The document provides information on opening letter of credit procedures, including: - Defining key parties in an LC transaction such as the issuing bank, beneficiary, applicant, and advising bank. - Describing the 5 major steps in an LC transaction: issuing, advising, amendment, presentation, and settlement. - Explaining types of LCs like revolving, back-to-back, transferable, and standby credits. - Listing documents required for opening an LC like the application form, proforma invoice, insurance cover note, and import registration. - Noting banks must check applicant signature, proforma invoice acceptance, importer entitlement, and restricted items

1. LC Opening prOCedure &
FOrmaLities
Presented byPresented by
Nazrul IslamNazrul Islam
Assistant Vice President &Assistant Vice President &
Head of Ibrahimpur BranchHead of Ibrahimpur Branch
Prime Bank Ltd; DhakaPrime Bank Ltd; Dhaka
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2. What is Import?
• To bring in, from abroad, something in kind of
goods or services is Import.
• Import is regulated by Import & Export Control
Act-1950 with Import Policy Order (IPO)
under the Ministry of Commerce and public
Notices issued from time to time by the office
of the Chief Controller of Imports and Exports
(CCI& E).
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3. Who is eligible to Import?
• As per Importers, Exporters and Indenters
(Registration) Order-1981 no person can
import goods in to Bangladesh unless he is
registered with CCI & E or exempted from the
provision of the said Order.
• An AD shall have to deal with those
customers who are known to Ads having a
business place in Bangladesh and can be
traced easily (GFET-1996, Vol-1,Chapter-
15,Para-2)
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4. What is L/C?
It is a definite undertaking given by a
bank (issuing Bank) at the request of a
customer (Applicant) or its own behalf
to pay a seller (Beneficiary) against
presentation of compliance document
as per terms and conditions of the
credit.
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5. Definition according to UCP
According to UCP-600 (2007 Rev) Credit means any
arrangement, however named or described, that is irrevocably
and thereby constitutes a definite undertaking of the issuing
bank to honour complying presentation.
Honour means:
• To pay at sight if the credit is available by sight payment
• To incur a deferred payment undertaking and pay at maturity if
the credit is available by deferred payment
• To accept a bill of exchange (draft) drawn by the beneficiary and
pay at maturity if the credit is available by acceptance.
All letters of credits are IRREVOCABLE CREDIT. Revocable
credit is no longer existing according to UCP-600 (2007 Rev)
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6. Types of letter of credit:
Special Documentary Credit:
• Revolving L/C: The revolving credit is one which provides
for restoring the credit to the original amount after it has been
utilized. How many times it will be taking place must be
specifically mentioned in the credit. The revolving credit may
may either cumulative or non-cumulative. ( According to Article
No.18 (ii), Chapter 15 of GFET-1996, Volume-1 this type of
cannot be opened without BB approval)
• Bank to Back L/C: is a new credit opened on the basis of
an original credit (export L/C) in favour of another beneficiary.
Under the back to back to bank concept, the seller as the
beneficiary of the first credit offers it as security to the advising
bank (or negotiating bank) for the issuance of the second credit.
The beneficiary of the BTB L/C may be located inside or outside
the original beneficiary’s (export L/C) county.
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7. Types of letter of credit: Continue...
• Transferable L/C: A transferable credit is one that can be
transferred by the original beneficiary in full or in part to one or
more subsequent beneficiaries. Such credit can be transferred
once only. That means second beneficiary has no right to
further transfer the credit to other.
• Red Clause L/C: is a credit with special condition
incorporate (is printed/ typed in red) into it that authorises the
confirming bank, or any other nominated bank to make advance
to the beneficiary before presentation of documents. Under this
credit the opening bank is liable for the pre-shipment advance
made by the negotiating bank, in case the beneficiary fails to
repay or deliver the documents for negotiation.
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8. Types of letter of credit: Continue...
• Green Clause L/C: is a credit with special clause incorporated into it which
not only authorises the advising bank to grant pre-shipment advances but
also storage cost for storing the goods prior to shipment. It is useful in
situations where shipping space is not readily available, e.g some African
counties. It is so called so because the credit was originally written in Green
Ink to draw attention to the unique nature of this credit. At present this type of
Credit is not in use.
