Sigdel

Letters of Arun
Credit
Wednesday, January
21, 2015

TRADE TRANSACTION
Goods

Seller

Sales contract

Buyers

Money
Wednesday, January
21, 2015

2
Arun Sigdel

Imports and Exports

Imports and exports are the two important components

of a foreign trade. Foreign trade is the exchange of
goods and services between the two countries, across
their international borders.
Imports imply the physical movement of goods into a
country from another country in a legal manner. It refers
to the goods that are produced abroad by foreign
producers and are used in the domestic economy to
cater to the needs of the domestic consumers.
Exports imply the physical movement of goods out of a
country in a legal manner.

Wednesday, January
21, 2015

Arun Sigdel

Objectives
Exporters:
To offset domestic markets cyclical sales.
To achieve additional sales.
To improve the efficiency of manufacturing equipment.
To achieve the success the firms management has seen
others achieve.
Importers:
To fill the gap of the supplies.
To make regular availability of goods/services.
To speed up industrialization.
To get achieved the goal set by the management.
Wednesday, January
21, 2015

Arun Sigdel

TRADE TRANSACTION
Goods

Seller

Sale contract

Buyers

Money
Wednesday, January
21, 2015

5
Arun Sigdel

Some methods of payment

Advance payment (remittance).

Open account.
Bills for (Documentary) collection.
Documentary Credit (LC).

Wednesday, January
21, 2015

Arun Sigdel

Advance Payment?

(They send you the money then you ship the goods!)

Be careful! Dont ship before

you are sure you are in receipt
of collected funds

wire transfer: make sure they

have complete instructions &
verify receipt
check - determine that check
has been paid by drawee bank
foreign check - may take weeks
to clear

Wednesday, January
21, 2015

Arun Sigdel

Open account... are you really

sure?

(You ship the goods, they sell them and then pay
you...maybe)

How can we be
sure hell pay?!

Wednesday, January
21, 2015

Arun Sigdel

Documentary Collection- Operation Chart

Goods

EXPORTER
(DRAWER)

Shipping
documents

Payments

IMPORTER
(DRAWEE)

Payments

Shipping
documents

Payments
REMITTING
BANK

Wednesday, January
21, 2015

Shipping documents

Arun Sigdel

COLLECTING
BANK

LC Operation system
EXPORTER
(BENEFICIARY)

LC Advise

Docs

Goods

Payment

IMPORTER
(APPLICANT)

Payments

Application

Documents
Payments

INTERMEDIARY
(ADVISING BANK)
Wednesday, January
21, 2015

Documents
Issues LC
Arun Sigdel

ISSUING
BANK

10

Introduction
A letter of credit is a document issued mostly by a
financial institution which usually provides an
irrevocable payment undertaking to a beneficiary
against complying documents as stated in the credit.
Letter of Credit is abbreviated as an LC or L/C, and
often is referred to as a documentary credit,
abbreviated as DC or D/C, documentary letter of
credit, or simply as credit (as in UCP- 600).
In documentary credit operations all parties
concerned deal in documents and not in goods.

Wednesday, January
21, 2015

Arun Sigdel

11

Letter of Credit
Issuance
Importer
(applicant)

(1) Contract

(2) Applies for

LC

Exporter
(beneficiary)
(4) Advises
LC

(3) Issues LC
Issuing Bank
Wednesday, January
21, 2015

Advising Bank
Border

Arun Sigdel

12

Letter of Credit Payment

Importer
(4a)
Pays

Exporter

(1) Ships goods

(4b)
Releases
document
(2) Submits
documents

Issuing
Bank
Wednesday, January

(3) Pays or
commits to pay
Reimbursing
Bank

Border

Nominated
Bank
Arun Sigdel

13

Importance
1.It is widely accepted method for settling international
financial transactions.
2. It brings an element of confidence to the parties involved.
3. It gives a form of security to both the buyer and seller as
the payment is handled by the bank upon compliance of
the stated conditions.
4. It helps both the parties meet their credit requirement and
foreign exchange requirement.
5. It serves to acquire legal credit documents for business.
6. It serves as a proof of evidence that the goods belong to a
specific country, such as belong to a landlocked country
like Nepal.
January 21, 2015

Arun Sigdel

14

Need of Letter of Credit

Seller
Buyer

Timely payment

A managed cash flow, with

bank finance

Bank finance for buyers

credit & goods
arrangement

An assuring third party

An assuring third party

Convenient
channel

Payment to be received at
own location

Desired
quantity
and
quality of the goods in
time

Wednesday, January
21, 2015

payment
Arun Sigdel

15

Parties Involved in L/C

Applicant
Issuing Bank
Advising Bank
Confirming Bank
Beneficiary
Negotiating/Collecting Bank
Reimbursing Bank

January 21, 2015

Arun Sigdel

16

Applicant

Should know the status of the beneficiary

Should understand the terms and conditions mentioned
in the underlying contract
Furnishes the documents to the issuing bank as required
to issue the LC
Agrees to abide by the local rules and regulations
Agrees to pay as per the payment terms of the
contract/LC

January 21, 2015

Arun Sigdel

17

Issuing Bank

Functions as the agent/trustee of the applicant

Should satisfy itself with the credit worthiness of the
applicant, beneficiary and with the documents submitted
Should ensure that the regulatory conditions are fulfilled
Should be precise and specific in its instructions, should
avoid excessive details in the LC
Should issue the LC on the conditions requested by the
applicant
Should decide the acceptance or refusal solely based
on the documents and ask for disposal instruction of the
presenter
Agrees to pay as per the payment terms of the LC

