Q2. Explain Letter of Credit and its whole process. Ans. A letter of credit (LC) is a type of guarantee given by a bank on behalf of its customer that the bank would make payment of goods and services to the supplier on presentation of documents, as required as per terms of the contract and LC. This term LC is often used in international trade when buyer and seller are far away from each other having different legal system and each unaware of others financial position. In such case, both parties deal through their banks and the devise used by banks is called LC or BCC. Parties to LC are : i) Applicant/Buyer/Importer/Opener ii) Issuing bank iii) Beneficiary/Exporter/Seller iv) Advising Bank/Notifying Bank – Bank in exporter‟s country through which LC is advised to the seller. v) Negotiating bank/nominated bank/paying bank – Bank in exporters country which makes payment on bills drawn by seller. vi) Reimbursing bank – bank appointed by issuing bank to reimburse payment to negotiating bank. Procedure of L.C. Purchaser makes an application to his bank for opening a L.C in favour of seller of other country. The bank after verifying the credit worthiness of applicant opens a LC. This L.C is then forwarded to the sellers bank in other country. The sellers bank after confirming the authenticity of LC, forwards the same to seller. The seller confirms the authenticity of LC, ships the machinery to the purchaser. Seller collects the bills of lading handed over by shipping company alongwith other documents under L.C; present these documents to his bank for obtaining the payment. After verifying bills documents, bank makes payment to seller. These documents are then sent to the purchaser bank under intimation to purchaser. The purchaser accepts the bill, collects the documents and makes payment. The purchaser goes to the shipping company, produces the documents and takes delivery. The purchaser‟s bank then forwards the payment to seller‟s bank. Documents under L.C 1. Bill of Exchange 2. Invoice 3. Transport documents e.g. bills of lading in case of a shipping company, airline bill in case of air transport, post parcel bill if sent by post 4. Insurance documents signed by insurance company or his agent. 5. Other documents as per terms of L.C e.g. certificate of weight, quality etc. Benefits of L/C To Purchaser: - No advance payment is required. - Not worried as payment only after getting documents. - Not worried about quality as certificate to that effect is there in documents. - He is sure of payment as banks are involved. - There is no delay in payment. - Not worried about import regulations of buyer‟s country. To Seller: - He is sure of payment as banks are involved. - There is no delay in payment. - Not worried about import regulations of buyer‟s country. - Not worried about fluctuations in currency rates as he gets payment in his currency. The banker‟s duty is primary for making payment as has been decided in many cases by various high courts and hence risk in L.C is minimum. Types of Letters of Credit (LC) 1. Revocable: One which allows cancellation or amendment of credit without prior notice to beneficiary however, LC should clearly state whether it permits revocation. 2. Irrevocable: All LC‟s are irrevocable unless stated in LC. Irrevocable LC cannot be cancelled/amended without consent of beneficiary. 3. Confirmed/unconfirmed LC: When on the request of issuing banker, bank in buyer‟s country confirms the credit, it is called confirmed credit and when not confirmed by buyer‟s bank, it is called unconfirmed LC. This confirmation is extra guarantee to the seller. 4. Revolving LC: Such LC‟s are opened to cover a series of transactions with the same buyer during a specified period.
Posted on: Tue, 29 Oct 2013 12:41:50 +0000
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