LATTER OF CREDIT

Presented By
Bharat
Lalit
Rajesh M.
 Definition

• Letter of Credit (or Documentary Credit)

is an undertaking issued by a bank for
the account of the buyer or for its own
account, to pay the seller against the
value of the draft and/or other
documents provided that the terms and
conditions of the credit are complied
with.
 Conti…

L/C is an instrument whereby the

importer’s bank promises the exporter to
make payments if the latter abides by the
condition mentioned therein.
 Example

You want to buy $50,000 worth of

radios from Seoul Manufacturing, which
agrees to sell the merchandise and gives
you 60 days to pay it with the condition
that you provide them with a 90 days
letter of credit for the full amount.
Types of Letters of Credit

• Revocable letter of credit

• Irrevocable letter of credit
• Confirmed letter of credit
• Transferable letter of credit
 Conti…
• Back to Back letter of credit
• Red Clause letter of credit
• Green clause letter of credit
• Sight letter of credit or DP letter of credit
• Usance letter of credit or DA letter of
credit
 Elements of a Letter of Credit
• 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
 Cont….

• Within specified time limits

• Documents must conform to terms and
conditions set out in the letter of credit
• Documents to be presented at a
specified place
 Reasons for using LC
(a) Seller would want:-
(i) To be paid as soon as he ships the
goods.
(ii) An assurance that he will be paid
by the buyer or his bank as per
contractual obligations
(iii) Convenience of receiving payments
in his own country.
 Cont….
(b) Buyer would want:-

(i) To pay for the goods only after they

are shipped by the seller.
(ii) An assurance that seller will ship
the goods ordered for and
deliver the min time.
 Essential Elements of LC
(a) Type of LC
(b) Name and address of applicant and
beneficiary
(c) Amount of credit and currency
(d) Validity of LC
(e) Latest shipment date (delivery date as
per contract)
(f) Basis of delivery
 Cont…..
(g) Contract No. and date
(h) Shipment from …………. To …………
(j) Consignee and ultimate Consignee
(k) Part shipment allowed/not allowed
(l) Documents required to be produced
by the beneficiary for release of
payment from LC.
 Extension of LC
(a) Extension of delivery date in the
contract and corresponding
amendment in LC for latest date of
shipment.
(b) Performance Bank Guarantee (PBG)
extension.
(c) Liability of charges for LC
extension.
 Advantages

(a) Payment released only after receipt of

goods.

(b) Payment to be made only after full

satisfaction to the quality, quantity
etc.

(c) Cost-effective-inexpensive .
Specified time limit and Delivery
Schedule
• L/C Payments. Six months from the date of
signing of contract which will include:-

(i) Obtaining export license and giving

notification of readiness for opening of L/C by
seller - 45 days.

(ii) Obtaining Foreign Exchange Release and

opening of L/C through CDA by buyer - 45 days
 Cont….
(iii) Validity period of L/C –
90 days. The LC will be opened three
months prior to the expiry of delivery
period only. In case the spares under
procurement are in large quantity or
their technical production cycle is long
as specified by the seller.