LETTER OF CREDIT

LETTER OF CREDIT
Aletterof credit isa commercial instrumentofassuredpaymentandwidelyusedbythebusiness community for its variousadvantages. InanLC,a
bankundertakes tomakepayment toa selleronproductionofdocuments stipulatedinthecredit.
Parties to LCs
a: Applicant- The buyer I importer of the goods (generally borrower of the issuing bank). The applicant has tomake payment if documents
asper LCaredelivered,whether the goods areasper contractbetween thebuyer andbeneficiaryornot.
b: Issuing bank - Importer's or buyer's bankwho lends its name or credit. It is liable for payment once the documents under LC are received
by it fromnominated (negotiating) bank, irrespective of the factwhether it is able to recover the payment fromapplicant or not. It gets 5.
banking days tocheck thedocuments.
c: Advising bank - Issuing bank's branch (or correspondent in exporter's country) towhomthe letter of credit is sent for onward transmission
to the seller or beneficiary, after authentication of genuineness of the credit. Where it is unable to verify the authenticity, it can seek
instructions from the opening bank or can advise the LC to beneficiary, without any liability on its part. This bank has no obligation to
negotiatethedocuments.
d: Beneficiary - The party to whomthe credit is addressed i.e. seller or supplier or exporter. It gets payment against documents as per LC
fromthenominatedbankwithinvalidityperiod for negotiation,maximum21 days fromdateof shipment.
e: Negotiating bank - The bank towhomthe beneficiary presents the documents for negotiation. It claims payment fromthe reimbursing
bank or opening bank and gets S banking days to check thedocuments,
f: Reimbursing bank- 3rd bank which repays, settles or funds the negotiating bank at the request of its prindpal, the issuing
bank.
g: Confirming bank - The bank adding confirmation to the credit, which undertakes the responsibility of payment by the issuing bank
and on his failure to pay. The confirmation is added on request of the opening bank.
TYPESOF LETTERSOFCREDITS
DA (Mance) or DP LCs:
DA LCs are those,where the payment is to bemade on thematurity date-in terms of the credit. The documents of title to goods are delivered
to applicantmerely on acceptanceofdocuments forpayment.Hemakes the payment onduedate.To thatextent these areunsecured.
DP LCs are thosewhere thepayment ismade against documentson presentation.
Irrevocable&Revocable LCs:
An irrevocable LC is one, which can be cancelled or amended with consent of beneficiary, applicant bank and confirming bank, if any. A
revocable credit is one that can be cancelled or amended at any time without the prior knowledge of the beneficiary. If the negotiating bank
makes a payment to the seller prior to receiving noticeof cancellation or amendment, the issuing bankmust honour the liability.
Ifnothing is stated, theLCis irrevocable.
With orwithout recourse LCs:
Where the beneficiary holds himself liable to the holder of the bill if dishonoured, it is considered with-recourse LC.Where he does not hold
himself liable, the credit is said to bewithout-recourse. As per RBI directive (Jan 23, 2003), banks should not open such LCs.Under LC, the Banks
can negotiatebillsbearing the 'without recourse' clause.
A restricted LC is onewherein&specified bank is designated to pay, accept or negotiate.
ConfirmedLCs:
It is a credit to which the advising or other bank at the request of the issuing bank adds confirmation that payment will be made. The
confirming bank's liability is similar to the issuing bank. The confirming bank has to negotiate documents if tendered by the beneficiary.
Transferable LCs:
It is an LC, where the beneficiary is entitled to transfer the LC, in whole or in part, to the 2' beneficiary/s (supplier of beneficiary). The 2'
beneficiary, however, cannot transfer it further, but can transfer the unused portion, back to the original beneficiary. It is transferable only
once.
A back to back credit is the 2nd LC opened by the original beneficiary in favour of the 2" beneficiarywho is his local supplier. Ile tenders the
original LC to the bank in his country as a cover for opening the 2' LC. The terms ' of such creditwould be identical except that the pricemay be
lower and validity earlier.
A red clause credit also referred to a packing or anticipatory credit, has a clause permitting the correspondent bank in the exporter's country to
grant advancetobeneficiaryat issuingbank'sresponsibility. Theseadvancesareadjustedfromproceedsofthebillsnegotiated.
A green clause LC permits the advances for storage of goods in a warehouse in addition to pre-shipment advance. It is an
extension of the red clause LC.
Standby credits is similar to performance bond or guarantee, but issued in the formof LC. The beneficiary can submit his claimbymeans of a draft
accompaniedby the requisitedocumentary evidenceofperformance, as stipulated inthe credit.
DocumentaryCredits:
When LC specifies that the bills drawn under LC must accompany documents of title to goods such as RRs or MTRs or Bills of lading etc. it is
termed asDocumentary Credit. If any such documents are not called, the creditis said to be Clean Credit.
RevolvingCredits:
These LCs provide that the amount of drawingsmade there underwould be reinstated andmade available to the beneficiary again and again for
further drawings during the currency of credit provided the applicant makes the payment of documents earlier negotiated. At times, an overall

turnover cap is also stipulated.
Instalment Credit:
It is a letter of credit for the full value of goods but requires shipments of specific quantities of goodswithin nominated period and allows for partshipment.
In case any one instalment of shipment ismissed, creditwill not be available for that and subsequent instalment unless LC permits it.
DOCUMENTSUNDER LETTEROF CREDIT
Liability of an opening bank in a letter of credit arises,when thebeneficiary delivers the documents strictly drawn asper terms of the letter of
credit. Thesedocuments include the following:
Bill of exchange: This is the basic document which requires to be discharged bymaking the payment. It is defined u/s 5 of NI Act. The right to
drawthis document is available to beneficiary and the amount, tenor etc. has to be in terms of the credit.
Invoice : This document provides relevant details of the sale transaction, which is made in the name of the applicant, by the
beneficiary. The details regarding, quantity, price, specification. etc. should be same as mentioned in the letter of credit.
Transport documents: It evidences the despatch of the goods by the beneficiary, by handing over the goods to the agent of the applicant, which
may be a ship, railways or a transport operator, who issues documents such as such as bill of lading, railway receipt, transport receipt. Other
documents could beAirway Bill or Postal or courier receipt.
Insurance : The despatched goods are required to be insured for transit. Insurance policy or insurance certificate should be signed by the
company or underwriter or their agent. Amount, kinds of risk etc. should be same asmentioned inthe letter of credit.
Other documents: The letter of creditmay also specify other documents to bepresented alongwith the abovedocumentswhichmay include
certificateoforigin, certificate fromhealth authorities etc.
Forward Contracts in Foreign Exchange
Forward contract is a contract which affords adequate protection to an exporter or an importer against exchange risk. Under these contracts, a
banker and customer enter into an agreement to buy or sell a fixed amount of foreign currency on a future specified date at a pre-determined
rate of exchange. Exporter, for instance sells foreign exchange of specified amount and currency at a specified future date which assures him
definite payment and the banker agrees to buy the same amount and currency at a pre determined rate, which assures himdefinite availability
of foreign exchange. A forward contract transactionmay end up in delivery on due date, early or late delivery, cancellation on due date, early or
late cancellation or extension on duedate and early or late extension.