{"id":560,"date":"2020-11-08T12:43:48","date_gmt":"2020-11-08T12:43:48","guid":{"rendered":"https:\/\/english.bankingkhabar.com\/?p=560"},"modified":"2020-11-08T12:56:26","modified_gmt":"2020-11-08T12:56:26","slug":"what-is-letter-of-credit-lc","status":"publish","type":"post","link":"https:\/\/english.bankingkhabar.com\/?p=560","title":{"rendered":"What is Letter of Credit (LC)?"},"content":{"rendered":"

\"\"<\/a><\/p>\n

Apekshya Dhungana, Banking Khabar.<\/strong> Letter of Credit (LC) also known as a documentary credit is a document sent from a bank that provide guarantee to the seller (beneficiary) that they will receive a payment from buyer (applicant) timely and accurately. If the buyer fails to make payment, then the bank pays the seller on behalf of the buyer who in return repays the bank. Simply, it is a promise from a bank to make a payment after verifying that somebody meets certain conditions.<\/p>\n

It is a written letter issued by the bank on behalf of buyer or importer that ensures the payment to the seller or exporter within a prescribed time and against presentation of required documents by the seller or exporter.It is governed by UCP600 (Uniform Customs and Practice) which is an international code of practice (voluntary set of rules) drawn up by the International Chamber of Commerce.<\/p>\n

For example, assume that the buyer\/importer of Electrical equipment of Kathmandu Nepal and the seller\/exporter of the Electrical equipment is in the Germany. The buyer and the seller do not know each other and, therefore, the seller will ask for the payment in advance for shipping the electrical equipment to the buyer. On the other side, the buyer feels risk to make advance payment to the unknown seller of other country.Under this circumstance, no trade can take place unless there is an intermediary who can bridge the lack of trust between the buyer\/importer and the seller\/exporter. In this case, the bank can play the role of intermediary and ensure confidence among the two parties. This can be done by issuing anLetter of Credit (LC) at the instance of the buyer\/importer\/applicant in favor of the seller\/importer\/beneficiary.<\/p>\n

\"\"<\/a><\/p>\n

Parties Involved in Letter of Credit (LC)<\/strong><\/p>\n

Mainly there are four parties involved in LC.<\/p>\n

1. Applicant:<\/strong><\/p>\n

Applicant is a buyer or importer who applies for Letter of Credit (LC) in a bank and finalizes the terms and conditions of a purchase transaction and submits a request in the prescribed format to his bank for issuing a Letter of Credit in favor of the seller.<\/p>\n

 <\/p>\n

2.Beneficiary:<\/strong><\/p>\n

Beneficiary is seller or exporter in whose favor the Letter of Credit (LC) has been issuedand who submits all required documents with is bank in accordance with the terms and conditions under LC.<\/p>\n

 <\/p>\n

3. Issuing Bank: <\/strong><\/p>\n

It is the buyer\u2019s or importer\u2019s bank which issues Letter of Credit (LC) and takes responsibility to pay amount on receipt of documents from seller or exporter of goods.<\/p>\n

 <\/p>\n

4. Advising Bank:<\/strong><\/p>\n

It is the supplier\u2019s or exporter\u2019s bank who notifies the seller about Letter of Credit (LC) and collects required documents from the seller\/exporter and sends those documents under Letter of Credit to Issuing bank.<\/p>\n

 <\/p>\n

However, upon terms and conditions and types of Letter of Credit (LC) there are other parties also who involves in Letter of Credit (LC).<\/p>\n

 <\/p>\n

5.Confirming Bank:<\/strong><\/p>\n

Confirming Bank confirms and guarantees to undertake the responsibility of payment e under the Letter of Credit (LC). Beneficiary may demands for additional confirmation, if he feels that there is a risk of default by the issuing bank in making payment under the LC, the beneficiary generally asks for confirmation by another bank.<\/p>\n

 <\/p>\n

6.Negotiating Bank:<\/strong><\/p>\n

The issuing bank may nominate another bank in the beneficiary\u2019s country to which the beneficiary presents its documents and obtains payment against the LC.This bank is known as the negotiating bank. Negotiating Bank negotiates documents delivered to bank by beneficiary of LC. And verifies documents and confirms the terms and conditions under LC on behalf of beneficiary to avoid discrepancies.<\/p>\n

