Letter of Credit
Letter of Credit (L/C) is one of the most frequently used payment mechanism in the international trade. Usually it satisfies the buyer (importer) need for credit and the seller (exporter) desire for cash.
A Letter of Credit is an irrevocable arrangement and constitutes a definite undertaking of the issuing bank to honor a complying presentation meaning a presentation that is in accordance with the terms and conditions of the Letter of Credit, the applicable provisions of these rules and international standard banking practice.
- Sight Payment: The Bank pays the stipulated sum immediately against a complying presentation.
- Deferred Payment: The Bank undertakes to pay on a specified future date after a complying presentation and no draft or bill of exchange is required.
- Acceptance: The Bank accepts the draft or bill of exchange drawn by the beneficiary and pays at maturity after a complying presentation.
- Negotiation: Immediate payment to the beneficiary against negotiation of a draft or a bill of exchange and a complying presentation.
- Confirmed L/C: It provides a double assurance of payment to the beneficiary, in addition to the issuing bank undertaking; there is a definite undertaking of the confirming bank, to honor or negotiate a complying presentation.
- Transferable L/C: The beneficiary may transfer his right to perform under the L/C to a third party (the second beneficiary or beneficiaries). It is usually used when the first beneficiary is a middleman who wishes to transfer all, or part of the value of the LC to his supplier.
- Assignment of Proceeds: The beneficiary may assign his right to receive the L/C proceeds to a third party. Such an assignment does not give to the designated payee any interest and does not affect the beneficiary or the bank right to agree to amendments, cancellation or any substitution.
- Revolving L/C: It permits reinstatement renewal or reinstatement of the amount without requiring specific amendments to the L/C.
- Standby L/C: It provides security against default in performance of an obligation.
- Back to Back L/C: It is basically used when a transferable L/C cannot be applied to the commercial transaction. It involves two separate L/Cs: One is opened in favor of a first beneficiary and another is opened on behalf of the first beneficiary (the back-to-back L/C) in favor of a second beneficiary (the supplier of goods). The first L/C is offered as sole collateral.
- LCs are governed by the Uniform Customs and Practice for Documentary Credits, 2007 Revision, and ICC Pub. 600 (Applied to all documentary credits including to the extent to which they may be applicable, any standby LCs). Standby LCs could alternatively be made subject to ICC International Standby Practices (ISP98).
- It facilitates financing, provides legal protection and assures expert examination of documents and payment execution in accordance with the terms conditions of the L/C.
- Bill Discounting: Usance bills and bankers acceptances (the bank own acceptances or other banks acceptances) could be discounted covering the shipment and sale of merchandise in local or international trade in accordance with our Bank credit policy requirements.