Letter of Credit /

Documentary Credit

Prepared by

Md Sajjad Hossain

Foreign Exchange Branch

Sonali Bank Limited

L/C

• A written commitment to pay, by a buyer's or importer's bank (called the issuing bank) to the seller'sor exporter's bank (called the accepting bank, negotiating bank, or paying bank).

• A letter of credit guarantees payment of

a specified sum in a specified currency,

provided the seller meets precisely-

defined conditions and submits the

prescribed documents within a fixed

timeframe. These documents almost

always include a clean bill of lading or air

waybill, commercial invoice, and

certificate of origin.

• To establish a letter of credit in favor of the seller or exporter (called the beneficiary) the buyer (called the applicant or account party) either paysthe specified sum (plus service charges) up frontto the issuing bank, or negotiates credit. Lettersof credit are formal trade instruments and are used usually where the seller is unwilling to extend credit to the buyer. In effect, a letter of credit substitutes the creditworthiness of a bank for the creditworthiness of the buyer. Thus, the international banking system acts as an intermediary between far flung exporters and importers.

• However, the banking system does not take on

any responsibility for the quality of goods,

genuineness of documents, or any other

provision in the contract of sale. Since the

unambiguity of the terminology used in

writing a letter of credit is of vital importance,

the International Chamber Of Commerce (ICC)

has suggested specific terms (called

Incoterms) that are now almost universally

accepted and used.

•Unlike a bill of exchange, a letter of credit is a nonnegotiable instrument but may be transferable with the consent of the applicant.

• Although letters of credit come in numerous

types, the two most basic ones are

• (1) Revocable-credit letter of credit and

• (2) Irrevocable-credit letter of credit, which

comes in two versions

• (a) Confirmed irrevocable letter of credit and

• (b) Not-confirmed irrevocable letter of credit.

Source: http://www.businessdictionary.com

Important DocumentsImporter

� LCA form

� LC application

�IRC (Import Registration Certificate

� Chamber of Commerce membership Certificate

� Tax Related documents

� Insurance Cover note

� Agreement / Performa Invoice

Importnat Documents

Exporter

� ERC (Export registration Certificate)

� Bill of Lading

� Invoice

�Bill of Exchange

� Insurance Policy Coverage

� Certificate of origin

LC Procedures

• Related terms

• A sight LC causes payment to be made immediately to the beneficiary/seller/exporter upon presentation of the correct documents.

• Negotiation means the giving of value for draft(s) or document(s) by the bank authorized to negotiate, with the nominated bank.

• Advising Bank — advises the beneficiary at the request of the issuing bank.

• Applicant — the party on whose request the issuing bank issues a credit .

• Banking day—The day on which a bank is regularly open at the place at which an act to be performed.

• Beneficiary — the party who is to receive the benefit (payment) of the LC. The consignee of an LC and the beneficiary may not be the same. The credit is issued in the beneficiary's favor.

• Presentation — either delivery of documents against an LC or the document itself.

• Complying presentation — when the presentation of documents is in accordance with:

• the terms and conditions of the credit

• the applicable provisions of UCP

• international standard banking practice

• Confirmation — a definite undertaking from the confirming bank to honor or negotiate a complying presentation in addition to that of the issuing bank.

• Confirming bank — adds confirmation to an LC. It does so at the request of the issuing bank and taking authorization from the issuing bank.

• Letter of credit/credit — an irrevocable commitment of the issuing bank to honor a complying presentation.

• Honour — to act according to commitment of the LC. Presentations are honored in different ways depending on the type of credit:

• Making payment at sight for sight LC.

• Incurring a deferred payment undertaking and paying at maturity for deferred payment LC.

• Accepting a draft drawn by the beneficiary and paying at maturity for deferred acceptance LC.

• Issuing bank — issues the LC.

• Nominated Bank — the bank with which

credit is available.

• Negotiation — A nominated bank is said to

negotiate a document if it purchases a draft or

documents under a complying presentation

either by making an advance or agreeing to

advance funds to the beneficiary on or before

the date on which reimbursement is due to

the nominated bank.

• SWIFT (Society for worldwide Interbank

Financial Telecommunication

• Inco-terms (International Commercial

terms) Example-FOB

• ICC (International Chamber of

Commerce)

• UCPDC (Uniform Customs and Practices

for Documentary Credit) (UCP 600)