WHAT IS LETTER OF CREDIT

Letter of Credit

In ancient time barter system is medium of exchange People exchange goods and services for other goods and services. After buyer and seller began to use money as medium of exchange for trading goods and services activates.

But in International Trade  where seller and buyer unknown to each other  Seller fears of not getting the payment From buyer .Buyer is also not ready to pay advance payment to known seller 

In above case buyer make a contract with seller that his bank will open LC   to seller bank after receiving the documents for shipment in this process known as letter of credit. Where Buyer is call Import Seller is call exporter 

Importer`s  bank called “ Issuing Bank” ,  Exporter`s bank called “ Nominated Bank” , Sometimes one more bank also part of  in this process which confirm the credit of issuing Bank upon the  issuing seller’s bank’s  request. This bank called as “Confirming Bank “

 Parties of the Letter of Credit.

Applicant

Applicant also called importer or buyer who purchase goods and services from Seller Applicant open the letter of credit

Beneficiary

Beneficiary also called exporter or Seller who Sales goods and services to buyer . Beneficiary’s duty is to present necessary documents to bank for Letter of credit 

Issuing Bank

Issuing Bank is bank of applicant. Applicant open the LC   with this bank Issuing bank checks the correctness of documents given by seller and issue  letter of credit

Nominated Bank

Nominated bank is  beneficiaries bank which accepted the  require document from beneficiary . Check the authenticity of documents and forward to issuing bank based on these documents issuing bank credited the beneficiary’s bank by issuing letter of credit

Confirming Bank

Sometimes nominated bank may think issuing bank  is  small bank and credit rating of that bank is not good so it approach a big bank  which is called  Confirming bank which gives  guarantee of financial status  of issuing bank and if issuing bank  makes default in making payment of LC “Confirming Bank” will make a payment of its behave

 Letter of credit is issued by issuing bank against collateral or fixed deposit.  Correctness of letter of credit is very important since both parties not unknown to each other

Correctness of letter of credit  

Both the parties unknown to each other  In  letter credit only banks operated  that`s way information mention in letter of credit like Names of buyer and seller , Amount , description of goods , date , port of loading and discharge are mention correct .  Spellings are correct as per require   by letter of credit If bank finds any mistake in letter of credit it can refuse to issue letter of credit

Advantage of LC

Buyer get the correct documents after issuing LC

Buyer gets the delivery of goods with in time after issuing  LC

LC issue by issuing bank it shows strong financial status  of buyer

Seller gets his payment through LC quickly

LC issued against the documents summit by seller therefore he process the movement of goods very quickly as to reach early to the destination

Thus we can say letter of credit plays a very important in the movement of foreign trade