• Standby L/C: is a documentary credit or similar arrangement, however
named or described, which represents an obligation to the beneficiary on the
part of the issuing bank to:
a) Repay money borrowed by the applicant, or advanced to or for the
account of the applicant.
b) Make payment on account of any indebtedness undertaking by the
applicant
c) Make payment on account of any default by the applicant in the
performance of an obligation.
• This concept introduced by North American country. It is a type of Guarantee.
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9. Parties involved in the letter of credit:
Main Parties:
i) The issuing bank
ii) The confirming bank
iii) The beneficiary
• Issuing Bank: Issuing bank means the bank issues
letter a credit at the request of an applicant or on its
own behalf.
• Confirming Bank: Confirming bank means the bank
that adds its confirmation to a credit upon the issuing
bank’s authorization or request.
• The beneficiary: the beneficiary means the party
whose favour the L/C is established
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10. Parties involved in the letter of credit:
Other Parties:
i) The applicant
ii) The advising bank
iii)The nominated paying /negotiating/
accepting bank
iv)The reimbursing bank
v)The transferring bank (if any)
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11. Parties involved in the letter of credit:
Other Parties: Continue...
i) Applicant: Applicant means the party on whose request the
credit is established.
ii) Advising Bank: Advising Bank means the bank that advises
the credit at the request of the issuing bank.
iii) Nominated bank means the bank with which the credit is
available or any bank in the case of a credit available with any
bank.
Negotiating bank is a bank which negotiates the bill and pays
the amount to the beneficiary.
Negotiation means the purchase by the nominated bank of
drafts (drawn on a bank other than the nominated bank) and or
documents under a complying presentation, by advancing or
agreeing to advance funds to the beneficiary on or before the
banking day on which reimbursement is due to the nominated
bank.
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12. Parties involved in the letter of credit:
Other Parties: Continue...
iv) Paying / Reimbursing Bank: is the bank as whom be bill will
be drawn ( as per condition of the credit). It is nominated in the
credit to make payment against stipulated documents complying
with terms of the credit. It may or may not be issuing bank.
v) Transferring Bank: Transferring Bank means a nominated
bank that transfers the credit or, in a credit available with any
bank, a bank that is specifically authorised by the issuing bank
to transfer and that transfers the credit. An issuing bank may be
transferring bank. Transferred credit means a credit that has
been made available by the transferring bank to the second
beneficiary.
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13. Operations of Documentary Letter of Credit:
The following 05 (five) major steps are
involved in the operations of a documentary
letter of credit.
i) Issuing
ii) Advising
iii) Amendment (if necessary)
iv) Presentation and
v) Settlement
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14. Operations of Documentary Letter of Credit:
Continue...
i) Issuing of Letter of Credit:
Before issuing of a L/C, the buyer and seller located in different
countries, concludes a sales contract providing for payment by
doc credit. As per requirement of the seller, the buyer then
instructs the issuing bank to issue a credit in favour of the seller
(Beneficiary). Instruction/Application for issuing a credit should
be made by the buyer ( Importer) in the issuing bank’s standard
form. The credit application which contains the full details of the
proposed credit, also serves as an agreement between the bank
and the buyer. After being convinced about the necessary
conditions contained in the application form and sufficient
conditions to be fulfilled by the buyer for opening a credit, the
opening bank then proceeds for opening the credit to be
addressed to the beneficiary.
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15. Operations of Documentary Letter of Credit:
Continue...
ii) Advising a letter of Credit:
Advising through a bank is prior of apparent
authenticity of the credit to the seller. The process of
advising a credit consists of forwarding the original
credit to the beneficiary to whom it is addressed.
Before forwarding the advising bank has to verify the
signature(s) of the officer (s) of the opening bank in
case of mail L/C & in case of should check BKE
arrangement for authenticity of the SWIFT L/C and
ensure that the terms and conditions of the credit are
not in violation of the issuing bank does not
undertake any liability.
