Letter of credits is a written undertaking of a bank to pay beneficiary against the delivery of specified documents as mentioned in the letter of credit.
Documents normally include following:
Evident of cargo loading: (Bill of lading, Airway bill, Truck waybill, Truck consignment note, etc...)
Invoice, Packing list, certificate of origin, Test report, etc...
How many banks are involved in Letter of credit ?? what are the functions of bank ??
Issuing Bank (Buyers Bank):
This Bank will take the payment obligation from Buyer and they will release the payment toSupplier'ss bank if certain conditions are met as per the LC.
Advising Bank:
Advising bank will be Issing bank representative or counterpart in sellers country normally this bank will receive a letter of credit from Issing bank and then will forward the LC to sellers bank (Beneficiary Bank) / to the seller directly.
Advising bank will not take any payment responsibility they are just representatives of Issing bank.
The seller can request the buyer to make their bank (Beneficiary Bank) and hence seller can save some charges and time.
Beneficiary Bank (Sellers Bank):
In which bank seller will receive payment and submit the document If buyer nominates seller as advising bank and then Beneficiary will act as advising bank.
There are other banks also involved in LC which are not in use regularly, Like: Negotiating bank, etc...
May I know what is mean by Revocable and Non - Revocable LC ?? Which are the LC's are used more often ??
Non - Revocable LC:
The majority of the LC are NON - Revocable LC's we can say the use of revocable LC is very rare.
Non - Revocable LC: In a Non - Revobale LC you will be changed, amend or canceled without mutual concern from the seller, If buyer or seller has to change LC then sellers bank has to be informed buyers bank will raise the amendment to sellers bank and then same has to be approved by seller.
Revocable LC: Buyer can change, amend or cancel the LC without sellers consent.
What is LC @ Sight ??
LC at Sight means Byers bank (Issing bank) will release payment to sellers Bank after receiving the document in buyers bank and after approving the LC arrival advice by the buyer.
Apart from LC @ sight, there are other payment terms as well LC @ 30 Days, 60 Days, 90 Days and 120 Days which means after credit days after the acceptance of documents.
Eg: LC@ 60 Days: Seller will receive payment after 60 Days of LC acceptance by buyers Bank.
Did you explain what is LC discrepancy ??
We had discussed previously as well seller required to submit some documents in Banks in order to get payment from Issuing Bank these documents has to match with LC issued if there is mismatch other than the tolerance allocated in LC which is allocated for Qty, Price (Not mandatory to allocate the tolerance) any bank can raise the discrepancy buyer should accept the discrepancy in order to get the payment to seller.
If the buyer rejects the discrepancy then the buyer will not get the document and seller could not get the payment.
Normally in such cases, buyer and seller will agree on an amicable solution in order to avoid further complications.
Why bank required only a clean bill of lading ?? why they will not accept a claused bill of lading ??
In LC BL will be consigned to BANK not to consignee directly so bank needs make sure cargo is safe from the port of loading.
Which are the main LC terms we have to look into it while getting an LC ?? What does it mean ??
- 40 A: Type of LC (Revocable / Irrevocable)
- 20: Documentary credit no (LC NO)
- 31C: Date of LC Issue
- 31D: Date and place of expiry.
- 50: LC Applicant
- 59: Beneficiary
- 32B: Currency code amount
- 39A: Percentage of credit amount tolerance.
- 41 D: LC document submission (ie: Advising bank by negotiation)
- 43 P: Partial shipments allowed / not allowed.
- 43 T: Transhipment allowed / not allowed
- 44 E: Port of loading / Airport of discharge
- 44F: Port of Discharge
- 44 C: Latest date of shipment
- 45A: Commodity description
- 46A: Document requirement.
- 47A: Additional requirement.
- 71B: Charges (Who will pay & What will pay )
- 48: Period of presentation (Within how many days document has to be presented in Bank)
- 57 D: Advising bank
Which are the points I need to consider before submitting the document to Bank ?? in order to avoid discrepancy ??
- L/C amount and currency (and if applicable the tolerance) in conformity with LC.
- Check whether Insurance is required or not if required organize accordingly.
- Make sure shipment has been taken place before the (LDS - Latest date of shipment) and whether documents are being submitted to Bank before the LC expiry date / prior the presentation date.
- Make sure description of goods is mentioned as per the LC.
- If LC doesn't permit transshipment and partial shipment make sure it has been followed.
- In case any document required legalization required make sure it has been done.
- Cross check consignee details and LC details mentioned in documents are in line with LC.
- Make sure All document as per LC is made ready for submission.
- Are documents are issued stipulated number copies as per LC.
- Also check the LC make sure all additional conditions are followed.
What is bank guarantee ?? why it is required ?? What is the pro and cons of Bank guarantee ??
Some instances shipments will have very shorter transit time whereas document will arrive bank very late due to various reason, under such circumstances buyer can use bank guarantee in order to clear the shipment, shipment will be cleared with the copy of shipping document and without presentation of original shipping document.
Advantages of Bank guarantee:
Buyer doesn't require to wait for the original document, he/her can get his goods released from port / Airport faster.
Buyer can avoid port detention and demurrage charges.
Dis-Advantages of Bank guarantee:
Buyer required to sign an indemnity to the bank by accepting all the discrepancies.
Buyer will have a liability until a certain period of time or original documents received from Bank.
Before taking the bank guarantee shipper should make sure he/she will be able to clear this shipment with a copy of documents, make sure all documents are ok or else it w.ill end up in a big problem.
I hope this article find good please advice your suggestions and shall write about LC process in another post.
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