January 21, 2015

Arun Sigdel

18

Advising Bank

Should establish the authenticity of the LC before

advising
Should immediately advise the issuing bank if it could
not establish the authenticity or elects not to advise the
LC
If opts to advise the LC, should inform the beneficiary
without delay
Should be aware of the conditions mentioned in the LC
Should check if any of the conditions mentioned in the
LC are against the local regulations

January 21, 2015

Arun Sigdel

19

Confirming Bank

Takes on all the liabilities/responsibilities of the issuing

bank
Should satisfy itself with the credit worthiness of the
issuing bank
Should confirm the LC on the terms and conditions
specified therein
Should immediately advise the issuing bank if elects not
to confirm the LC

January 21, 2015

Arun Sigdel

20

Beneficiary

Upon receipt of the LC should check if the terms and

conditions mentioned are feasible and may ask for
amendment
Delivers the goods/services as per the LC
Satisfies the conditions mentioned in the LC
Presents documents as required in the LC to the
negotiating or collecting bank

January 21, 2015

Arun Sigdel

21

Negotiating/Collecting Bank

Acts as the agent/trustee of the beneficiary

Checks the docs as per the LC conditions
Advices the presenter (beneficiary) of discrepancies (if
any) in the docs
Forwards the same to the issuing bank as per the
beneficiary's instruction
Collects fund from the issuing bank or the reimbursing
bank if any nominated in the LC
Reimburses the beneficiary either upon negotiation or
upon receipt of fund from the issuing bank

January 21, 2015

Arun Sigdel

22

Reimbursing Bank

Provides reimbursement to the claiming bank as per the

authority provided
Is not concerned about the terms and conditions of the
LC
Acts as guided by URR

January 21, 2015

Arun Sigdel

23

Types of L/ C
a) Security Wise
i) Revocable LC (not in use today)

LC, which can be cancelled or amended by the

applicant at any time within the validity without prior
consent of the beneficiary.

The issuing bank is reserved with the right to revoke

the same without notice to other parties.

Wednesday, January
21, 2015

Arun Sigdel

24

Types of L/C, contd

ii) Irrevocable LC

LC which can not be cancelled or amended within the

validity without prior consent of the parties involved in
LC.

Credit means an irrevocable undertaking of the

issuing bank (UCP 600 Art 2).

A credit is irrevocable even if there is no indication

to that effect. (UCP 600 Art 3)

Wednesday, January
21, 2015

Arun Sigdel

25

Types of L/C, contd

iii) Confirmed/ Unconfirmed LC

i.
ii.

LC is guaranteed by adding payment confirmation by the

advising bank or any third bank (confirming Bank) on
behalf of the opening bank.
otherwise it is an unconfirmed LC.
confirmation can be added only to irrevocable .

Wednesday, January
21, 2015

Arun Sigdel

26

Types of L/C, contd

b) Payment Wise
i) Sight LC (Payment LC)
The LC against which payment is made at first sight of
credit conformed import documents asked in the
credit.

ii) Usance LC (Time LC/ Acceptance LC)

Usance credit calls for drawing of drafts at a stated
usance period requiring acceptance and/ or payment
by drawee at the end of such usance period. For
example, a 60 days usance credit requires payment
after 60 days.
Wednesday, January
21, 2015

Arun Sigdel

27

Types of L/C, contd

iii) Deferred Payment LC

LC in which payment is made after agreed time

period in installment basis or in a lump-sum as in
usance LC.

This type of LCs is normally used where a payment

is required to make by LC for availing (buying)
services rather than goods itself.

Wednesday, January
21, 2015

Arun Sigdel

28

Types of L/C, contd

iv) Red Clause LC (Advance Payment)

A red clause LC allows the beneficiary to avail

finances in advance to execute the required order in
LC.

The credit contains a special clause, usually printed in

red, authorizing the bank to make advances to the
beneficiary.

Wednesday, January
21, 2015

Arun Sigdel

29

Types of L/C, contd

v) Reimbursement LC
LC having special payment conditions that, the
negotiating bank is authorized to claim and get the
payment against the LC directly from the opening
banks nominated agency bank after presentation of
credit conformed documents.

Wednesday, January
21, 2015

Arun Sigdel

30

Types of L/C, contd

vi) Installment LC

Installment LC calls for shipment of goods in specified

quantity on stated dates or periods.

An installment LC is similar to any simple LC with

partial shipments. However, a simple LC with partial
shipments doesnt specify quantities and dates of
such partial shipments.

Wednesday, January
21, 2015

Arun Sigdel

31

Types of L/C, contd

vii) Back to Back LC

An import LC established to procure the required

goods (raw materials/ finished goods) for an export
LC by pledging the same export LC.

The payment of back to back LC is made only after

the realization of proceeds of the Export LC (mother
LC) in full amount.

Wednesday, January
21, 2015

Arun Sigdel

32

Types of L/C, contd

c) Others
i) Transferable LC
Can be transferred partially or fully by the original
beneficiary (known as first beneficiary) to one or
multiple other parties (known as second beneficiary).

ii) Revolving LC
Allows to make the shipment of the goods in
prescribed times and value as mentioned in the LC on
revolving basis. After drawing is made the credit
reverts to its original amount for re-use by beneficiary
without requiring specific amendment to the credit.

Wednesday, January
21, 2015

Arun Sigdel

33

Types of L/C, contd

iii) Stand By LC
It is a sort of standby or back up credit which is
generally used as a substitute for performance
guarantee or for securing loans.

iv) Local LC
This LC is not different than the other LCs which we
described earlier, but it is opened within the country.
In another word we can say it is an inland LC.

Wednesday, January
21, 2015

Arun Sigdel

34

Any Questions???

Wednesday, January
21, 2015

Arun Sigdel

35

Thank You for Your Patience

Wednesday, January
21, 2015

Arun Sigdel

36