LETTER OF CREDIT

The name “letter of credit” is derived from the French word

“accreditation”, which means a power to do something. Letter of Credit is
the most important mode of payment for trade in international trade
throughout the world. As the Buyers(importers) and sellers(exporters) are
often not known to each other and the bankers are well known for their
credit standing, the banks creditworthiness is substituted for the importers
creditworthiness.The Letter of Credit is an undertaking given by the bank to
pay or accept the bill provided to the exporter(beneficiary) to fulfill the terms
and conditions of sale as set out in the application made to the bank by the
importer. Almost all letters of credit are irrevocable, i.e., cannot be
amended or canceled without prior agreement of the beneficiary, the
issuing bank and the confirming bank. A Letter of Credit is issued by the
importers bank guaranteeing the payment by the importer or importers
bank for the trade transaction.Typically, the documents a beneficiary has to
present in order to receive payment include a commercial invoice, bill of
lading etc.
The Letter of Credit is obtained by the importer from his bank and
then sent to the exporter. Based on such a Letter of Credit the exporter can
obtain both preshipment and postshipment finance from his bank at a
concessional rates of interest as notified by RBI. Also for the exporter,
Letter of Credit helps in confirmed receipt of the payment even if the
importer goes bankrupt then his bank(issuing bank) will make the payment.
A Letter of Credit helps an exporter in arranging finance in order to meet
his working capital requirements.Financial documents(bills of exchange),
commercial document, shiping document are some of the documnets under
Letter of Credit.

9 Steps in the Letter of Credit Process

I.Buyer and seller agree to terms including means of transport, period
of credit offered (if any), and latest date of shipment acceptable.
II.Buyer applies to bank for issue of letter of credit. Bank will evaluate
buyer's credit standing, and may require cash cover and/or reduction
 of other lending limits.
III.Issuing bank issues L/C, sending it to the Advising bank by airmail or
electronic means such as telex or SWIFT.
IV.Advising bank establishes authenticity of the letter of credit using
signature books or test codes, then informs seller (beneficiary).
V.Seller should now check that L/C matches commercial agreement
and that all its terms and conditions can be satisfied.
VI.Seller ships the goods, then assembles the documents called for in
the L/C (invoice, transport document, etc.).
VII.The Advising bank checks the documents against the L/C. If the
documents are compliant, the bank pays the seller and forwards the
documents to the Issuing bank.
VIII.The Issuing bank now checks the documents itself. If they are in
order, it reimburses the seller's bank immediately.
IX.The Issuing bank debits the buyer and releases the documents
(including transport document), so the buyer can claim the goods
from the carrier.

ST. GONSALO GARCIA

 COLLEGE.

NAME : MEHRAN MIRZA WANDRICK.

SUBJECT : FINANCIAL MANAGEMENT.

TOPIC : LETTER OF CREDIT.

CLASS : TYBMS.

ROLL NO : 57.

SUBMITTED TO: MISS HYCINTA.