LETTER OF CREDIT AS A

INTERNATIONAL TRANSACTION
TOOLS
Sharing Session

SCM DEPARTMENT

7 AUGUST 2020

RT
 Table of Content
1. Objective
2. Definition of L/C and Legal Basis
3. Type of L/C
4. Mechanism of L/C
5. Advantages and disadvantages
6. Should TPEC SCM Accept LC
Payment?

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 1. Objective

Objective of this Session:

Know and understand the definition of a
Letter of Credit / SKBDN as Transaction Tools

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 Payment Methods
Export and import payment transactions can be
made in cash or credit in various forms;
An open account
transaction is a sale
Advance where the goods
are shipped and
Payment delivered before
payment is due,
LETTER OF CREDIT
which in
Is a payment done international sales Documentary
by an importer to is typically in 30, 60 Collection
the exporter before or 90 days A documentary
shipment. collection (D / C) is
Open
a transaction where
Account the exporter
entrusts the
collection of the
payment for a sale
to its bank

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 QUIZ-1
Which of the following method of payment is the lowest risk for Seller ?
A. Open Account
B. Cash In Advance
C. Letter of Credit
D. Documentary Collection

Answer: B

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 Payment Methods
The Risk between Exporter and Importer

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 2. Definition of L/C & Legal Basis
UCP (Uniform Customs and
Practice for Documentary
Credits)
L/C is a promise from the
issuing bank to make a
payment or authorize another
bank to make a payment to
the recipient for the delivery
of documents
Agoes Moerjono, an
insurance practitioner in the
field of export development,
said that a Letter of Credit is
an interbank agreement that
issues a Letter of Credit with
exporters who enjoy the
benefits of a Letter of Credit.
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 4. Type of LC
Revocable L/C

Stand by
Irrevocable
Letter of
L/C
Credit

LETTER
Transferable Clean Letter
L/C OF of Credit
CREDIT

Documentary
Back to Back
Letter of
L/C
Credit

Revolving L/C

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 Type of L/C

1. Revocable L/C
L/C can be canceled or changed unilaterally at any time by the opener or the issuing
bank without requiring approval from the beneficiary.

2. Irrevocable L/C
L/C that cannot be canceled during the validity period specified in the L/C and the
opening of the bank still guarantees to receive notes drawn on the L/C. Cancellations
may also be made, but must be approved by all parties concerned

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 Type of L/C

Confirm LC is a guarantee for payment issued by a bank for goods

and services purchased, which cannot be cancelled during some
specified time period.

Confirmed LC

Irrevocable LC
unConfirmed LC An unconfirmed irrevocable letter of credit provides a
commitment by the issuing bank to pay, accept, or negotiate a
letter of credit. An advising bank forwards the letter of credit to
the beneficiary without responsibility or undertaking on its part
but confirming its authenticity. It does not provide a commitment
from the advising bank to pay, so the beneficiary is reliant upon
the undertaking of the overseas bank.

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 QUIZ-3
From of all types of Letter of credit above which is the safest for seller?
A. Irrevocable and unConfirmed L/C
B. Revocable L/C
C. Irrevocable and Confirmed L/C
D. Revolving L/C

Answer: C

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 3. Mechanism of L/C
1. PO/Contract
Buyer Seller
5. Deliver Goods

4. Deliver 6. Present
2. Request for 8. Docs and Letter of Credit Docs
Credit Claim for
Payment

7. Present Docs
Issuing Bank Negotiating Bank
3. Send Letter of Credit

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 TPEC MECHANISM

FILLING THE LC FORM WITH LC ISSUED FROM TPEC BANK

TPEC OPEN LC THE REQUIREMENT TO ADVISING/NEGOTIATING
DOCUMENTS BANK

LC Example (Bank ADVISING BANK RECEIVED BENEFICIARY HAVE TO

THE LC AND SEND THE PRESENT THE REQUIREMENT
Format) NOTIFICATION TO
BENEFICIARY GET
DOCUMENTS IN TERMS OF LC
NOTIFICATION
BENEFICIARY THAT THE LC AND SEND TO
ALREADY OPEN BY TPEC ADVISING/NEGOTIATING BANK

ISSUING BANK VERIFY ALL

ADVISING BANK RECEIVED ALL DOCUMENTS AND SEND THE
REQUIREMENT DOCUMENT NOTIFICATION TO TPEC THAT
VERIFY AND SEND WITHIN 5 WORKING DAYS
NOTIFICATION TO PAYMENT WILL BE RELEASE,
DIRECTLY TO ADVISING BANK

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 QUIZ-4
For International PO, which of the following documents should be
necessary present to the Advising Bank from seller to release the payment
A. commercial invoice
B. insurance document
C. certificate of origin
D. all of the above

Answer: D

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 Mechanism of L/C
Example Documents to be present by Seller

Certificat
Packing
e of
List
Origin
Inspectio
Transport
n
Documen
Certificat
t
e

Insurance
Commercia Negotiation
Certificat
l Invoice Bank
e

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 FORM LC

FORM REQUEST FORM Request

LC SKBDN

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5. Advantages and disadvantages

Mitigation:
• Importer shall be know when the right
time to open the LC
• Importer shall ensure that the Issuing
and Advising banks have a credibility,
trustworthiness and have a good
correspondent with beneficiary

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 Should TPEC SCM Accept LC Payment?
• Avoid why?

• Accepted why?
- LC terms have back to back to our Contract payment with Client
- Advising/negotiating Bank Beneficiary confirm as reputable bank
Q/A
END OF SESSION
THANK YOU