LETTER OF CREDIT

GROUP MEMBERS:
Bhumi Jayalakshmi 01 Krishna Bhavsar - 02 Arpit Shah - 25 Moyena Parikh 21 Zeal Shah 30 Priyansh Modi - 18

INDEX
S.No. 1. 2. 3. 4.

CONTENT
Meaning Of Letter of credit Parties to Letter of credit Letter of Credit Process Types of Letter of Credit Irrevocable L/C Back to Back L/C Transferable L/C Revolving L/C

5.
6.

Risk Situations for L/C transactions

Conclusion

The International Chamber Of Commerce (ICC) in the Uniform Custom and Practice of Documentary Credit (UCPDC) defines L/C as: "An arrangement, however named or described, whereby a bank(the Issuing bank) acting at the request and on the instructions of a customer (the Applicant) or on its own behalf: Is to make a payment to or to the order third party (the beneficiary) or is to accept bills of exchange (drafts) drawn by the beneficiary. Authorized another bank to effect such payments or to accept and pay such bills of exchange (draft). Authorized another bank to negotiate against stipulated documents provided that the terms are complied with.

IN SHORT:
Summary of a contract between seller and buyer with the bank(s) as referee.

PARTIES TO THE L/C:

APPLICANT ISSUING BANK BENEFICIARY ADVICING BANK CONFIRMING BANK NEGOTIATING BANK

REIMBURSING BANK

L/C PROCESS

Irrevocable L/C

Back to Back L/C

Types of L/C

Revolving L/C

Transferable L/C

IRREVOCABLE L/C
A letter of credit that can't be canceled. This guarantees that a buyer's payment to a seller will be received on time and for the correct amount. PROCESS FLOW A Letter of Credit is issued in India By State Bank of India for Importer Mr. A and favoring Exporter Mr. X in U.S.A for USD 10,000.00 State Bank of India Sends the L/C to Citibank via SWIFT. Mr. X receives the L/C from Citibank which advises the L/C. Mr. X then manufactures goods and prepares documents as per the terms and conditions of the L/C. Mr. X ships the goods and also dispatches documents to the importers bank State Bank of India through his Bank Citibank in the U.S.A State Bank Checks the documents and delivers the same to Mr. A who will then take delivery of goods at the port/airport.

BACK TO BACK L/C

Back to Back Letter of Credit is also termed as Counter vailing Credit. A credit is known as back to back credit when a L/C is opened with security of another L/C. PROCESS FLOW A Import L/C is issued for Importer Mr. P in Australia for USD 50,000.00 favoring Mr. A in India for Manufacture of Shirts. Mr. A in India does not have essential Raw materials and other resources for Manufacturing the same. Mr. A goes to his Bank in India and submits the above L/C to his bank. Mr. A then requests to Import raw Materials from China for manufacture of shirts. Mr. As Bank will open an Import L/C for Import of Raw Materials from China Once such a transaction is done, Mr. A will be in a position to fulfill his obligations under the first L/C.

TRANSFERABLE L/C

A transferable documentary credit is a type of credit under which the first beneficiary which is usually a middleman may request the nominated bank to transfer credit in whole or in part to the second beneficiary. The difference in value between the Transferable Credit (Master LC) and the Transferred Credit often is the Trade Profit for the 1st Beneficiary. PROCESSC FLOW A Transferable L/C is issued for Importer Mr. X in China for USD 25,000 favoring Mr. A in India for USD 25,000 Mr. A subsequently transfers this L/C to Mr. B who will manufacture goods as required under L/C for USD 20,000.00 Mr. B will supply goods directly to the Importer or supply to Mr. A, who will then subsequently ship the goods to Importer. The Profit of USD 5,000.00 will be the kept by Mr. A under the Letter of Credit transaction.

REVOLVING L/C
Single L/C that covers multiple-shipments over a long period. Instead of arranging a new L/C for each separate shipment, the buyer establishes a L/C that revolves either in value (a fixed amount is available which is replenished when exhausted) or in time (an amount is available in fixed installments over a period such as week, month, or year). L/Cs revolving in time are of two types: cumulative type, the sum unutilized in a period is carried over to be utilized in the next period non-cumulative type, it is not carried over. PROCESS FLOW Revolving Cumulative L/C LC Value USD 50,000.00 ,shipment to be made in 5 Equal Installments Every Month. Shipment to be made at the end of Each Month beginning January 2006. The Exporter after 2 months fails to Ship at the end of February. In this case, He can Ship for USD 20,000 at the end of March, this being Shipment quota for February and March. Revolving Non-Cumulative L/C If in the above case, the Exporter fails to ship at end of February, he Cannot ship for the more than USD 10,000 at the end of March.

RISK SITUATION IN L/C TRANSACTIONS:

Risks to the Applicant Non-delivery of Goods Short Shipment Inferior Quality Early /Late Shipment Damaged in transit Foreign exchange Failure of Bank viz Issuing bank / Collecting Bank

Risks to the Issuing Bank Insolvency of the Applicant Fraud Risk, Sovereign and Regulatory Risk and Legal Risks Risks to the Reimbursing Bank no obligation to reimburse the Claiming Bank unless it has issued a reimbursement undertaking Risks to the Beneficiary Failure to Comply with Credit Conditions Failure of, or Delays in Payment from, the Issuing Bank Credit Issued by Party other than Bank

Risks to the Advising Bank The Advising Banks only obligation if it accepts the Issuing Banks instructions is to check the apparent authenticity of the Credit and advising it to the Beneficiary

Risks to the Nominated Bank Nominated Bank has made a payment to the Beneficiary against documents that comply with the terms and conditions of the Credit and is unable to obtain reimbursement from the Issuing Bank

Risks to the Confirming Bank If Confirming Banks main risk is that, once having paid the Beneficiary, it may not be able to obtain reimbursement from the Issuing Bank because of insolvency of the Issuing Bank or refusal of the Issuing Bank to reimburse because of a dispute as to whether or not payment should have been made under the Credit.

Preferred payment option for the exporters. It has many safeguards for sellers and assurance for buyers. Ensures proper payment to the seller.