3. It is a non-fund base credit facility like bank guarantee but having many variations or
can say differences compared to the concept of bank guarantee. Monetizing letters
of credit is often considered as a financial instrument issued by a bank to do certain
import-export.
The working of the monetizing letters of credit
Here we can take mainly 4 parties say:
Buyer/Importer
Issuing bank
Advising bank
Seller/Exporter
4. Let’s discuss each of the above-mentioned parties in brief:
Buyer/Importer
Here, for example, we can consider the buyer is from India and wanted to purchase
some electrical equipment from UAE. So for that he/she needs to submit a proposal
and here by simply doing conversations through phone calls or emails does not work
as well as both buyer and seller can't trust each other.
Issuing Bank
So for doing the import activity, the buyer will request for the ‘Letter of Credit' from a
particular bank which is termed as ‘ISSUING BANK'. After verifying the details of the
buyer, the particular issuing bank will issue the ‘monetizing Letter of Credit’.
5. Advising bank
Now the advising bank is the bank who informs the seller about
credibility of the buyer after checking the ‘Letter of credit’ issued by the
buyer’s bank.
Seller/exporter
The seller/exporter is now confident about the buyer’s authenticity
because the advising bank has sent the ‘Letter of Credit’ from the
buyer’s side and he/she will be ready to ship the goods to India.
Now the seller gets a bill of lading after shipping the goods to another
country. He/she will take this main document called the bill of lading to
the negotiating bank which can be a separate bank or the same advising
bank.
6.
7. This bank will check the accuracy of the shipping documents and also
evaluate whether the goods are shipped according to the monetizing
Letter of Credit. Ultimately, the payment is processed by the negotiating
bank to the seller.
Now, these documents are sent to the Issuing bank for the payment
approval and it is further sent to the buyer by the issuing bank to get the
approval of the documents.
Now when the buyer sent an approval, the opening bank will demand
the goods payment and the payment is received to the issuing bank from
the buyer.
8. Features of Letters of Credit
When ‘Letter of Credit' is issued, an FD(Fixed deposit) or bank deposit is
kept as a security.
For issuing the ‘Letters of Credit’ certain fee is charged by the bank.
Inside ‘Letter of Credit': Name of the seller, Product name, code amount,
date all the information must be precise and authentic.
Whatever details mentioned in this letter must be free from any typo
error.