Documentary Letters of Credit

Documentary Letters of Credit
A Letter of Credit/Documentary Credit is a very common and familiar instrument, used for trade settlements across the globe. It is a
link between buyers and sellers, reinforcing the buyer's integrity by adding to it, his banker's undertaking to pay, while sellers need
to make shipments of goods specified and present shipping documents to banks, before getting the payment. Thus, for international
trade, where buyers and sellers are far apart in two different countries, or even continents, the letter of credit acts as a most
convenient instrument, giving assurance to the sellers of goods for payment and to the buyers for shipping documents, as called for
under the credit.
In order to bring uniformity in matters pertaining to letters of credit documents and transactions, International Chambers of
Commerce (ICC), established in 1919 and headquartered in Paris, has framed uniform rules and procedures for issuance and handling
of transactions under letters of credit, so that parties to letters of credit transactions uniformly interpret various terms and are
bound by a common rule. These rules and procedures are called Uniform Customs and Practices for Documentary Credits (UCPDC).
The UCPDC was first brought out in 1933, and has been revised from time to time in 1951, 1962, 1974, 1983, 1993 with the last
revision in 2007. The current update of UCPDC is the publication No. 600 of ICC, which has been implemented with effect from
1.7.2007.
DEFINITION OF LETTER OF CREDIT
A documentary credit or/and letter of credit, ( DC or LC) can be defined as a signed or an authenticated instrument issued by the
buyer's banker, embodying an undertaking to pay to the seller a certain amount of money, upon presentation of documents,
evidencing shipment of goods, as specified, and compliance of other terms and conditions.
An LC can also be defined as an undertaking issued by the bank, on behalf of the importer or the buyer, in favour of the exporter or
the seller, that, if the specified documents, showing that a shipment has taken place, or a service has been supplied, are presented
to the issuing bank or its nominated bank, within the stipulated time, the exporter/seller will be paid the amount specified.
Thus, in an LC transaction, following parties are involved:
(i) The buyers/importers or the applicant—on whose behalf LC is opened,
(ii) The sellers/exporters or the beneficiary of the LC,
(iii) The opening bank (buyers bank), who establishes the LC
(iv) The advising bank (bank in sellers country), who acts as an agent of the issuing bank and authenticates the LC.
(v) The confirming bank— who undertakes to pay on behalf of the issuing bank,
(vi) The negotiating bank (sellers bank or bank nominated by the opening bank),
(vii) Reimbursing bank— who reimburses the negotiating or confirming bank.
The advising bank, confirming bank and the negotiating bank could be the same
Operation of letter of credit
1. Buyer and seller enters into a contract for sale of goods or providing of services. The transaction is covered by LC.
2. On request of the buyer i.e. applicant, LC is issued by Opening Bank in favour of Beneficiary and sent to advising bank instead
of sending directly to beneficiary.
3. After authentication of LC, the advising bank sends the LC to beneficiary.
4. After receiving LC, the beneficiary manufacturers the goods and makes shipment and prepares documents, as mentioned in
LC.
5. Documents are presented by beneficiary to nominated bank for negotiation. Negotiating bank
makes payment against these documents and claims payment on due date from opening bank.
6. Opening bank makes payment to negotiating bank and recovers the payment from applicant.