L/C
Collected by
Md. Zahidul Islam
Senior Officer
BKB
DEFINITION OF L/C
• L/C stands for Letter of Credit.
• In modern business practice, a letter of credit is a written
undertaking from a bank to pay a beneficiary against the delivery of a
specified set of documents.
• The name "letter of credit" derives from the French word
"accréditation", a power to do something, which derives from the
Latin "accreditivus", meaning trust.
DEFINITION OF L/C
UCP 600 defines a number of terms related to letters of credit. These
include:
• The Advising Bank is the bank that will inform the Beneficiary or their
Nominated Bank of the credit, send the original credit to the
Beneficiary or their Nominated Bank, and provide the Beneficiary or
their Nominated Bank with any amendments to the letter of credit.
• The Applicant is the person or company who has requested the letter
of credit to be issued; this will normally be the buyer.
• The Beneficiary is the person or company who will be paid under the
letter of credit; this will normally be the seller.
DEFINITION OF L/C
• The Nominated Bank is a bank mentioned within the letter of credit
at which the credit is available.
DEFINITION OF L/C
• A Complying Presentation is a set of documents that meet with the
requirements of the letter of credit and all of the rules relating to
letters of credit.
• Confirmation is an undertaking from a bank other than the issuing
bank to pay the Beneficiary for a Complying Presentation, allowing
the Beneficiary to further reduce payment risk, although
Confirmation is usually at an extra cost.
• The Issuing Bank is the bank that issues the credit, usually following a
request from an Applicant.
UNDERSTANDING L/C
• According to INVESTOPEDIA, A letter of credit is a letter from a bank
guaranteeing that a buyer's payment to a seller will be received on
time and for the correct amount.
• businessdictionary.com says, A written commitment to pay, by a
buyer's or importer's bank (called the issuing bank) to the seller's or
exporter's bank (called the accepting bank, negotiating bank, or
paying bank).
• A letter of credit guarantees payment of a specified sum in a specified
currency, provided the seller meets precisely-defined conditions and
submits the prescribed documents within a fixed timeframe.
UNDERSTANDING L/C
• These documents almost always include a clean bill of lading or air
waybill, commercial invoice, and certificate of origin.
UNDERSTANDING L/C
STEP BY STEPS PROCESSES OF L/C
• Buyer and seller agree to conduct business. The seller wants a letter
of credit to guarantee payment.
• Buyer applies to his bank for a letter of credit in favor of the seller.
• Buyer's bank approves the credit risk of the buyer, issues and
forwards the credit to its correspondent bank (advising or
confirming). The correspondent bank is usually located in the same
geographical location as the seller (beneficiary).
• Advising bank will authenticate the credit and forward the original
credit to the seller (beneficiary).
STEP BY STEPS PROCESSES OF L/C
• Seller (beneficiary) ships the goods, then verifies and develops the
documentary requirements to support the letter of credit.
Documentary requirements may vary greatly depending on the
perceived risk involved in dealing with a particular company.
• Seller presents the required documents to the advising or confirming
bank to be processed for payment.
• Advising or confirming bank examines the documents for compliance
with the terms and conditions of the letter of credit.
STEP BY STEPS PROCESSES OF L/C
• If the documents are correct, the advising or confirming bank will
claim the funds by:
- Debiting the account of the issuing bank.
- Waiting until the issuing bank remits, after receiving the documents.
- Reimburse on another bank as required in the credit.
• Advising or confirming bank will forward the documents to the issuing
bank.
• Issuing bank will examine the documents for compliance. If they are
in order, the issuing bank will debit the buyer's account.
• Issuing bank then forwards the documents to the buyer.
RESOURCES
• https://en.wikipedia.org/wiki/Letter_of_credit
• http://www.investopedia.com/terms/l/letterofcredit.asp
• http://www.businessdictionary.com/definition/letter-of-credit-L-
C.html
• http://resources.alibaba.com/topic/186470/Step_by_Step_Process_o
f_Letter_of_Credit.htm
THANK YOU
