INLAND LETTER OF

CREDIT
BASIC OPERATIONS
TYPES
DOCUMENTS
RISKS
REGULATIONS
BY
Ashima

BASIC OPERATIONS
Documentary credits, otherwise, popularly

known as letter of credit or L/C, is an

financial instrument of settlement of trade
related payments.

High degree of involvement by banks in the

documentary credit process build

LETTERS OF CREDIT
Facilitates trade domestic & international
Helps in reducing working capital requirement

for buyer
Helps seller to get immediate payment
Bank intermediates lend its creditworthiness
for which it charges the applicant
Transactions are guided by UCPDC (ICC
Uniform
Customs
and
practices
for
Documentary credits)
Total no. of articles = 39
Publication : UCP 600 (2007 Revision w.e.f. July 1, 2007)

An arrangement by means of which

a bank (issuing bank) acting at the
request of a customer (applicant)
undertakes to pay to a third party
(beneficiary) a predetermined
amount by a given date according
to agreed stipulations and against
presentation
of
stipulated
documents

MECHANICS OF
DOCUMENTARY CREDIT
CONTRACT
GOODS
IMPORTER

DOCS

SHIPPING
COMPANY

GOODS
DOCS

EXPORTER

OPEN CREDIT
OPENING
BANK

ADVISING/

DOCUMENTS
PAYMENT

NEGOTIATING

DOCUMENTS

BANK

PAYMENT

DOCUMENTS UNDER
LC
Bill of exchange.
Invoice.
Bill of lading / Airway Bill / LR / RR.
Insurance Policy.
Certificate of origin.
Packing List.
Weight list.

DOCUMENTS UNDER
L/C
THE DOCUMENTS ARE BROADLY CLASSIFIED AS :
NEGOTIABLE DOCUMENT (BILL OF

EXCHANGE, BILL OF LADING, R/R, L/R)

LEGAL DOCUMENTS (CERTIFICATE OF
ORIGIN,INSURANCE CERTIFICATE, ETC)
QUASI-NEGOTIABLE DOCUMENT (AIRWAY
BILL)
OTHERS (COMMERCIAL INVOICE, PACKING LIST
AND WEIGHT LIST)

BASIC OPERATIONS
(INTER BANK
COMMUNICATION)
SFMS
IS
STRUCTURED
FINANCIAL
MESSAGING
SYSTEM WHICH TERMS AS SECURED MEDIUM
FOR
TRANSMITTING
TRADE
FINANCE
MESSAGES
FOR SENDING/RECEIVING LCs/BGs.

SFMS MESSAGES ARE PRESET AND REFERRED TO

BY A CATEGORY NUMBERED CALL MT NUMBER.

IN THE LETTER OF CREDIT THE NUMBER STARTS
FROM 700.
IN PROCESS MT-700 AND 701 REFERS TO ISSUE
OF THE DOCUMENTARY CREDIT.
MT-707 REFERS TO AMENDMENT TO L/C
MT-720 REFERS TO TRANSFER OF L/C
MT-760 REFERS TO ISSUE OF BANK GUARANTEE
MT-792 REFERS TO CANCELLATION OF L/C

PARTIES TO A LETTER
OF CREDIT
Applicant (Buyer)
Issuing Bank (Opening

Bank)
Beneficiary (Seller)
Advising Bank
Negotiating Bank
(Paying Bank)

TYPES OF LETTERS OF
CREDIT
REVOCABLE

NEGOTIATION

IRREVOCABLE

TRANSFERABLE

SIGHT/PAYMENT
USANCE/ACCEPT

ANCE

REVOCABLE CREDITS
ARTICLE- 6 UCP- 500
(No mention in UCP 600- Art-3Interpretation)
CAN BE REVOKED/ AMENDED/ WITHDRAWN

