Letters of Credit
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Letters of Credit (L/C) Value creation through process innovations!
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Transcript of Letters of Credit
Letters of Credit (L/C)
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A documentary credit is the written promise of a bank, undertaken on behalf of a buyer, to pay a seller the amount specified in the credit provided the seller complies with the terms and conditions set forth in the credit.
What is L/C ?
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How does L/C function ?
Banks act as intermediaries to collect payment from the buyer in exchange for the transfer of documents that enable the holder to take possession of the goods.
The seller is assured that payment will be made by a party independent of the buyer so long as the terms and conditions of the credit are met.
The buyer is assured that payment will be released to the seller only after the bank has received the title documents called for in the credit.
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Types of Credits
Letter of Credits
Standard credits
Revocable (cancellable)
Irrevocable (non-cancellable)
Confirmed (Buyer’s bank &
another bank guarantee payment)
Un-Confirmed (Only buyer’s bank
guarantees payment)
Specialized credits
Revolving Credits
Red Clause Credits
Standby Credits
Transferable Credits
Back-to-back Credits
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Issuance of L/C
Buyer / Importer
Buyer / Importer
Beneficiary / Exporter
Advising / Confirming
Bank
4.Advice of L/C
3.Request to Advice &
confirm L/C
1.Purchase &
Sales Agreement
2.Request for a L/C
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Payment under L/C
Buyer / Importer
Buyer / Importer
Beneficiary / Exporter
Advising / Confirming
Bank
3.Payment
1.Shipment of
Goods
3.Payment
2.Documents
2.Document
3.Payment
2.Documents
Advantages Importer is assured of payment to exporter only if all
terms & conditions of L/C would be met Importer is able to negotiate more favorable trade
terms with the exporter
Disadvantages L/C doesn’t guard import from exporter shipping
inferior quality and / or lower quantity of goods Its importer’s responsibility to ascertain reputation of
exporter. It is important for important to have line of credit
before the bank could issue L/C
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Advantages & Disadvantages to the
Importer
Advantages Risk of payment relies upon the creditworthiness of
the Issuing bank & not on creditworthiness of the importer
If L/C is not issued as agreed, exporter is not obligated to ship against it.
Disadvantages Importers might be unable to open L/C due to the lack
of credit facilities with their bank Documents must be prepared and presented in strict
compliance with requirements stipulated in L/C & cannot modify it.
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Advantages & Disadvantages to the
Exporter
Beneficiary name Credit amount Validity period for presentation of the document Beneficiary bank name Payment type availability Desired documents Notify address Merchandise description Confirmation order
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Key points for Buyer in L/C
L/C date expired prior to its presentation Inconsistent description of goods Changes included in the invoice not authorized in
the credit Mismatch of amount mentioned in invoice and
draft Ports of loading and destination are wrongly
mentioned Key documents are unattached or have wrong
information Invoice or statement is not signed by appropriate
authority
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Common Defects in L/C
L/C doesn’t ensure that the goods actually shipped are as ordered.
L/C doesn’t insulate buyers and sellers from other disagreements or complaints arising from their relationship.
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Limitations of L/C
Get in touch
Genex Logistics(Genex LogiSolutions Pvt. Ltd.)
681, Sec 16B, Pocket B, Dwarka, New Delhi - 110075
Tel: +91-11-28035020
Mobile: +91-9810404438
Email: [email protected]: www.genexlogistics.in
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For queries on L/C
Thank You!!
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