Letters of Credit


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Letters of Credit

  1. 1. Letters of Credit (L/C) Value creation through process innovations!
  2. 2. What is L/C ? A documentary credit is the written promise of a bank, undertaken on behalf of a buyer, to pay a seller the amount specified in the credit provided the seller complies with the terms and conditions set forth in the credit. Value creation through process innovations !
  3. 3. How does L/C function ? Banks act as intermediaries to collect payment from the buyer in exchange for the transfer of documents that enable the holder to take possession of the goods. The seller is assured that payment will be made by a party independent of the buyer so long as the terms and conditions of the credit are met. The buyer is assured that payment will be released to the seller only after the bank has received the title documents called for in the credit. Value creation through process innovations !
  4. 4. Types of Credits Letter of CreditsStandard Specialized credits credits Revocable Revolving Credits (cancellable) Red Clause Credits Irrevocable (non-cancellable) Standby Credits Confirmed (Buyer’s bank & another bank guarantee payment) Transferable Credits Un-Confirmed (Only buyer’s bank Back-to-back Credits guarantees payment) Value creation through process innovations !
  5. 5. Issuance of L/C 1.Buyer / Purchase & Beneficiary /Importer Sales Exporter Agreement 2. 4.Request Advice of L/Cfor a L/C 3. Request toBuyer / Advising / Advice &Importer Confirming Bank confirm L/C Value creation through process innovations !
  6. 6. Payment under L/C 1. Buyer / Shipment of Beneficiary / Importer Goods Exporter 2. 3.Documents Payment 3. Payment 2. Documents 3. Buyer / Payment Advising / Importer 2. Confirming Bank Document Value creation through process innovations !
  7. 7. Advantages & Disadvantages to the ImporterAdvantages Importer is assured of payment to exporter only if all terms & conditions of L/C would be met Importer is able to negotiate more favorable trade terms with the exporterDisadvantages L/C doesn’t guard import from exporter shipping inferior quality and / or lower quantity of goods Its importer’s responsibility to ascertain reputation of exporter. It is important for important to have line of credit before the bank could issue L/C Value creation through process innovations !
  8. 8. Advantages & Disadvantages to the ExporterAdvantages Risk of payment relies upon the creditworthiness of the Issuing bank & not on creditworthiness of the importer If L/C is not issued as agreed, exporter is not obligated to ship against it.Disadvantages Importers might be unable to open L/C due to the lack of credit facilities with their bank Documents must be prepared and presented in strict compliance with requirements stipulated in L/C & cannot modify it. Value creation through process innovations !
  9. 9. Key points for Buyer in L/C Beneficiary name Credit amount Validity period for presentation of the document Beneficiary bank name Payment type availability Desired documents Notify address Merchandise description Confirmation order Value creation through process innovations !
  10. 10. Common Defects in L/C L/C date expired prior to its presentation Inconsistent description of goods Changes included in the invoice not authorized in the credit Mismatch of amount mentioned in invoice and draft Ports of loading and destination are wrongly mentioned Key documents are unattached or have wrong information Invoice or statement is not signed by appropriate authority Value creation through process innovations !
  11. 11. Limitations of L/C L/C doesn’t ensure that the goods actually shipped are as ordered. L/C doesn’t insulate buyers and sellers from other disagreements or complaints arising from their relationship. Value creation through process innovations !
  12. 12. For queries on L/C Get in touch Genex Logistics (Genex LogiSolutions Pvt. Ltd.) 681, Sec 16B, Pocket B, Dwarka, New Delhi - 110075 Tel: +91-11-28035020 Mobile: +91-9810404438 Email: info@genexlog.com Website: www.genexlogistics.inFacebook | Twitter | LinkedIn | Slideshare | Blog Value creation through process innovations !
  13. 13. Thank You!!Value creation through process innovations !