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International Trade FinanceLetter of Credit
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Letter of Credit/ Documentary Credit
It is a conditional undertaking given by a bank at a request of an importer
(Applicant) or on its own behalf to effect settlement (Payment) to an
exporter (Beneficiary)
It ensures payment provided the terms and conditions of the credit have
been fulfilled
The importer has to pay for the documents of the goods to take ownership
of the goods
The bank is able to supply trade and credit information which is important
to both the importer and exporter
It is also known as Documentary Credit
Other types of L/C:
Transferable L/C
Revolving L/C (not allowed for Import in Bangladesh)
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Exporter
Issuing/Confirming bankNegotiating / Advising bank
4. Goods are shipped
1. L/C application
6. Documents sent to issuing bank
2. L/C issued
7. Issuing bank will effect payment or accept for a future payment
5. Documents presented. If
any discrepancy exists the
exporter is notified
3. L/C
advised
Letter of Credit (L/C)
9. Documents
received and
import
bill settled
Cash FlowDocuments Goods Flow
8. Payment toexporter
Advice / Notice
Importer
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Transferable L/C
A transferable L/C is an irrevocable L/C designated as transferable
It is a L/C that can be transferred by the original beneficiary to another party
for the same or lesser value
The transferable L/C allows partial shipments under which the L/C may be
transferred to one or more beneficiary
However the second beneficiary is not allowed to transfer to a third
beneficiary
The first beneficiary is allowed to substitute only drafts and invoices for
presentation unless otherwise specified in the master L/C
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Transferable L/C Phase 1
Exporte
r
2. Master L/C issued
3. Master L/C
advised
6. Transferred L/C advised
7. Goods are shipped
5. Transferred L/C issued
Cash FlowDocuments Goods Flow
Middleman
Advice / Notice
1. L/C application
allowing L/C to be
µTransferable¶
4. Request for L/C to
be transferred
Advising bank Issuing bankTransferring bank
Importer
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11. Master L/C documents
sent to issuing bank
Transferable L/C Phase 2
Exporte
r
Cash FlowDocuments Goods Flow
9. Transferred L/C documents
sent to transferring bank
13b. Remittance made
under Transferred L/C
12. Remittance made under Master L/C
14. Documents
received and
importbill settled
Middleman
Advising bank Issuing bankTransferring bank
13a.Middleman
receives
payment
13c.Payment toexporter
Advice / Notice
Importer
10. Middleman advised
to substitute
documents for
presentation under
Master L/C
8. Documents presented. If
any discrepancy exists the
exporter is notified
7. Goods are shipped
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Revolving L/C
It is a single documentary credit that covers multiple shipments over a long
period
It is automatically reinstated after each drawing or upon receipt of
authorisation from the L/C issuing bank
It has limits as to the duration of the facility and as to the amount involved
for each drawing
It provides convenience and possible reduction in transaction fess for large
sourcing agents
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Revolving L/C
Exporte
r
Negotiating / Advising bank
4. Goods are shipped, since being a revolving L/C
multiple shipments can be accommodated
6. Documents sent to issuing bank
2. Revolving L/C issued
7. Issuing bank will effect payment or accept for a future payment
3. L/C
advised
9. Documents
received and
import
bill settled.
Multiple
drawings
allowed
under
revolving
L/C
Cash FlowDocuments Goods Flow
Issuing bank
8. Payment toexporter
Advice / Notice
Importer
1. L/C application onrevolving
payment terms
5. Documents presented. If
any discrepancy exists theexporter is notified
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L/C Discounting / Negotiation
A L/C is said to be discounted / Negotiated when the negotiating
bank agrees to make payment in advance to the beneficiary upon
receipt of compliant or accepted documents.
The exporter receives the money for their exported goods from the
bank before the due date. It is thus beneficial to discount / negotiate
the L/C to enhance cash flow
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L/C Discounting / Negotiation
Negotiating / Advising bank
4. Goods are shipped
1. L/C application
7. Documents sent to issuing bank
2. L/C issued
8. Issuing bank will effect payment or accept for a future payment
9. Documents
received and
import
bill settled
Cash FlowDocuments Goods Flow
Issuing bank
Exporte
r
Advice / Notice
3. L/C
advised
Importer
6. Negotiating
bank will
discount L/C
and deliver
full value to
the exporter
5. Documents presented for
examination with request
for discounting, subject to
clean presentation
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L/C Confirmation
A L/C is considered µconfirmed¶ if a second bank (confirming bank) confirms to pay the
invoice amount even if the issuing bank fails to make the payment
Bank and country risks, which may arise from defaults or political restrictions, are mitigated
The confirmation is only valid if compliant documents are presented to the confirming bank
Confirmation charges are usually borne by the exporter and are reflective of the bank and
country risk
The ability to confirm a L/C will depend on confirming bank¶s risk appetite for the issuing
bank and country where the L/C is issued
Any advance payment or L/C discounted against a confirmed credit is on a non-recourse
basis
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L/C Confirmation
1. L/C application
2. L/C issued
3. L/C advised
5a. Yes. Bank adds confirmation
5b. No. Bank notifies accordingly
4. Requests for confirmation
Confirmation requirements met?
Exporte
r
Documents Advice / Notice
Negotiating /
Advising bank
Issuing bank
Importer