Railway receipt, CMC receipt, Delive


7/13

Revocable letter of credit : Just like the name says the LC can be

revoked by the Issuing Bank without the agreement of the

beneficiary.

Irrevocable letter of credit : Can not be cancelled or amended without all

the parties agreement.

Standby letter of credit : Guarantee of payment. If the beneficiary

does not get paid from its customer it can then

demand payment from the Bank by forwarding the

copy of the invoice that was not paid and supporting documentation.


8/13

If I ship goods,will you pay?

Documentary Credits like a Letter of Credit or L/C is the mostpreferred form of payment for goods in international trade as it solvesissues of mutual mistrust by using banks as arbiters.

ExporterImporter

If I pay, will youship the goods?

Ok, Ill ask my bankto open a L/C

Great!


9/13

Using aLetter of Credit


10/13

Common problems associated with the letters of credit process are listed below.

Documents required by the credit are missing.

Documents required to be signed are not signed.

The credit amount is exceeded.

The credit has expired or the documents are presented late.

Shipment was short or late.


11/13

"Sellers may have one or more of the following problems:

The shipment schedule cannot be metweather extremes.mechanical or IT breakdownborder crossing delayed

The stipulations concerning freight costs are unacceptable; The price becomes too low due to exchange rates fluctuations; The quantity of product ordered is not the expected amount; The description of product is either insufficient or too detailed;

which effects the customs classification and the tariff applied The stipulated documents are difficult or impossible to obtain."export permits.permit for hazardous materials.permission for the truck to cross some int'l border


12/13

17-12

Sample Letter of Credit


13/13

Letter of Credit1

Documents

Transcript of Letter of Credit1