Chapter six

Letter of credit
6.1 An Overview of Letter of Credit
6.2 Parties to Letter of Credit
6.3 Procedures of documentary credit
operation
6.4 Types of Letter of Credit
6.5 Inspection and Amendment of letter of
credit
6.6 Amendment of Letter of Credit





Definition

Characteristics of a L/C

Contents of a L/C

Uniform customs and
practice



1.Definition of L/C
A L/C is a written undertaking by the issuing bank to
the beneficiary, under which the bank will pay a sum
certain in money to the beneficiary if the beneficiary of
the L/C provides the bank with specified documents
within a prescribed time period, which all comply with
the terms and conditions of the credit.

L/C is a letter from a bank promising to
pay on certain specific condition

Characteristics of a L/C
A. Primary Liability of the Issuing Bank to Make Payment
B. Separated from the sales
C. Dealing with Documents Only
D. High level of protection and security to both buyers and sellers

Assignment: translate the L/C on page 88
Contents of a L/C
Items on the credit itself
Basic parties
Items on draft
Settlement conditions
Items on goods, shipping documents ,
transport and insurance
L/C amount and currency
Additional conditions
Reimbursement of the paying, accepting
and negotiating bank
The notation of the credit subject to
UCP600
6.1.4 Uniform Customs and Practice for Documentary Credits
Uniform Customs and Practice
UCP 500


UCP 600


ISBP


6.2 Parties to letter of credit
Applicant/buyer
Issuing bank/the buyers bank
Beneficiary/seller
Advising bank
Confirming bank
negotiating bank

APPLICANT
Liable for payment to the issuing bank provided
no discrepancy between documents and the credit;
(
right to examine the documents and refuse
payment;
any requirement of the applicant should be
satisfied by certain documents and clearly
indicated when making credit application

Issuing application form

Issuing bank
Require the applicant to hand over certain
percentage of credit amount as a margin when it
opens a credit.
After effecting the payment, the issuing bank may
handle goods under the credit and make claim on
the importer if the importer is unable to pay the
issuing bank.
If there are any discrepancies in the documents, the
issuing bank may reject the payment.(

The issuing bank may be exempted from its
obligation for delay or loss of transmission.(

The right to examine a credit upon receipt of it
according to the sales contract;
whether be paid or not solely depends on the
fulfillment of terms and conditions of the credit.





Beneficiary
Advising bank
According to UCP600article 2, advising
bank means the bank that advises the
credit at the request of the issuing bank.
Advising bank is usually the correspondent
bank of the issuing bank in the exporters
country, which verifies the authenticity of
the letter of credit and any amendment and
forwards them to the beneficiary.
According to the UCP600, Negotiation
means the purchase by the nominated bank
of drafts (drawn on a bank other than the
nominated bank) and/or documents under a
complying presentation by advancing or
agreeing to advance funds to the
beneficiary on or before the banking day on
which reimbursement is due to the
nominated bank.

negotiating bank
Confirming bank
According to UCP600article 2,
confirming bank means the bank that adds
its confirmation to a credit upon the issuing
banks authorization or request.
the confirming bank undertakes the same
independent responsibility for payment as
that of the issuing bank

Reimbursing bank
The reimbursing bank is the bank that
holds the local currency account of the
issuing bank.
6.3 The procedure of L/C
Application of Issuing L/C by applicant
Issue of L/C by issuing banks
L/C delivered by advising bank
Shipment of goods and presentation of
documents

Procedures of L/C

Step 1
Step 2
A buyer and a seller enter into a sales
contract providing payment by a
documentary credit (

The buyer instructs the issuing
bank to issue a documentary
credit in favor of the seller


Step 4
The issuing bank opens a documentary
credit according to the instructions of the
applicant (
Step 3
Step 5
The issuing bank asks another bank,
usually in the country of the seller, to
advise and perhaps also to add its
confirmation to the documentary credit
The seller examines the documentary
credit, and requires an amendment of
the credit if necessary.

Step 7
The seller presents his documents to the
advising bank for settlement
Step 6
Step 8
The negotiating bank forwards
documents to the issuing bank, claiming
reimbursement as agreed between the
two banks. The issuing bank examines
the documents and make reimbursement.
The buyer redeems the
documents and picks up the goods
against the documents

Procedures of L/C
Seller/
beneficiary
Buyer/
applicant
Advising bank
designated bank
Issuing bank
Shipping
company
1)contract
2)application
and cash
deposits
3)opens a L/C
4)advise L/C
5)examine and
require an
amendment
6)
8)Forwards documents and
claiming reimbursement
10)pick up
goods
9)examine
documents
and ask
the buyer
to redeem
7)payment
4.Types of L/C
Revocable L/C
Irrevocable L/C
Confirmed L/C
Unconfirmed L/C
Documentary L/C
Clean credit
UCP600



UCP600UCP500


Sight payment L/C
Bankers acceptance credit
Negotiable L/C
Deferred payment L/C

1. THIS CREDIT IS AVAILABLE WITH ISSUING
BANK(OR XX) BY PAYMENT AT SIGHT.
2.

L/C sight payment credit



This credit is available with advising bank
by deferred payment at 30 days after date
of bill of lading against the documents
detailed herein.