 <\/p>\n

7.Reimbursing Bank:<\/strong><\/p>\n

If the issuing bank of the Letter of Credit (LC)arrange with another bank to reimburse the amount under the LC to the negotiating bank that has made payment to the beneficiary such bank is known as reimbursing bank.<\/p>\n

 <\/p>\n

Documents Required in Letter of Credit (LC)<\/strong><\/p>\n

Various types of documents are required in Letter of Credit (LC) which are as follows:<\/p>\n

    \n
  1. Commercial Invoice (Proof of Value)<\/li>\n
  2. Bill of Lading (Proof of Shipment)<\/li>\n
  3. Packing List (Proof of Packing)<\/li>\n
  4. Certificate of Origin (Proof of Origin)<\/li>\n
  5. Inspection Certificate (Proof of Quality)<\/li>\n
  6. Insurance Certificate (Proof of Insurance)<\/li>\n
  7. Health Certificate<\/li>\n
  8. Certificate of Origin<\/li>\n
  9. Consular Invoice<\/li>\n
  10. Bill of Exchange (Draft)<\/li>\n<\/ol>\n

     <\/p>\n

    Types of Letter of Credit (LC)<\/strong><\/p>\n

    There are various types of Letter of Credit (LCs) depending on the method of payment and other terms and conditions involved in LC.<\/p>\n

      \n
    1. Revocable Letter of Credit<\/li>\n
    2. Irrevocable Letter of Credit<\/li>\n
    3. Stand-by Letter of Credit<\/li>\n
    4. Confirmed Letter of Credit<\/li>\n
    5. Unconfirmed Letter of Credit<\/li>\n
    6. Transferable Letter of Credit<\/li>\n
    7. Back-to-Back Letter of Credit<\/li>\n
    8. Payment at Sight Letter of Credit<\/li>\n
    9. Deferred Payment Letter of Credit<\/li>\n
    10. Red Clause Letter of Credit<\/li>\n
    11. Green Clause Letter of Credit<\/li>\n<\/ol>\n

      Benefits of Letter of Credit (LC)<\/strong><\/p>\n

      Almost all the parties involved in Letter of Credit (LC) get some benefits. Some of the benefits are:<\/p>\n

        \n
      • A letter of credit is safer for the seller or exporter in case the buyer or importer makes default in payment. Since the creditworthiness of the importer is transferred to the issuing bank, it is the bank\u2019s obligation to pay the amount as agreed in the letter of credit. Thus, a letter of credit protects the seller or exporter from the importer\u2019s business risk.<\/li>\n
      • The buyer makes the payment only when they receive the required shipping or transportation documents and these documents provide ownership to buyers or importers.<\/li>\n
      • The issuing bank charges certainfees to issue the Letter of Credit (LC).<\/li>\n
      • The Advising and Negotiating bank (can be same) also changes certain fees for their services.<\/li>\n<\/ul>\n

         <\/p>\n","protected":false},"excerpt":{"rendered":"

        Apekshya Dhungana, Banking Khabar. Letter of Credit (LC) also known as a documentary credit is a document sent from a bank that provide guarantee to the seller (beneficiary) that they will receive a payment from buyer (applicant) timely and accurately. If the buyer fails to make payment, then the bank pays the seller on behalf […]<\/p>\n","protected":false},"author":1,"featured_media":562,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[12],"tags":[],"class_list":["post-560","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-banner"],"yoast_head":"\nWhat is Letter of Credit (LC)? - Bankingkhabar<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/english.bankingkhabar.com\/?p=560\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"What is Letter of Credit (LC)? - Bankingkhabar\" \/>\n<meta property=\"og:description\" content=\"Apekshya Dhungana, Banking Khabar. Letter of Credit (LC) also known as a documentary credit is a document sent from a bank that provide guarantee to the seller (beneficiary) that they will receive a payment from buyer (applicant) timely and accurately. 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