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TABLE OF CONTENTS
S.No
Topic
01
Executive summary
02
Introduction
03
Letter of credit
04
Types of L/C
05
06
Availability
07
08
09
10
11
Conclusion
13
Appendix (A)
14
Appendix (B)
15
Bibliography
16
Index
Page
No
EXECUTIVE SUMMARY
Whatever sector you might be located, you may have to open a
letter of credit throughout your professional career one day.
A letter of credit is a method of securing payment to a vendor.
When a seller asks a buyer to obtain a letter of credit, it means
the seller would like to ensure payment for a product he sells to
that customer. Typically letters of credit are issued by a bank.
The most common forms are standby letters of credit for
domestic transactions and documentary letters of credit for
international transactions.
Letter of credit is a payment method in international trade
which is used by almost all sectors from textile to machinery,
food manufacturing to construction, oil trading to customer
goods. You may assume that there are big differences exist on
letter of credit application process for all these different
sectors. But this is not correct. You have to follow similar
procedures when opening a letter of credit regardless of the
sector you may be located.
Two types of L/C is wideley used around the globe which is
Revocable L/C and Irrevocable L/C and the following parties are
involved in letter of credit; Applicant of L/C, L/C issuing bank,
beneficiary party, advising bank, confiming bank, negotiating
bank and second beneficiary. Typically, the documents a
beneficiary has to present in order to receive payment include
a commercial invoice, bill of lading, and documents proving the
shipment was insured against loss or damage in transit.
However, the list and form of documents is open to imagination
INTRODUCTION
when you hear the phrase letter of credit, it might be natural to
think it would refer to a document verifying that you are
creditworthy, but that isn't the case. a letter of credit is a
document issued by a third party that guarantees payment for
goods or services when the seller provides acceptable
documentation. letters of credit are usually issued by banks or
other financial institutions, but some creditworthy financial
services companies, like insurance companies or mutual funds,
might issue letters of credit under certain circumstances.
The purpose of this report is to get deeper knowledge of the
procedure to open letter of credit. In this regard we were
advised to visit any bank and collect the relevant information
regarding Letter of Credit. We have visited the Habib Metro
Bank ( Bahudarabad Branch).The branch manager was really
co-operative and he gave us not only his precious time but also
his valuable and practical insights on Letter of credit as he has
years of experience in this feild.
This report helped us a lot and a great addition in our
knowledge.Now we are fimiliar with procedure of opening letter
of credit .
LETTER OF CREDIT
DEFINITION:
L/C. A binding document that a buyer can request from his
bank in order to guarantee that the payment for goods will be
transferred to the seller. Basically, a letter of credit gives the
seller reassurance that he will receive the payment for the
goods. In order for the payment to occur, the seller has to
present the bank with the necessary shipping documents
confirming the shipment of goods within a given time frame. It
is often used in international trade to eliminate risks such as
unfamiliarity with the foreign country, customs, or political
instability.
REVOCABLE L/C:
The Revocable L.C can be amended and cancel without the
exporter permission on knowledge.
IRREVOCABLE L.C
An Irrevocable L.C cannot amended and cancel without the
permission or knowledge of the exporter.
AVAILABILITY
LC being an irrevocable undertaking of the issuing bank makes
available the Proceeds, to the Beneficiary of the Credit
provided, stipulated documents strictly complying with the
provisions of the LC, UCP 600 and other international standard
banking practices, are presented to the issuing bank, then:
I.
II.
III.
IV.
V.
VI.
Financial Documents
Bill of Exchange, Co-accepted Draft
Commercial Documents
Invoice, Packing list
Shipping Documents
Transport Document, Insurance Certificate, Commercial,
Official or Legal Documents
Official Documents
License,
Embassy
legalization,
Origin
Inspection Cert , Phyto-sanitary Certificate
Certificate,
Transport Documents
Bill of Lading (ocean or multi-modal or Charter party),
Airway bill, Lorry/truck receipt, railway receipt, CMC Other
than Mate Receipt, Forwarder Cargo Receipt, Deliver
Challan...etc
Insurance documents
Insurance policy, or Certificate but not a cover note. Pre
shipment packing list.
STANDARD
FORMS
DOCUMENTATION
OF
Commercial Invoice
The billing for the goods and services. It includes a description
of merchandise, price, FOB origin, and name and address of
buyer and seller. The buyer and seller information must
correspond exactly to the description in the letter of credit.
Unless the letter of credit specifically states otherwise, a
generic description of the merchandise is usually acceptable in
the other accompanying documents.
Bill of Lading
A document evidencing the receipt of goods for shipment and
issued by a freight carrier engaged in the business of
forwarding or transporting goods. The documents evidence
control of goods. They also serve as a receipt for the
merchandise shipped and as evidence of the carrier's obligation
to transport the goods to their proper destination .
Warranty of Title
A warranty given by a seller to a buyer of goods that states that
the title being conveyed is good and that the transfer is
rightful. This is a method of certifying clear title to product
transfer. It is generally issued to the purchaser and issuing bank
expressing an agreement to indemnify and hold both parties
harmless.
Letter of Indemnity
Specifically indemnifies the purchaser against a certain stated
circumstance. Indemnification is generally used to guaranty
that shipping documents will be provided in good order when
available.
RISKS IN LC TRANSACTION
Fraud Risks
The payment will be obtained for nonexistent or worthless
merchandise against presentation by the beneficiary of
forged or falsified documents.
Credit itself may be forged.
Legal Risks
Possibility that performance of a Documentary Credit may be
disturbed by legal action relating directly to the parties and
their rights and obligations under the Documentary Credit
CONCLUSION
Whatever sector you might be located, you may have to open a
letter of credit throughout your professional career one day.
A letter of credit is a method of securing payment to a vendor.
When a seller asks a buyer to obtain a letter of credit, it means
the seller would like to ensure payment for a product he sells to
that customer. Typically letters of credit are issued by a bank.
The most common forms are standby letters of credit for
domestic transactions and documentary letters of credit for
international transactions.
APPENDIX (A)
Bill of Lading: A detailed list of a ship's cargo in the form of a
receipt given by
cancelled unless everyone involved agrees. Irrevocable letters
of credit provide more security than revocable ones.
Documentary collection:
APPENDIX (B)
BIBLIOGRAPHY
www.businessdictionary.com
www.investopedia.com
www.smedia.org
www.wikipedia.org
INDEX
Bill of Lading
Commercial Invoice
Deferred Payment
Documentary collection
Documentary Credit:
Irrevocable L/C
Issuing Bank
Letter of credit:
Letter of Indemnity
Revocable L/C:
Sight Payment