WITHOUT NOTICE
BENEFICIARY

TO

OR

CONSENT

OF

IS ONLY AN ADVICE AND NOT AN UNDERTAKING

CAN NOT BE CONFIRMED
NOT PERMITTED BY RBI

IRREVOCABLE
CREDITS
AN

UNCONDITIONAL
ISSUING BANK

UNDERTAKING

BY

AMENDMENTS SUBJECT TO THE CONSENT

OF ALL PARTIES TO THE CREDIT

ALL CREDITS UNDER UCPDC DEEMED TO

BE IRREVOCABLE
SPECIFIED

UNLESS

OTHERWISE

SIGHT/ PAYMENT
WHERE

THE
OPENING
BANK
AND/OR
CONFIRMING BANK UNDERTAKES TO PAY ON
THE
PRESENTATION
OF
CONFORMING
DOCUMENTS

IT

ALSO ALLOWS THE CONFIRMING OR

NOMINATED BANK TO DEBIT THE ACCOUNT OF
THE OPENING BANK

USANCE/
ACCEPTANCE
WHERE THE UNDERTAKING IS TO PAY AFTER A

CERTAIN PERIOD AS DEFINED IN THE CREDIT

ITSELF

TO ACCEPT DRAFTS, WHERE CALLED FOR,

DRAWN ON THE OPENING BANK AND TO PAY

THEM ON MATURITY

WITH/WITHOUT
RECOURSE L/C
In with recourse letter of credit, if the buyer

fails to pay bank after the specified period the

bank can have recourse on the exporter.
There is no such provision in the without

recourse letter of credit.

CHECKLIST FOR
BANKS
Full Set Original is Presented
Not a Charter Party- Unless Permitted
Consignee as per terms of Credit
Proper Endorsement as Required
Name of the Shipper or its Agent
Name and Address if any of Notifying Party
Description of Goods as per Credit
Unclaused and Freight Details

CHECKLIST FOR
BANKS
Shipping

and
Presentation
documents within specified time

of

Documents are consistent with each

other
Material Alterations/ Corrections are

properly authenticated

BANKS OBLIGATION &

RESPONSIBILITIES
Issuing Bank (opening bank)
( UCP Article 7)
-the prime obligator

-to ensure credit-worthiness and trustworthiness of the applicant

- Once credit is opened, the bank is
placing itself as a substitute for the
buyer.

BANKS OBLIGATION &

RESPONSIBILITIES
Advising

Bank has the obligation to

authenticate the credit once it is received
and passing it promptly on to the
beneficiary ( Art.9).
Confirming
Bank
takes
over
the
responsibilities of the issuing bank as far as
the beneficiary is concerned though it has
got recourse to the Issuing Bank (Art 8).

BANKS OBLIGATION &

RESPONSIBILITIES
Negotiating Bank
to examine docs. Within 5 banking days
after receipt of the documents at their
counters(Art 14b).
to ensure compliance of credit terms ( on
the basis of documents alone) as well as
consistency of docs with each other.

PROTECTION TO BANKS
Banks are not responsible :
for the genuineness or contents of any

documents submitted (Art. 34)

For losses etc. arising from transmission
problems (Art. 35)
Force Majeure ( Art. 36)
For the failings of their correspondent Banks
(Art. 37)

PROTECTION TO BANKS
Issuing Bank is responsible for all Bank

charges and other costs at home or abroad

even if they are supposed to be paid by
other party (Art. 37 c).
Applicant is responsible for any adverse

consequences of foreign laws (Art. 37d).

RISKS IN LETTER OF
CREDIT
1) FINANCIAL STANDING OF THE BUYER

In letter of credit the issuing bank primarily

guarantees to pay on behalf of the buyer on
fulfillment of certain conditions. Thereby the
bank has to look to the buyer to pay the bills
drawn under L/C and should be sure that the
latter has or will have the funds to pay.

RISKS
2)

THE GOODS

Trade finance is supposed to be self-

liquidating and the goods ust be readily

saleable. Consideration should also be given
to the risks associated with perishability of the
goods, possible obsolescence, import
regulations, packing and storage, etc.

RISKS.
3) THE STATUS OF SELLER

Although bank deals with documents but

there is always the risk that an errant seller
could ship sub-standard goods, and one
always guards against this by finding out as
much as possible about the seller using
status reports and other confidential
information from banks or rating agencies.

RISKS.
4) COUNTRY RISK

The factors usually associated with this type

of risk are the political and economic stability
of a country, exchange controls etc.

