o Letter of Credits

A letter of credit is a written undertaking by a bank (issuing bank) given at the

request and accordance of a buyer (the applicant) to the seller (the beneficiary) to a fact
payment up to a stated amount of money within prescribed time limit provided that the terms and
conditions are complied with. Letter of Credits issued in the international trade business. There
are two types of Letter of Credits:
o Usance LC
o Sight LC
o Letter of Guarantees
Letter of guarantees is a guarantee that the bank gives to an organization on behalf of
the bank. Letter of Guarantees are mainly used when a tender for a specific job is filled by
acustomer. There are three main types of LGs
Securities for Advances
The advancing of credit involves a great risk for the bank. Therefore, to cover risk, the bank
keeps different tangible and non-tangible securities, before sanctioning the credit facility to a
customer. The bankers prefer those securities that carry less risk of depreciation due to market
fluctuations and are easily saleable, even under changing market conditions. The securities used
in disbursing advances are as follows:

Pledge
Mortgage
Hypothecation
Charge
Lien on Documents
Guarantees

Pledge:
Pledge is the actual delivery of the movable and tangible property to the lender, as a security for
a credit. In pledge, the possession of movable assets is with bank but the ownership remains with
the client. Pledge is considered to be the best security for the bank. The commodities which are
being pledged are normally raw material, consumables, finished goods and in certain cases work
in process (WIP).

Mortgage:

In mortgage, immovable assets are offered as security. Mortgage means, to

surrender the proprietary rights of the property. The transferor of property is called
mortgagor and the transferee (bank) is called a mortgagee. Usually two types of
Mortgages are being created in the bank for the purpose of collateral.

Equitable Mortgage

Registered Mortgage

Token Registered Mortgage

Equitable Mortgage (E/M):

When a mortgage deed is attached with the title documents only and is deposited in the bank, it
is known as Equitable Mortgage or Mortgage by deposit of title deed.It is the most common
form of the mortgage created in bank.
Registered Mortgage (R/M):
When the mortgage deed is between the bank and the client is registered, it becomes a registered
mortgage. Mortgage deed is registered with the Registrar of the Companies. It is an expensive
mortgage and is created when the title documents are weak or the client is not much trustworthy.
Token Registered Mortgage
In TRM except of mark leiun on whole property, leiun is marked on some part of property. Red
Most of the cudtomers like this type og mortagage because they are not supposed to be
registered the whole property and reduce their cost in order to pay fee for the registeration of
whole property.
Hypothecation:
When an immovable property is offered for security against credit but both theownership and
possession is left with the borrower, the goods are said to beHypothecated. Securities like
machinery, stock etc. are offered for hypothecation. The banker, for his protection, may ask the
borrower to insure. The banker mayhimself do so and recover the expenses from the
borrower.The banker may ask the borrower to maintain a balance of goods sufficient to fulfill
themargin requirements.For the creation of hypothecation, the bank gets the letter of
hypothecation signed by the client. This deed is got registered in case of both public and private
Lien on Documents:
Like charge, bank creates its lien on the documents in its possession, as security.For example, in
case of import transaction under L/C, bank creates lien on importdocuments.
.
Reasons for opening LC
Following are the reasons for opening the LC

Helps importer to make goods available on credit.

A sort of guarantee to exporter regarding payment.
Due to presence of banks it becomes a more secured way of international trade.

Types of LC
LC is divided in two ways
Type
1.Sight LC

Features
Payment immediately after
shipment

2.Usance LC

Payment is done as on agreed

time

Procedure of opening LC
LC is a kind of credit document. In order to open LC the importer comes to BAL. For opening
LC first of all the person should have an account with the bank and have good contractual
relationships with it. . Party comes to the credit department and fills the form which is provided
on the payment of Rs. 100. This form is filled by the party and is return to the bank, it includes
details like.
Name of company
Address
Country of origin
Branch name
Quantity
Insurance company
Shipment from
Shipment to
The credit department makes a credit line approval and sends it to head office for opening of LC.
When approval comes the work of trade department starts.

Documents/Requirements for LC:

The trade department will ask for following documents for opening LC.
LC application request
LC Application Form
Valid import license
Performa invoice / Sale Contract
Letter of under taking form importer
Insurance cover
Customer Portfolio
After verification of securities and details provided by the application, a credit line proposal is
made which is sent to the Area Office. After Area Office approval the LC is issued to the
customer.
Points to Be Considered While Opening LC

Availability of sufficient funds in LC customer account.

Margin of funds availability may vary as per bank requirements.
Value of LC should not increase the value of import license.

After all the documents are being checked and signatures are verified by the bank. A
sanction slip is attached with each form so that the approval can be gained from the manager of
the bank. After the approval is made four copies are prepared and the entries are made on the
computer and the printout is taken the margin amount is checked from the importer account and
if the amount is not found then LC is not opened and the party is informed about the situation.
Working after opening LC
Function of trade department doesnt ends on the opening of LC. After this bank
sends the LC to the correspondent bank of importer. Exporter collects his LC and procedure of
shipment starts. After shipment the exporter prepares shipment documents and through his
correspondent bank send to importer bank. Importers bank or opening bank receives the
following documents from the exporters bank or negotiating bank.
Bill of exchange
Invoices

 Bill of lading
Packing list
Insurance
And then as per mutually agreed settlement the payment is done and LC is retired.