A letter of credit guarantees payment of a specified sum in a specified currency, when seller meets precisely-defined conditions and submits the prescribed documents within a fixed time frame.

1. Letter of Credit
Presented by: KAUSTUBH VARTAK.
2016172

2. Letter of Credit:
 A written commitment to pay, by a buyer's or importer's bank (called the
issuing bank) to the seller's or exporter's bank (called the accepting bank,
negotiating bank, or paying bank).
 A letter of credit guarantees payment of a specified sum in a specified
currency, when seller meets precisely-defined conditions and submits the
prescribed documents within a fixed timeframe.
 Letters of credit are formal trade instruments and are used usually where the
seller is unwilling to extend credit to the buyer.
 A letter of credit substitutes the creditworthiness of a bank for the
creditworthiness of the buyer.
 the international banking system acts as an intermediary between exporters
and importers.

3. General Documents Under Documentary
Credits.
 Commercial Invoice
 Packing List
 Bill of lading and other transport documents
 Certificate of Origin
 Inspection Certificate
 Bill of Exchange
 Insurance Documents

4. Letter of Credit Process

5. Parties involved in LC transaction
 The Applicant is the party that arranges for the letter of credit to be issued.
 The Beneficiary is the party named in the letter of credit in whose favour the
letter of credit is issued.
 The Issuing or Opening Bank is the applicant’s bank that issues or opens the
letter of credit in favour of the beneficiary and substitutes its
creditworthiness for that of the applicant.

6. Parties involved in LC transaction
 An Advising Bank may be named in the letter of credit to advise the
beneficiary that the letter of credit was issued. The role of the Advising Bank
is limited to establish apparent authenticity of the credit, which it advises.
 The Paying Bank is the bank nominated in the letter of credit that makes
payment to the beneficiary, after determining that documents conform, and
upon receipt of funds from the issuing bank or another intermediary bank
nominated by the issuing bank.
 The Confirming Bank is the bank, which, under instruction from the issuing
bank, substitutes its creditworthiness for that of the issuing bank. It
ultimately assumes the issuing bank’s commitment to pay.

7. THE PAYMENT STRUCTURE
 In a sight payment, the commercial letter of credit is payable when the
beneficiary presents the complying documents and if the presentation takes
place on or before the expiration of the commercial letter of credit.
 In a deferred payment, the commercial letter of credit is payable on a
specified future date. The beneficiary may present the complying documents
at an earlier date, but the commercial letter of credit is payable only on the
specified future date.
 An acceptance credit is a type of letter of credit that has paid by a time
draft authorising payment on or a after a specific date, if the terms of the
letter of credit have been complete.

8. Advantages of Letter of Credit
 The beneficiary is assured of payment as long as it complies with the terms
and conditions of the letter of credit.
 The credit risk is transferred from the applicant to the issuing bank.
 The beneficiary minimizes collection time as the letter of credit accelerates
payment of the receivables.
 The beneficiary’s foreign exchange risk is eliminated with a letter of credit
issued in the currency of the beneficiary’s country.

9. Risks involved
 Since all the parties involved in Letter of Credit deal with the documents and
not with the goods, the risk of Beneficiary not shipping goods as mentioned in
the LC is still persists.
 The Letter of Credit as a payment method is costlier than other methods of
payment such as Open Account or Collection.
 The Beneficiary’s documents must comply with the terms and conditions of
the Letter of Credit for Issuing Bank to make the payment.
 The Beneficiary is exposed to the Commercial risk on Issuing Bank and Foreign
Exchange Risk .

10. THANK YOU