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Letter of Credit /
Documentary Credit
Prepared by
Md Sajjad Hossain
Foreign Exchange Branch
Sonali Bank Limited
L/C
• A written commitment to pay, by a buyer's or importer's bank (called the issuing bank) to the seller'sor exporter's bank (called the accepting bank, negotiating bank, or paying bank).
• A letter of credit guarantees payment of
a specified sum in a specified currency,
provided the seller meets precisely-
defined conditions and submits the
prescribed documents within a fixed
timeframe. These documents almost
always include a clean bill of lading or air
waybill, commercial invoice, and
certificate of origin.
• To establish a letter of credit in favor of the seller or exporter (called the beneficiary) the buyer (called the applicant or account party) either paysthe specified sum (plus service charges) up frontto the issuing bank, or negotiates credit. Lettersof credit are formal trade instruments and are used usually where the seller is unwilling to extend credit to the buyer. In effect, a letter of credit substitutes the creditworthiness of a bank for the creditworthiness of the buyer. Thus, the international banking system acts as an intermediary between far flung exporters and importers.
• However, the banking system does not take on
any responsibility for the quality of goods,
genuineness of documents, or any other
provision in the contract of sale. Since the
unambiguity of the terminology used in
writing a letter of credit is of vital importance,
the International Chamber Of Commerce (ICC)
has suggested specific terms (called
Incoterms) that are now almost universally
accepted and used.
•Unlike a bill of exchange, a letter of credit is a nonnegotiable instrument but may be transferable with the consent of the applicant.
• Although letters of credit come in numerous
types, the two most basic ones are
• (1) Revocable-credit letter of credit and
• (2) Irrevocable-credit letter of credit, which
comes in two versions
• (a) Confirmed irrevocable letter of credit and
• (b) Not-confirmed irrevocable letter of credit.
Source: http://www.businessdictionary.com
Important DocumentsImporter
� LCA form
� LC application
�IRC (Import Registration Certificate
� Chamber of Commerce membership Certificate
� Tax Related documents
� Insurance Cover note
� Agreement / Performa Invoice
Importnat Documents
Exporter
� ERC (Export registration Certificate)
� Bill of Lading
� Invoice
�Bill of Exchange
� Insurance Policy Coverage
� Certificate of origin
LC Procedures
• Related terms
• A sight LC causes payment to be made immediately to the beneficiary/seller/exporter upon presentation of the correct documents.
• Negotiation means the giving of value for draft(s) or document(s) by the bank authorized to negotiate, with the nominated bank.
• Advising Bank — advises the beneficiary at the request of the issuing bank.
• Applicant — the party on whose request the issuing bank issues a credit .
• Banking day—The day on which a bank is regularly open at the place at which an act to be performed.
• Beneficiary — the party who is to receive the benefit (payment) of the LC. The consignee of an LC and the beneficiary may not be the same. The credit is issued in the beneficiary's favor.
• Presentation — either delivery of documents against an LC or the document itself.
• Complying presentation — when the presentation of documents is in accordance with:
• the terms and conditions of the credit
• the applicable provisions of UCP
• international standard banking practice
• Confirmation — a definite undertaking from the confirming bank to honor or negotiate a complying presentation in addition to that of the issuing bank.
• Confirming bank — adds confirmation to an LC. It does so at the request of the issuing bank and taking authorization from the issuing bank.
• Letter of credit/credit — an irrevocable commitment of the issuing bank to honor a complying presentation.
• Honour — to act according to commitment of the LC. Presentations are honored in different ways depending on the type of credit:
• Making payment at sight for sight LC.
• Incurring a deferred payment undertaking and paying at maturity for deferred payment LC.
• Accepting a draft drawn by the beneficiary and paying at maturity for deferred acceptance LC.
• Issuing bank — issues the LC.
• Nominated Bank — the bank with which
credit is available.
• Negotiation — A nominated bank is said to
negotiate a document if it purchases a draft or
documents under a complying presentation
either by making an advance or agreeing to
advance funds to the beneficiary on or before
the date on which reimbursement is due to
the nominated bank.
• SWIFT (Society for worldwide Interbank
Financial Telecommunication
• Inco-terms (International Commercial
terms) Example-FOB
• ICC (International Chamber of
Commerce)
• UCPDC (Uniform Customs and Practices
for Documentary Credit) (UCP 600)