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16. Operations of Documentary Letter of Credit:
Continue...
iii) Amendment of a letter of Credit:
Parties involved in a L/C, particularity the seller and
the buyer, cannot always satisfy the terms and
conditions in full as expected due to some obvious
and genuine reasons. In such a situation, the credit
should be amendment.
A credit can neither be amended nor cancelled
without the agreement of the issuing bank.
Confirming bank (if any) and the beneficiary.
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17. Operations of Documentary Letter of Credit:
Continue...
iv) Presentation of Documents under letter of credit:
The seller being satisfied with the terms and
conditions of the credit proceeds to dispatch the
required goods to the buyer and after that, has to
present the documents evidencing dispatching of
goods to the negotiating bank on or before the
stipulated expiry date of the credit. If the documents
are found in order, the bank will pay, accept or
negotiate to the issuing bank, either
= effect payment or
= reimburses in the pre-agreed manner.
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18. Operations of Documentary Letter of Credit:
Continue...
v) Settlement of letter of credit:
Settlement means fulfilling the commitment of
issuing bank in regard to effect payment
subject to satisfying the credit terms fully.
a) Settlement by payment:
b) Settlement by Acceptance
c) Settlement by Negotiation
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19. Operations of Documentary Letter of Credit:
Continue...
v) Settlement of letter of credit:
a) Settlement by payment:
Here the seller presents the doc to the paying bank.
In compliance presentation paying bank makes
payment to the beneficiary and in case this bank is
other than the issuing bank, then sends the doc to
the issuing ban. If the issuing bank is satisfied with
the requirements, payment is obtained by the paying
bank from the issuing bank.
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20. Operations of Documentary Letter of Credit:
Continue...
v) Settlement of letter of credit:
b) Settlement by Acceptance:
Under this arrangement, seller submits the
documents evidencing the shipment to the accepting
bank accompanied by the draft drawn on the bank
(where credit is available) at the specified tenor. After
being satisfied with the documents, the bank accepts
the docs and drsft if it is a bank other than the issuing
bank, then sends the docs to the issuing bank stating
that it has accepted the draft and at maturity the
reimbursement will be obtained in the pre-agreed
manner.
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21. Operations of Documentary Letter of Credit:
Continue
v) Settlement of letter of credit:
c) Settlement by Negotiation:
This settlement procedure starts with the submission
of docs by the seller to the negotiating bank
accompanied by the draft drawn on the drawee at
sight or at a tenor, as specified in the credit. After
scrutinizing that the docs meet the credit
requirements, the bank may negotiate the draft. This
bank, if other than the issuing bank, then sends the
docs and the draft to the issuing bank. As usual,
reimbursement will be obtained in the pre-agreed
manner.
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22. Following paper / documents are required
for opening of letter of credit
1. Application form duly signed by applicant with LCAF
2. Proforma Invoice or Indent
3. Insurance Cover note
4. Letter of allotment or consent from concern Ministry
( In case of Govt. L/C)
5. Valid member ship certificate from a registered
Chamber of commerce and industry or others
business body/Trade association.
6. Renewed Trade licence, TIN and VAT certificate
7. Renewed Import registration certificate (IRC)
8. Income Tax assessment
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23. Before opening a L/C, the issuing bank must check
the following:
1. Applicant signature verified with bank record
2. L/C application properly stamped
3. Proforma Invoice/ Indent duly accepted by the applicant
4. In case of import under indent the Indentor Registration No with CCI&E and
Bangladesh Bank permission No. has been quoted in the L/C applicant form.
5. The importer entitlement as per IRC
6. The items are not one are banded list or restricted list in accordance with
current Import Policy Order (IPO).
7. Correct HS code.
8. Insurance cover note mentioning the items to be imported, the port of
shipment & destination, mode of shipment and particulars of risk coverage.
9. Price verification.
10.Suppliers credit report.
11.Ensure the imported items are bonded or not. If not bonded and other than
capital machineries incorporated PSI clause in the L/C.
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24. As required by Guidelines for Foreign Exchange
Transaction (GFET), Volume-1 the credit report of the
supplier should be obtained in all cases of L/C
involving Tk.10,00,000/- or over against indent issued
by local indenting agent and over Tk.5,00,000/-
against proforma invoices issued by the supplier
direct.
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