Basics of Letter of Credit

A letter of credit simply defined as a written instrument that is provided by the bank at the request of its customers, the buyer, whereby the bank ensures to pay the beneficiary for goods or services, provided that the exporter presents all documents called for, exactly as required and meet all other terms and conditions set out. It is the most important segment of non-fund based business for banks and it is too called as documentary credit. It is a financial tool that can be very useful in some situations. It usually has three fields.

In the first field, there is a beneficiary, the company or the person who will be paid. The second is the buyer of the services or goods, the one who needs it. Lastly, the third is the issuing bank, the institution providing the letter of credit. This is most often used in international trade, where they are governed by the Uniform Customs and Practice for Documentary Credits. The beneficiary may request payment to an advising bank, which is a bank where the beneficiary is a client, rather than directly to the beneficiary.Document Needed:-

The document that the providing bank will accept are specified, the beneficiary must present documentation of completion of their part in the transaction to the issuing bank. This often includes:-

Invoices

Bills of exchange

Insurance policies or certificates, except cover notes

Government documents such as licenses, inspection certificates, embassy legalizations, phytosanitary certificates, and certificates of origin.

Transport and Shipping documents such as bills of landing and airway bills.

Risks in LC transactions: -

Acceptability and saleability of the goods: - This is a risk associated with all modes of international trade, and may affect the importer’s ability to pay for his consignment.

The financial standing of the Importer: - This involves an appraisal of the creditworthiness of the importer as a borrower.

Country Risk: - This includes Risk element like the economic and political stability of a country and exchanges control.

Failure of the collecting bank or issuing or insolvency of the buyer.

Yield 4 Finance (P) Ltd. involves the use of our letter of credit and guarantee facilities with numerous institutions.