L/C deferred payment credit
In a bankers acceptance credit, a
time draft drawn on the issuing
bank or any other nominated
drawee bank by the beneficiary
is essential, and the drawee of
the draft should be bank only.

acceptance credit

Usance Letter of Credit Payable at sight

This usance drafts are payable on a sight-basis,
discount charges and acceptance commission
are for buyers account





1.
Usance
Drafts to be negotiated at sight basis and
discounted by us Issuing Bank, discount
charges and acceptance
commission are for Importer's account.

2.
Usance draft to be negotiated at sight basis,
interest is for buyer's account.


3.
The Negotiating Bank is authorized to negotiate
the usance drafts at sight for the face amount.

4.
Usance drafts drawn under this credit are to be
negotiated at sight basis.

5 UCP600 42C DRAFTS ATAT
XXX DAYS AFTER SIGHT


negotiation credit
A negotiation credit refers to the
credit under which the issuing
bank authorizes other nominated
banks to purchase the documents
and /or drafts presented by the
beneficiary.

Special Types of L/C
Transferable L/C
Back to Back Credit
Reciprocal credit
Revolving L/C
Anticipatory credit

Green clause L/C Red clause L/C
Transferable L/C
According to UCP600 Article 38, a
transferable credit means a credit that
specifically states it is transferable. A
transferable credit may be made
available in whole or in part to another
beneficiary (second beneficiary) or
several other beneficiaries at the
request of the beneficiary (first
beneficiary).

CASE
A

B

C

CBB
A1.full set of clean
B/L made out to order with blank endorsed and
notify applicant. 2.the name of applicant must be
appeared in inspection certificate of the health as
the consignee
.
Question
:

1.full set of clean B/L made out to order
with blank endorsed and notify C
company.
2.the name of C company must be
appeared in inspection certificate of the
health as the consignee

Answer
Once the letter of credit is received by the
middleman from the opening bank, that letter of
credit is used as security to establish a second
letter of credit drawn on the exporter in favor of
his supplier. So a back-to-back documentary
credit process actually involves two separate
documentary credits: one opened by the buyer
in favor of the middleman, and one opened for
the account of the middleman naming the actual
supplier of the goods as the beneficiary.
(Back to Back Credit)
(reciprocal credit)
A reciprocal credit is mostly used in a barter
trade, a trade of processing of incoming
materials, a counter trade, or a
compensation trade. In the above types of
trade, there are usually two transactions and
letters of credit involved. The applicant of
one credit(the original credit)may assume
the position of the beneficiary of the other
credit(the reciprocal credit), and the
beneficiary of the first credit is the applicant
of the second credit.

(revolving credit)
The amount of the credit can be
renewed or reinstated without
specific amendments to the credit.

Revolving around time
This is a monthly revolving credit
which is available for up to the
amount of USD15000 per month, and
the full credit amount will be
automatically renewed on the 1
st
day
of each succeeding calendar month.
Our maximum liability under this
revolving credit does not exceed
USD90000 being aggregate value of
six months.

Revolving around value
This credit is revolving for three
shipments only. Each shipment
should be effected at one month
interval. The amount of each
shipment is not exceeding
USD50000. The total value of this
revolving credit does not exceed
USD150000.


cumulative revolving
non-cumulative revolving

automatic revolving
periodic revolving (semi-automatic revolving)

notice revolving (non-automatic revolving)

(anticipatory credit)
Anticipatory credit includes red clause letter of
credit and green clause credit. Under this letter of
credit variation, the beneficiary is able to obtain
advances or funds against (from within) the letter
of credit in order to purchase or process
merchandise or carry out other activities. The
beneficiary does not have to borrow money to get
money.

Advising bank inspect the credit
Inspection of Letter of Credit
Issuing bank inspect the credit application
and applicants credit
1.Advising bank inspect the credit
Beneficiary inspect the credit
it
Check the soft clause



.The credit clause stated that the credit become
effective unless the issuing bank give another
instruction or notice.
The credit clause stated that the beneficiary must
submit an inspection certificate signed by the buyer
after the cargo arrived the destination.
The credit clause stated that the beneficiary must
submit a certain document signed by a nominated
person.
:
4000
The credit note that the issuing banks payment
must be on the applicants acceptance on the draft
drawn by beneficiary.

The credit may ask for documents impossible to get.
For example, asking for the container B/L in cabin etc.
which can not be got by shipper according to
transportation regulation.

The credit terms seems easy but actually impossible
to carry on. So that the issuing bank get the right to
dishonor all the time.

The credit specify that 1/3 original B/L and one set
of non-negotiable documents to be sent to applicant
within 3 days after shipment by DHL.
case