INCOTERMS
ICC Rules 2010 (w.e.f.
1/1/2011)
EXW
FCA
CPT
FOB
CFR
CIF
CIP
DAP
DDP

- Ex Works
(Any Mode)
- Free Carrier
(Any Mode)
- Carriage Paid To
(Any Mode)
- Free On Board
(Sea, inland water)
- Cost and Freight
(Sea, inland water)
- Cost Insurance Freight (Sea, inland water)
- Carriage and Insurance Paid to (Any Mode)
- Delivered at Place
(Any Mode)
- Delivered Duty Paid
(Any Mode)

IMPORTANT PROVISIONS
GOVERING LETTER OF
CREDIT
ARTICLE NO. 1:
THE UNIFORM CUSTOMS AND

PRACTICE
FOR DOCUMENTARY
CREDITS 2007 REVISION.
ICC PUBLICATION NO. 600 APPLY TO
ANY DOCUMENTARY CREDIT WHEN THE
TEXT OF THE CREDIT EXPRESSLY
INDICATE THE SAME.

ARTICLE NO.4 :
A CREDIT BY NATURE IS A SEPARATE

TRANSACTION FROM THE SALE OR OTHER

CONTRACT ON WHICH IT MAY BE BASED.

ARTICLE NO.6
CREDIT MUST STATE THE BANK

WHICH IT IS

AVAILABLE WITH.
CREDIT MUST STATE WHETHER PAYABLE ON
SIGHT/DEFFERED PAYMENT OR ACCEPTANCE
OR NEGOTITATION.
CONTINUED..

.CONTINUED

A CREDIT MUST NOT BE ISSUED AVAILABLE BY

DRAFT DRAWN ON APPLICANT.

A CREDIT MUST HAVE AN EXPIRY DATE FOR

PRESENTATION AND NEGOTIATION.

ARTICLE NO. 14
A NOMINATED BANK COMPLYING AS A
NOMINATED BANK ON THE BASIS OF THE
DOCUMENTS ALONE COMPLY , WHETHER OR
NOT THE DOCUMENTS APPEAR ON THEIR A
FACE TO CONTITUTE A COMPLYING
PRESENTTION.

ARTICLE NO.9
A CREDIT AND ANY AMENDMENT MAY BE
ADVISED TO A BENEFICIARY THROUGH AN
ADVISING BANK, WHO SIGNIFIES THAT IT HAS
SATISFIED ITSELF AS TO THE APPARENT
AUTHETICITY OF THE CREDIT AND THAT THE
ADVISE ACCURATELY REFLECTS THE TERMS
AND CONDITIONS OF THE CREDIT RECEIVED.

ARTICLE NO. 16
IF THE NOMINATED BANK AS NOMINATED FOR
NEGOTITAION OF THE DOCUMENTS
DETERMINES THAT THE PRESENTATION DOES
NOT COMPLY WITH THE CREDIT, MAY REFUSE
TO HONOUR OR NEGOTIATE THE DOCUMENTS.

ARTICLE NO. 17
AT LEAST ONE ORIGINAL OF EACH DOCUMENT
STIPULATED IN THE CREDIT MUST BE
PRESENTED.

ARTICLE NO. 30
THERE MAY BE A TOLERANCE NOT TO EXCEED

10% MORE OR LESS THAN THE AMOUNT.

A TOLERANCE NOT EXCEED 5% MORE OR

LESS THAN THE QUANTITY OF GOODS IS

ALLOWED.

ARTICLE NO. 33
A BANK HAS NO OBLIGATION TO ACCEPT A
PRESENTATION OUTSIDE OF ITS BANKING
HOURS.

ARTICLE NO. 35
A BANK ASSUMES NO LIABILITY OR
RESPONSIBILITY FOR THE CONSEQUENCES
ARISING OUT OF DELAY, LOSS IN TRANSIT OR
OTHER ERRORS ARISING OUT IN THE
TRANSMISSION OF ANY MESSAGES OR
DELIVERY OF L/C.

ARTICLE NO. 36
A BANK ASSUMES NO LIABILITY OR
RESPONSIBILTY FOR THE CONSEQUENCES
ARISING OUT OF INTERRUPTION OF ITS
BUSINESS BY THE ACT OF GOD, RIOTS, CIVIL
COMMOTIONS, WAR,ACTS OF TERRORISM,
STRIKES OR LOCKOUTS,ETC.