ALL ABOUT LETTER OF CREDIT ........

What is Letters of Credit ?

A letter of credit, which is also known as a Documentary Credit , is a promise to pay. Banks issue letters of credit as a way to ensure sellers that they will get paid as long as they do what they have agreed to do.

Letters of credit are common in international trade because the bank acts as an uninterested party between the buyer and seller. Both importers and exporters might use LC to protect themselves as it spells out the details so that everybody's on the same page.
• A payment undertaking given by a bank (issuing bank)
• On behalf of a buyer (applicant)
• To pay a seller (beneficiary) for a given amount of money
• On presentation of specified documents representing the supply of goods
• Within specified time limits
• Documents must comply with terms and conditions set out in the letter of credit
• Documents to be presented at a specified place

How does it work ?

• Buyer and seller agree to conduct business.
• The seller demands a letter of credit to guarantee payment.
• Buyer applies to his bank for a letter of credit in favor of the seller.
• Buyer's bank approves the credit risk of the buyer, issues and forwards the credit to its

correspondent bank (advising or confirming). The correspondent bank is usually located in the

same geographical location as the seller (beneficiary).
• Advising bank will authenticate the credit and forward the original credit to the seller

(beneficiary).
• Seller (beneficiary) ships the goods, then verifies and develops the documentary requirements

to support the letter of credit.
• Seller presents the required documents to the advising or confirming bank to be processed for

payment.
• Advising or confirming bank examines the documents for compliance with the terms and

conditions of the letter of credit.
• If the documents are correct, the advising or confirming bank will claim the funds by:
o Debiting the account of the issuing bank.
o Waiting until the issuing bank remits, after receiving the documents.
o Reimburse on another bank as required in the credit.
• Advising or confirming bank will forward the documents to the issuing bank.
• Issuing bank will examine the documents for compliance. If they are in order, the issuing bank

will debit the buyer's account.
Issuing bank then forwards the documents to the buyer

Negotiability

Letters of credit are usually negotiable. The issuing bank is obligated to pay not only the beneficiary, but also any bank nominated by the beneficiary. The transaction is considered a straight negotiation if the issuing bank's payment obligation extends only to the beneficiary of the credit.

Revocability

Letters of credit may be either revocable or irrevocable and it will be referenced on its face. A revocable letter of credit may be revoked or modified for any reason, at any time by the issuing bank without notification. The revocable letter of credit is not a commonly used instrument and is generally used to provide guidelines for shipment.

The irrevocable letter of credit may not be revoked or amended without the agreement of the issuing bank, the confirming bank, and the beneficiary. An irrevocable letter of credit from the issuing bank insures the beneficiary that if the required documents are presented and the terms and conditions are complied with, payment will be made.

Documents to be submitted along with LC

When making payment , the issuing bank must verify that all documents comply with the terms and conditions of the letter of credit. Although the credit can require an array of documents, the most common documents that must accompany the draft include:

Commercial Invoice

The billing for the goods and services. It includes a description of merchandise, price, FOB origin, and name and address of buyer and seller. The buyer and seller information must correspond exactly to the description in the letter of credit.

Bill of Lading

A document evidencing the receipt of goods for shipment and also serve as a receipt for the merchandise shipped and as evidence of the carrier's obligation to transport the goods to their proper destination.

In addition to above , Packing list ( if any), Declaration Letter , Papers related RBI regulations (FERA) etc .. also need to submit .

Common issues in Documentation

The seller (beneficiary) should prepare and examine all documents carefully before presentation to the paying bank to avoid any delay in receipt of payment. Commonly found discrepancies between the letter of credit and supporting documents include:
• Letter of Credit has expired prior to presentation of draft.
• Bill of Lading evidences delivery prior to or after the date range stated in the credit.
• Stale dated documents.
• Changes included in the invoice not authorized in the credit.
• Inconsistent description of goods.
• Invoice amount not equal to draft amount.
• POL and POD not as specified in the credit.
• Description of merchandise is not as stated in LC.
• A document required by the LC is not presented.
• Invoice or statement is not signed as stipulated in the letter of credit.

When a discrepancy is detected by the negotiating bank, a correction to the document may be allowed if it can be done quickly while remaining in the control of the bank. If time is not a factor, the exporter should request that the negotiating bank return the documents for corrections.