Letter Of Credit
Prepared For
Hassan
How To Open
Sir Mumtaz
Prepared By
Abdul Latif
Roll No
1204101
DATED
S.No
Topic
Page
No
01
Executive summary
01
02
Introduction
02
03
Letter of credit
03
04
04
05
05
06
07
07
08
08
09
09
10
10
Conclusion
12
11
Appendix (A)
13
12
Appendix (B)
14
13
Bibliography
15
14
Index
16
TABLE OF CONTENTS
EXECUTIVE SUMMARY
A letter of credit is a method of securing payment to a vendor. When a
seller asks a buyer to obtain a letter of credit, it means the seller would like
to ensure payment for a product he sells to that customer. Typically letters
of credit are issued by a bank. The most common forms are standby letters
of credit for domestic transactions and documentary letters of credit for
international transactions.
Letter of credit is a payment method in international trade which is used by
almost all sectors from textile to machinery, food manufacturing to
construction, oil trading to customer goods. You may assume that there are
big differences exist on letter of credit application process for all these
different sectors. But this is not correct. You have to follow similar
procedures when opening a letter of credit regardless of the sector you may
be located.
Two types of L/C is wideley used around the globe which is Revocable L/C
and Irrevocable L/C and the following parties are involved in letter of
credit; Applicant of L/C, L/C issuing bank, beneficiary party, advising bank,
confiming bank, negotiating bank and second beneficiary. Typically, the
documents a beneficiary has to present in order to receive payment include
a commercial invoice, bill of lading, and documents proving the shipment
was insured against loss or damage in transit. However, the list and form of
documents is open to imagination and negotiation and might contain
requirements to present documents issued by a neutral third party
evidencing the quality of the goods shipped, or their place of origin.
INTRODUCTION
When you hear the phrase letter of credit, it might be natural to think it
would refer to a document verifying that you are creditworthy, but that isn't
the case. a letter of credit is a document issued by a third party that
guarantees payment for goods or services when the seller provides
acceptable documentation. letters of credit are usually issued by banks or
other financial institutions, but some creditworthy financial services
companies, like insurance companies or mutual funds, might issue letters
of credit under certain circumstances.
The purpose of this report is to get deeper knowledge of the procedure to
open letter of credit. In this regard we were advised to visit any bank and
collect the relevant information regarding Letter of Credit. We have visited
the Habib Metro Bank ( Bahudarabad Branch).The branch manager was
really co-operative and he gave us not only his precious time but also his
valuable and practical insights on Letter of credit as he has years of
experience in this feild.
This report helped us a lot and a great addition in our knowledge.Now we
are fimiliar with procedure of opening letter of credit .
LETTER OF CREDIT
DEFINITION:
A conditional guaranty of payment made by a bank to the name of
beneficiary granting that payment will be made provided that the term of
credit are made. This term will state that the beneficiary must submit
satisfied document to a stated bank at a certain date.
TYPES OF L/C:
There are two types of Letter of Credit.
1) Revocable L.C
The Revocable L.C can be amended and cancel without the exporter
permission on knowledge.
2) Irrevocable L.C
An Irrevocable L.C cannot amended and cancel without the
permission or knowledge of the exporter.
CHARACTERISTICS OF
LETTER OF CREDIT
NEGOTIABILITY
Letters of credit are usually negotiable. The issuing bank is obligated to pay not only
the beneficiary, but also any bank nominated by the beneficiary. Negotiable
instruments are passed freely from one party to another almost in the same way as
money. To be negotiable, the letter of credit must include an unconditional promise
to pay, on demand or at a definite time. The nominated bank becomes a holder in due
course. As a holder in due course, the holder takes the letter of credit for value, in
good faith, without notice of any claims against it. A holder in due course is treated
favorably under the UCC.
The transaction is considered a straight negotiation if the issuing bank's payment
obligation extends only to the beneficiary of the credit. If a letter of credit is a straight
negotiation it is referenced on its face by "we engage with you" or "available with
ourselves". Under these conditions the promise does not pass to a purchaser of the
draft as a holder in due course.
REVOCABILITY
Letters of credit may be either revocable or irrevocable. A revocable letter of credit may
be revoked or modified for any reason, at any time by the issuing bank without
notification. A revocable letter of credit cannot be confirmed. If a correspondent bank
is engaged in a transaction that involves a revocable letter of credit, it serves as the
advising bank.
Once the documents have been presented and meet the terms and conditions in the
letter of credit, and the draft is honored, the letter of credit cannot be revoked. The
revocable letter of credit is not a commonly used instrument. It is generally used to
provide guidelines for shipment. If a letter of credit is revocable it would be
referenced on its face.
