Parties Involved in a Letter of Credit

There are four parties involved in a letter of credit

Account party Issuing party Exporter Paying or negotiating bank

Account party or Importer

The buyer or the importer on whose account and request the letter of credit is opened is known as account party.

Issuing party
The bank, which issues or opens a letter of credit at the request of importer, it is called the issuing bank.

Exporter
The seller or the party in whose favour the letter of credit is draw is the third party and it is also known as beneficiary.

Paying or negotiating bank

The paying bank in the exporters country on which the draft is drawn is called the paying bank.

Operation of a letter of credit

1)

The importer of buyer contacts the seller in foreign country for the purchase of a particular good or goods.

2) He settles with the seller the quantity and quality of the goods to be importer. 3) The sale contract also includes the method of payment. 4) The importer then submits an application to his bank for the issuing of an

individual letter of credit.

5) The form on which the importer employees for a letter of credit is supplied by

the bank.

6) This form contains all the necessary details discussed between the importer

and exporter for the shipment of goods which include the description of merchandise, port of shipment, port of unloading, the documents against which the bank is the honour the draft, the total value of the goods etc. exporter will be paid.

7) If the documents supplied by the seller conform to the terms of contract the 8) The issuing bank will not be responsible if there is any fraud or the

merchandise does not conform to the sales contract.

9) The obligation of the buyers bank is,

To issue letter of credit on agreed terms and condition with the buyer. To have a proper examination of the documents. To honour draft when presented with proper documents..

Types of Letter of Credit

1)

Irrevocable letter of credit

2) Revocable letter of credit 3) Confirmed letter of credit 4) Unconfirmed letter of credit 5) Documentary letter of credit

1. Irrevocable letter of credit

It is the one in which the issuing bank gives a lasting undertaking to accept and in due course to pay bills drawn upon it provided the exporter fulfils the terms and conditions. It gives a complete protection to the exporter.

2. Revocable letter of credit

It is the one in which can be modified or cancelled by the issuing bank at any time without any obligation on its part. They are not acceptable to the businessman.

3. Confirmed letter of credit

It is that which has the protection of the credit standing of the importers as well as the exporters bank. The exporter bank, which confirms the letter of credit, takes the liability of paying in case the issuing bank fails to make payment to the exporter.

4. Unconfirmed letter of credit

It is one under which the exporters bank does not give any guarantee to the exporter that the bills drawn will be honoured by the issuing bank. It is the commitment of the issuing bank to honour the draft. From the exporters point of view, the confirm irrevocable letter of credit is the best form of receiving payment.

5. Documentary letter of credit

It is the one of which provides for bills to be accompanied by documents of title to goods such as the bills of landing, invoice, the policy of insurance etc.

How a letter of credit is opened?

1)

Application for a letter of credit

2) Line of credit 3) Opening of the letter of credit 4) Handling of the documents 5) Payment by the importer to the bank 6) Liability of the issuing bank