Chapter 5 - Documentary Letters of Credit

Buyer / Importer
- The buyer / importer of the goods (generally borrower of the issuing bank). The applicant has to make payment if documents as per LC are delivered, whether the goods are as per contract between the buyer and beneficiary or not

The party to whom the credit is addressed i.e. seller or supplier or exporter. It gets payment against documents as per LC from the nominated bank within validity period for negotiation, maximum 21 days from date of shipment.

Importer’s or buyer’s bank who lends its name or credit. It is liable for payment once the documents under LC are received by it from nominated (negotiating) bank, irrespective of the fact whether it is able to recover the payment from applicant or not. It gets 5 banking days to check the documents.

Issuing bank’s branch (or correspondent in exporter’s country) to whom the letter of credit is sent for onward transmission to the seller or beneficiary,-after authentication of genuineness of the credit. Where it is unable to verify the authenticity, it can seek instructions from the opening bank or can advise the LC to beneficiary, without any liability on its part. This bank has no obligation to negotiate the documents

The bank adding confirmation to the credit, which undertakes the responsibility of payment by the issuing bank and on his failure to pay. The confirmation is added on request of the opening bank

The bank to whom the beneficiary presents the documents for negotiation. It claims payment from the reimbursing bank or opening bank and gets 5 banking days to check the documents.

3rd bank which repays, settles or funds the negotiating bank at the request of its principal, the issuing bank.

Advising Bank, Confirming Bank & Negotiating Bank could be same

A revocable credit is one that can be cancelled or amended at any time without the prior knowledge of the beneficiary. If the negotiating bank makes a payment to the seller prior to receiving notice of cancellation or amendment, the issuing bank must honour the liability. If nothing is stated, the LC is irrevocable.

An irrevocable LC is one, which can be cancelled or amended with consent of beneficiary, applicant bank and confirming bank, if any.

Irrevocable confirmed letter of credit
- It is an LC, which has been confirmed by bank, other than the issuing bank, usually situated in the country of the exporter, thereby taking an additional undertaking to pay on receipt of documents conforming to the term and conditions of the Letter of Credit.
Transferable LC

It is an LC, where the beneficiary is entitled to transfer the LC, in whole or in part, to the 2nd beneficiary/s (supplier of beneficiary). The 2’d beneficiary, however, cannot transfer it further, but can transfer the unused portion, back to the original beneficiary. It is transferable only once.

A red clause credit also referred to a packing or anticipatory credit, has a clause permitting the correspondent bank in the exporter’s country to grant advance to beneficiary at issuing bank’s responsibility. These advances are adjusted from proceeds of the bills negotiated

A green clause LC permits the advances for storage of goods in a warehouse in addition to pre-shipment advance. It is an extension of the red clause LC

Sight, Acceptance, Deferred Payment, Negotiation LC
- In a Sight LC the beneficiary is able to get the payment on presentation of documents confirming term and conditions of the LC
- In an Acceptance Credit the bill of exchange or drafts are drawn with certain usance period, and are payable, upon acceptance, at a future date, subject to receipt of documents conforming to the term and conditions of the LC
- A Deferred Payment Credit is almost similar to acceptance credit, except that there is no bill of exchange or draft drawn
- In a Negotiation LC, the issuing bank undertakes to make payment to the bank, which has negotiated the documents
Back to Back LC

A back to back credit is the 2’1 LC opened by the original beneficiary in favour of the rd beneficiary who is his local supplier. He tenders the original LC to the bank in his country as a cover for opening the 2’1 LC. The terms of such credit would be identical except that the price may be lower and validity earlier

Standby credits is similar to performance bond or guarantee, but issued in the form of LC. The beneficiary can submit his claim by means of a draft accompanied by the requisite documentary evidence of performance, as stipulated in the credit

These LCs provide that the amount of drawings made there under would be reinstated and made available to the beneficiary again and again for further drawings during the currency of credit provided the applicant makes the payment of documents earlier negotiated. At times, an overall turnover cap is also stipulated.