Letter of Credit (LC) – Banking Awareness

    Letter of Credit (LC) - Banking Awareness
    Letter of Credit (LC) – Banking Awareness:
    A brief notes about the Letter of Credit (LC) was given here below, which was important banking awareness topic for the upcoming banking exams. Candidates those who are preparing for those exams can use this.

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    1).Letter of Credit (LC) is a document from a bank guaranteeing that a seller will receive payments in full as long as certain delivery conditions have been met

    2).If the buyer is unable to make payments on the purchase then the bank will cover the remaining amount

    3).LC are often used ininternational transactions where buyer and seller may not know each other and are from different countries thus exposing the seller to credit and legal risks caused by
    ·        Distance
    ·        Differing laws
    ·        Difficulty in knowing each party personally

    4).The bank that writes the LC will act on behalf of the buyer and will make sure that all delivery conditions have been met before making the payment to the seller

    5).LC are governed by guidelines given by theInternational Chamber of Commerce known asUniform Customs and Practice for Documentary Credits (UCP)

    6).LC is widely used in theimporting and exporting companies and also in land development

    7).To receive payments an exporter must present the documents required by the LC. The Payee presents a document proving that the goods were sent instead of showing actual goods

    8).Bill of lading (BOL) – is the document accepted by the bank as proof that goods have been shipped

    9).Types of documents required by the LC are as follows
    ·        Financial documents
    a)   Bill of exchange
    b)   Co-accepted draft
    ·        Commercial documents
    a)   Invoice
    b)   Packing list
    ·        Shipping documents
    a)   Transport document
    b)   Insurance certificate
    c)   Commercial, official or legal papers
    ·        Official documents
    a)   License embassy legalization
    b)   Origin certificate
    c)   Inspection certificate
    d)   Phytosanitary certificate
    ·        Transport documents
    a)   Bill of Lading
    b)   Airway bill
    c)   Lorry/truck receipt
    d)   Railway receipt
    ·        Insurance documents
    a)   Insurance policy/certificate

    10).The bank’s obligation is defined by the terms of the LC alone and the sale contract is irrelevant according to the Article 4a of UCP

    11).Article 5 of the UCP states that banks deal with documents only and they will not be accountable for the goods

    12).The different types of LCs are as follows
    ·        Import/Export LC
    a)   For importer – Import LC
    b)   For exported – Export LC
    ·        Revocable LC
    a)   The buyer and the bank that established the LC will be able to manipulate or make corrections in the LC
    b)   This type of LC is obsolete
    ·        Irrevocable LC
    a)   Any changes or cancellation of LC is done by the applicant through the issuing bank
    b)   It must be authorized and approved by the beneficiary
    ·        Confirmed LC – A second bank will guarantee to honor a complying presentation at the request of the issuing bank
    ·        Unconfirmed LC – Does not acquire the other bank’s confirmation
    ·        Restricted LC – Only one advising bank can purchase a bill of exchange from the seller
    ·        Unrestricted LC – the confirmation bank is not specified that means the exporter can show the bill of exchange to any bank and receive a payment
    ·        Transferrable LC
    a)   It can be transferred to a second party at the request of the 1st beneficiary
    b)   A transferrable LC can be transferred to more than one alternate beneficiary as long as it allows partial shipments
    ·        Un-transferrable LC
    a)   The seller cannot assign all or part of LC to another party
    b)   In international commerce all credits are un-transferrable
    ·        Deferred/Usance LC
    a)   A credit that is not paid immediately after the presentation but after an indicated period that is accepted by both the seller and buyer
    b)   Seller allows buyer to pay the required money after taking the related goods and selling them
    ·        At Sight LC – a credit that the announcer bank immediately pays after inspecting the carriage documents from the seller
    ·        Back to Back LC
    a)   A pair of LCs in which one is to the benefit of a seller who is not able to provide the corresponding goods for unspecified reasons
    b)   In that situation a second credit is opened for another seller to provide the desired goods
    c)   It is issued to facilitate intermediary trade
    ·        Standby LC
    a)   Operates like a Commercial LC except that it is retained as a standby instead of being the intended payment mechanism
    ·        Red Clause LC
    a)   The terms and conditions are particularly written in red ink
    b)   Before sending the products seller can take the pre-paid part of the money from the bank
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