The irrevocable letter of credit may not be revoked or amended without the
agreement of the issuing bank, the confirming bank, and the beneficiary. An
irrevocable letter of credit from the issuing bank insures the beneficiary that if the
required documents are presented and the terms and conditions are complied with,
payment will be made. If a letter of credit is irrevocable it is referenced on its face.
COMMERCIAL DOCUMENTS
Invoice, Packing list
SHIPPING DOCUMENTS
Transport Document, Insurance Certificate, Commercial, Official
or Legal Documents
OFFICIAL DOCUMENTS
License, Embassy legalization, Origin Certificate, Inspection Cert ,
Phyto-sanitary Certificate
TRANSPORT DOCUMENTS
Bill of Lading (ocean or multi-modal or Charter party), Airway bill,
Lorry/truck receipt, railway receipt, CMC Other than Mate Receipt,
Forwarder Cargo Receipt, Deliver Challan...etc
INSURANCE DOCUMENTS
Insurance policy, or Certificate but not a cover note. Pre shipment
packing list.
STANDARD FORMS OF
DOCUMENTATION
When making payment for product on behalf of its customer, the issuing bank
must verify that all documents and drafts conform precisely to the terms and
conditions of the letter of credit. Although the credit can require an array of
documents, the most common documents that must accompany the draft include:
COMMERCIAL INVOICE
The billing for the goods and services. It includes a description of merchandise,
price, FOB origin, and name and address of buyer and seller. The buyer and seller
information must correspond exactly to the description in the letter of credit.
Unless the letter of credit specifically states otherwise, a generic description of the
merchandise is usually acceptable in the other accompanying documents.
BILL OF LADING
A document evidencing the receipt of goods for shipment and issued by a freight
carrier engaged in the business of forwarding or transporting goods. The
documents evidence control of goods. They also serve as a receipt for the
merchandise shipped and as evidence of the carrier's obligation to transport the
goods to their proper destination.
WARRANTY OF TITLE
A warranty given by a seller to a buyer of goods that states that the title being
conveyed is good and that the transfer is rightful. This is a method of certifying
clear title to product transfer. It is generally issued to the purchaser and issuing
bank expressing an agreement to indemnify and hold both parties harmless.
LETTER OF INDEMNITY
Specifically indemnifies the purchaser against a certain stated circumstance.
INTERNATIONAL TRADE
PAYMENT METHODS
ADVANCE PAYMENT
where the buyer parts with money first and waits for the seller to forward the
goods
DOCUMENTARY CREDIT
subject to icc's ucp 600, where the bank gives an undertaking (on behalf of
buyer and at the request of applicant ) to pay the shipper ( beneficiary ) the
value of the goods shipped if certain documents are submitted and if the
stipulated terms and conditions are strictly complied.
here the buyer can be confident that the goods he is expecting only will be
received since it will be evidenced in the form of certain documents called for
meeting the specified terms and conditions while the supplier can be confident
that if he meets the stipulations his payment for the shipment is guaranteed by
bank, who is independent of the parties to the contract.
DOCUMENTARY COLLECTION
subject to icc's urc 525, sight and usance, for delivery of shipping documents
against payment or acceptances of draft, where shipment happens first, then
the title documents are sent to the [collecting bank] buyer's bank by seller's
bank [remitting bank], for delivering documents against collection of
payment/acceptance
DIRECT PAYMENT
where the supplier ships the goods and waits for the buyer to remit the bill
proceeds, on open account terms.
RISKS SITUATION IN LC
TRANSACTION
FRAUD RISKS
The payment will be obtained for nonexistent or worthless merchandise against
presentation by the beneficiary of forged or falsified documents.
Credit itself may be forged.
LEGAL RISKS
Possibility that performance of a Documentary Credit may be disturbed by legal
action relating directly to the parties and their rights and obligations under the
Documentary Credit
CONCLUSION
A letter of credit is a method of securing payment to a vendor. When a
seller asks a buyer to obtain a letter of credit, it means the seller would like
to ensure payment for a product he sells to that customer. Typically letters
of credit are issued by a bank. The most common forms are standby letters
of credit for domestic transaction and documentary letters of credit for
international transactions.
APPENDIX(A)
Letter Of Credit: A letter of credit is a document from a bank guaranteeing that
a seller will receive payment in full as long as certain delivery conditions have been met.
In the event that the buyer is unable to make payment on the purchase, the bank will
cover the outstanding amount.
Bill Of Lading: A detailed list of a ship's cargo in the form of a receipt given by
cancelled unless everyone involved agrees. Irrevocable letters of credit provide more
security than revocable ones.
APPENDIX(B)
BIBLIOGRAPHY
www.smedia.org
www.wikipedia.org
www.businessdictionary.com
www.investopedia.com
INDEX
Documentary collection
Documentary Credit:
Irrevocable L/C
Issuing Bank
Commercial Invoice
Deferred Payment
Letter of credit:
Letter of Indemnity
Revocable L/C:
Sight Payment