Letter of credit

2009-10-30T13:12:00.000-07:00

The letter of credit is a written instrument issued by the buyer’s bank authorizing the seller to draw in accordance with certain terms and conditions.

There are four parties includes in it

Parties to a (Letter of credit)
1- the buyer or the importer or the account party
2- the bank issuing the letter of credit (Issuing bank) or the importer bank
3- The exporter or the seller who receive the benefit
4- The paying bank in the exporter’s country or negotiating bank

How a (Letter of credit) is opened:
The procedure of letter of credit is as under

Sale Agreement:
If the seller of any country agrees to sale any good to the buyers of other country then they will do agreement. In other words the importer contracts the exporter for the purchase of particulars goods and the sale contracts includes the following

A- Distribution of the goods to be imported
B- Quality to be imported
C- Per unit price and total payment to be made
D- Mode of payment
E- Port of loading and unloading
F- An information about the Importer’s and Exporter’s Bank
G- The period of time in which goods are to be supplied and documents dispatched by the Exports
Submission of Application:
After concluding the sale contract the importer submits an application to his bank for the issuing of letter of credit. The banker this form contain all necessary detail discussed between the exporters and the importers supplies this application form.

Acceptance of letter of credit:
After satisfy itself of the information supplied by the importer in the application the bank signs an acceptance agreement with the importer. The object of getting acceptance agreement is to bind the importer for the payment of money as and the bank is called upon to honour the drafts drawn under the letter of credit.
Issuance of Letter of Credit;
When all formalities have been completed the bank issuing the letter of credit addressed to the exporter. Generally four copies of letter of credit are prepared:-
1- One for its own record
2- One for the paying bank
3- One for exporter
4- One for importer
Dispatch of (Letter of Credit) to Exporter:
When all copies of letter of credit are prepared then the bank sends the original one copy to the exporter through the paying bank in the exporter country.
Shipment of Goods:
After having received the letter of credit the exporter makes arrangement for the shipment of goods.
Payment to Exporter
After supplying the goods the exporter presents the necessary documents and the drafts to paying bank in his owns country. If the bank is satisfied with the document he pays the drafts of the exporters is concerned and the transaction comes to an end.
Cash Margin
The importer is asked by the bank to deposit with the bank in the form of cash and securities proper margin depending upon his credit worthiness.
Transmission of Document to the opening Bank:
The paying bank forwards the document to issuing bank after making payment to exporter.
Release of Documents:
After receiving the documents the issuing bank intimates the importer and the bank release the document to the importer after receiving from him the amount of the draft and other charges.
Clearence of Consignment:
After obtaining documents from bank the importer’s can get consignment from the shipping company through clearing agent.

How a Letter of Credit is Opend

Letter of credit