LETTER OF CREDIT

Documentary
Letters of Credit
(LC)
LC is a document:
 Issued by Buyer‟s bank at his request.
 Carrying undertaking to pay to the seller
 Upon presentation of documents evidencing shipping of goods.
 In compliance with terms and conditions.
ILC is Inland Letter of Credit and FLC is Foreign Letter of Credit. The
parties to LC are as under:
Applicant Buyer or Importer
Beneficiary Seller or Exporter
Issuing Bank It is opening Bank which ultimately pays on
behalf of importer in the Importer‟s country.
Advising Bank or
Notifying Bank
Bank in Exporter Country through which LC is
advised. It acts as agent
Negotiating Bank
or Nominated Bank
Bank in Exporter Country which makes payment
to exporter or accepts Bill of Exchange.
Confirming Bank In Exporter‟s country. It may be advising bank
also if it adds confirmation. This bank will be
responsible for default, if any.
Reimbursing Bank The bank which reimburses the negotiating
bank. (Usually, it is the bank having Nostro
account of Opening Bank.

UCP– 600
Uniform Custom
and Practice of
Documentary
Credit



It is a publication of ICC (international Chamber of Commerce). It does not
apply by default. There must be special mention in LC about applicability of
UCPDC – 600. It has 39 articles. Some of the important are here under:
 Issuing Bank gets Reasonable time for acceptance/refusal of
Documents which is 5 Banking days after presentation.
 Bank to deal with documents and not with goods. Bank not to check
quality of the goods. However shipping documents must contain the
particulars of commodity shipped which should match with LC.
 Bank is not concerned with underlying contract of buyer and seller.
 Courts refrain from passing injunction on complaint of importer
regarding any discrepancy of goods.
 Amount of Bill may differ from LC amount ±10% (Tolerance limit)
 Quantity of Bill may differ from LC specification ±5% (Tolerance
limit).
 Documents are original if it carries original signatures, stamp mark
and label of issuer.
 Documents must be presented for negotiation within 21
Calendardays from date of Shipment. It becomes stale thereafter.
 If expiry of LC falls on Public holiday, under such situations
documents can be submitted on Preceding banking day.
Types of LC LC Type Features
Revocable It is an LC which can be amended or cancelled
without consent of all parties. UCPDC 600 does not
allow issue of such LC.
Irrevocable It is LC which cannot be cancelled or amended
without consent of all parties.
Confirmed LC If confirmed by some bank in exporter country.
Transferable LC It can be transferred in Full or part by advising bank at
the request of issuing bank. ONLY ONCE
Red Clause LC It enables the beneficiary to avail pre-shipment credit
.
Green Clause
Letter of Credit
Besides pre-shipment, advising bank can allow
advance for storage and shipment.
Revolving LC Where bills are negotiated and LC is automatically
renewed.
Back to Back LC Beneficiary Uses LC to open another LC in favor of
local suppliers.
Standby LC It is issued in lieu of Guarantee. It is substitute of
guarantee and is used in countries like US where
guarantees are not used.


 If nothing is mentioned, LC will be Irrevocable, non-transferable.
Documents under LC
1. Bill of exchange.
2. Invoice
3. Transport Documents: Bill of Lading & Airway Bill
4. Insurance Documents (Insurance is done at 110% of CIF value)
5. Certificate of Origin
Short Bill of Lading: Which does not carry detailed terms and conditions
Thorough Bill of Lading covers entire voyage with several modes of
transport
Straight Bill of Lading is issued directly in the name of consignee.
Clause Bill of Lading: It bears super imposed clause that declared
defective condition of Goods.
Clean Bill of Lading: It has no such super imposed clause declaring
goods or packaging as defective.
Crystallization of
Foreign
currency
Liability
It is incumbent upon the issuing bank to make payment immediately.
In case of sight documents, the issuing bank can hold documents for
maximum period of 10 days. In case the bill is not retired or paid within this
period, the issuing bank will crystallize the liability on 10th day at Bill
Selling rate or the rate at which the contract was booked (whichever is
higher)
In case of Usance bill, Forex liability will be crystallized on due date into
Indian Rupees at Bill Selling rate or Contracted Rate (which is higher)
Inco Terms Ex-Works
Exporter says that goods can be picked up from Factory. Exporter will not
pay the freight. The transport cost and risk will be borne by the Importer.
FCA (Main Freight Paid by Buyer)
Free Carrier means seller hands over the goods to first Carrier.
FAS (Main Freight Paid by Buyer)
Free alongside ship i.e. Goods will be delivered by exporter to shipping co.
FOB (Main Freight Paid by Buyer)
Free on Board (Say FOB Mangalore) means Goods will be loaded on
ship/Aero plane (main carriage still unpaid by the exporter)
CFR (Cost and Freight Paid by Seller)
Seller will pay cost and freight till destination
CIF (Cost, Insurance and Freight paid by Seller)
The cost, Insurance and Freight will be borne by seller.
Other related
guidelines
 UCPDC does not apply by default. It is required to be mentioned on
LC
 Shipping Documents can be dated prior to the date of LC. It means
LC covers the shipping done prior to the issue of letter of credit. But,
the shipping done after expiry of LC is not permitted.
 On or about date means ±5 Calendar days. If it is mentioned on LC
that date of credit is on or about 31.12.2013. This implies that date
of expiry of LC can be after 5 calendar days after 31.12.2013.