LETTER OF CREDIT By Dr Anubha Gupta Faculty

LETTER OF CREDIT By Dr. Anubha Gupta Faculty , S. S. in Commerce Vikram University Useful for BBA(H)/B. COM(H)/M. COM and allied subject

What is Letter of Credit ? Meaning : An Arrangement by means of which bank (Issuing Bank) acting at the request of a customer (Applicant ) undertakes to pay to a third party (Beneficiary) a predetermined amount by a given date according to agreed stipulation and against presentation of stipulated document.

What is Letter of Credit ? A letter of credit is an important financial tool in trade transactions. Both, domestic as well as international market, trades use the LC to facilitate the payments and the transactions. A bank or a financial institution acts as a thirdparty between the buyer and the seller and assures the payment of funds on the completion of certain obligations.

What is Letter of Credit ? • In a simple word letter of credit may define as a arrangement where payment is made against the document, its an agreement between Importer , Exporter and Bank.

Parties of LC 1 2 3 4 5 6 7 Applicant Issuing Bank Beneficiary Advising Bank Confirming Bank Negotiating Bank Reimbursing Bank

Parties of LC 1. Applicant : Applicant is the party who opens Letter of Credit. Normally, buyer of goods is the Applicant who opens letter of credit. Letter of credit is opened as per his instruction and necessary payment is arranged to open Letter of credit with his bank.

Parties of LC • 2. Issuing Bank : Issuing Bank is the bank who opens letter of credit. Letter of credit is created by issuing bank who takes responsibility to pay amount on receipt of documents from supplier of goods (beneficiary under LC).

Parties of LC 3. Beneficiary : • Beneficiary is the party under letter of credit who receives amount under letter of credit. The LC is opened on Beneficiary party’s favour, Beneficiary is Third party who is seller /exporter of the underlying LC.

Parties of LC • 4. Advising Bank : Advising bank is takes responsibility to communicate with necessary parties under letter of credit and other required authorities. The advising bank is the party who sends documents under Letter of Credit to opening bank.

Parties of LC 5. Confirming Bank : Confirming bank as a party of letter of credit confirms and guarantee to undertake the responsibility of payment or negotiation acceptance under the credit.

Parties of LC 6. Negotiating Bank who negotiates documents delivered to bank by beneficiary of LC. Negotiating bank is the bank who verifies documents and confirms the terms and conditions under LC on behalf of beneficiary to avoid discrepancies

Parties of LC • Reimbursing Bank Reimbursing bank is the party who authorized to honor the reimbursement claim of negotiation/ payment/ acceptance.

How letter of credit operates D Seller Beneficiary Buyer/Applicant A PAYMENT C Advising Confirming bank Issuing Bank B

How letter of credit operates

. • Thank You