1. Letter of Credit
Anurag Sharma
MBA-IB
University Business School

2. Contents
 Introduction
 Definition
 Principle
 Parties to Letter of Credit
 Process of settlement
 Types of Letter of Credit
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3. Introduction
• Letter of Credit L/c also known as Documentary Credit is a widely
used term to make payment secure in domestic and international
trade.
• The document is issued by a financial organization at the buyer‟s(or
Importer‟s) request. Buyer also provides the necessary instructions
in preparing the document.
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4. Definition
The International Chamber of Commerce (ICC) in the Uniform
Custom and Practice for Documentary Credit (UCPDC) defines L/C
as:
“Any arrangement whereby a bank acting at the request and in
accordance with the instructions of a customer(the importer)
undertakes to make payment to or to the order of third party(the
exporter) against stipulated documents and compliance with
stipulated terms & conditions”
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5. Principle
• A key principle underlying letter of credit (L/C) is that banks deal
only in documents and not in goods.
• The decision to pay under a letter of credit will be based entirely on
whether the documents presented to the bank appear on their face
to be in accordance with the terms and conditions of the letter of
credit.
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6. L/c(sample)
• Bank‟s name
• L/c number
• Wholesaler‟s acc
• Expiry date
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7. Parties to Letter of Credit
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8. Applicant
 Applicant (Opener): Applicant which is also referred to as account
party is normally a buyer or customer of the goods, who has to make
payment to beneficiary. LC is initiated and issued at his request and
on the basis of his instructions.
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9. Issuing Bank
 Issuing Bank (Opening Bank) : The issuing bank is the one which
create a letter of credit and takes the responsibility to make the
payments on receipt of the documents from the beneficiary or
through their banker.
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10. Beneficiary
 Beneficiary : Beneficiary normally stands for seller of the goods,
who has to receive payment from the applicant. A credit is issued in
his favour to enable him or his agent to obtain payment on surrender
of stipulated documents and comply with the term and conditions of
the L/c.
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11. Advising Bank
 Advising Bank: The Bank to whom the L/c is sent for authentication
and delivery is known as “Advising Bank”. It is expected to take
reasonable care while verifying the authenticity of the documentary
credit.
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12. 12
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Issuing Bank
Documents
reuired

13. Confirming Bank
 Confirming Bank: The bank which adds the confirmation, is known
as “Confirming Bank”. It gives its commitment to make the payment
if conditions stipulated in the credit are complied with even if the
advising bank is unable to pay or refuses to make the payment.
 Normally, advising bank and confirming bank are one and the same.
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14. Paying Bank
 Paying Bank: It is normally the bank with which issuing bank has an
account from which payment has to be made.
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15. Negotiating Bank
 Negotiating Bank: When paying bank is not located in exporter‟s
place, credit permits any bank to make the negotiation of documents
and disburse payment to exporter.
 After payment, the negotiating bank claims reimbursement from the
paying bank
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16. Process of settlement
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17. Types of L/C
 Documentary L/C
 Revocable and Irrevocable L/C
 With recourse or without recourse L/C
 Confirmed and unconfirmed L/C
 Transferrable and Non-Transferrable L/C
 Fixed and revolving L/C
 Freely negotiable and restricted L/C
 Red Clause and Green Clause L/C
 Back to Back L/C
 Assignable & non-assignable L/C
 Deffered period of credit
 Stand by credit
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18. Documentary letter of credit
• Sight or usance bill of exchange
• Commercial invoice/Customs invoice
• Consular invoice
• Packing list
• Bill of lading
• Inspection certificate
• Marine insurance policy
• Certificate of origin
• Any other document required by the buyer
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19. Revocable & Irrevocable
• Revocable: The opening bank reserves the right to cancel or modify
the credit, at any time, without the consent of the beneficiary.
• Irrevocable: The opening bank has no right to change the terms of
credit, without the consent of the beneficiary.
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20. 20
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We hereby
establish our
irrevocable letter
of credit
This L/c is
specifically issued
at the request of
operator

21. With recourse & without recourse
• „With Recourse‟- The negotiating bank can make the exporter liable,
in case of default in payment by the opening bank or importer.
• „Without Recourse‟-The negotiating bank has no recourse to the
exporter.
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22. Confirmed & Unconfirmed
• Exporter and importer may remain in different countries. Exporter
may insist that the local bank should add confirmation to the credit
opened.
• Importer would not be willing to add confirmation to credit as it
involves additional commission of the confirming bank.
• After confirmation, letter of credit becomes confirmed and
irrevocable.
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23. Transferrable & non- Transferrable
• Under Transferrable L/c, exporter can transfer the credit fully or
partially to one or more parties.
• Used when seller is the middleman who can transfer a part of the
credit to the exporter for shipping the goods.
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24. Fixed & Revolving
• A fixed letter of credit is for a fixed period and amount. L/C expires if
the credit is exhausted or period is over, whichever is earlier.
• Revolving: The L/c would be revived automatically for the same
amount and period once it is exhausted.
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25. Freely negotiable & Restricted
• When the letter of credit does not put any condition for the
negotiation of documents, it is a freely negotiable letter of credit.
• In case the credit names a specific bank for negotiation, then the
letter of credit is a restricted credit.
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26. Red Clause & Green Clause
• A Red Clause L/c is one that authorises the exporter to avail pre-
shipment finance on the strength of the credit.
• The clause is printed in red ink.
• In a green clause L/c, in addition to pre-shipment finance, storage
facilities are allowed at the port of shipment to the exporter by
opening bank.
• The clause is printed in green ink.
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27. Back-to-back L/c
 When the beneficiary wants to purchase raw materials from a third
party for the purpose of executing export order, or is only a
middleman and not the actual supplier of goods, he can ask the
bank to open a new letter of credit, on the strength of this credit, in
favour of a third party.
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28. Assignable & Non-Assignable
 An assignable letter of credit can be assigned to a third party by the
beneficiary of the credit. When the buyer is not able to find the real
exporter, in the meantime, he opens the credit in favor of his agent
or representative.
 When the agent is able to find an exporter who is willing to supply
the goods on the terms of the buyer, he assigns the letter of credit to
the supplier of goods.
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29. Stand by Credit
• The credit assures the beneficiary that in the event of non-
performance or non-payment of any obligation, the beneficiary may
request the issuing bank to make the payment.
• The beneficiary has to draw the claim by drawing a bill on the
issuing bank, accompanied with documentary evidence in support of
non-performance of contract.
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30. Thank You
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