Letter of Credit


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Assignment, International Banking System, BBA-BI 7th semester, Ace Institute of Management

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Letter of Credit

  1. 1. B Y : • A A Y U S H R A J A R J Y A L • C H H I T I Z S H R E S T H A • D I G A J A M A T Y A • S A M Y E K S H A K Y A • S A P A N D U L A L • S A T I S H K H A D K A
  2. 2. DOCUMENTS REQUIRED FOR L/C • Draft • Commercial Invoice • Consular or Customs Invoice • Bill of Lading • Airway bill • Insurance Policy or Certificate • Certificate of Origin • Inspection Certificate • Packing List
  3. 3. DRAFT • Bill of exchange and a legally enforceable instrument • Drawn by a Bank Branch, drawn to other branches • Cover is provided by the drawing bank • Usually in foreign currency • Drafts are never subject to be dishonored • Use of draft is for the settlement of transactions
  4. 4. COMMERCIAL INVOICE • Itemized account issued by the beneficiary and addressed to the applicant • Must be supplied in the number of copies specified in the letter of credit • Invoice description of the goods must be identical to that stipulated in the letter of credit • Unit prices and shipping terms, i.e., CIF, FOB, etc., must be as stipulated in the letter of credit
  5. 5. CONSULAR OR CUSTOMS INVOICE • Prepared by the beneficiary on forms either supplied by the buyer or local consulate offices • Consular invoices must be visa (officially stamped) and signed by a consular officer • Supplied in the official form and number of copies as stipulated in the letter of credit • value of goods required must agree with that shown on the commercial invoice
  6. 6. BILL OF LADING • A receipt issued by a carrier for goods to be transported to a named destination • Details the terms and conditions of transit. • Incase of shipment by sea it is called Document of Title. • Two different types of bill of lading: STRAIGHT BILL OF LADING One that names a specific consignee to whom goods are to be delivered. Non-negotiable document. ORDER BILL OF LADING ORDER BILL OF LADING: Is written “to order” or to order of a named party making the instrument negotiable by endorsement.
  8. 8. AIRWAY BILL • Receipt issued by an air carrier indicating receipt of goods to be transported by air • Showing goods consigned to a named party • Non-negotiable receipt • Not a document of title. • Airport of departure and airport of destination must be as stipulated in L/C
  9. 9. INSURANCE POLICY OR CERTIFICATE • Beneficiary is obliged to arrange insurance • Extent of coverage and risks should be agreed upon between the buyer and seller. • Insurance policy or certificate indicates that it is issued in duplicate, both copies must be presented • Description of the goods insured must be consistent with that in the other documents • Name of the carrying vessel, port of loading and port of discharge must agree with those shown on the bill of lading
  10. 10. CERTIFICATE OF ORIGIN • Certifies as to the country of origin of the goods described and should comply with any stipulations in the letter of credit. • Certificate should be consistent with and identified with the other shipping documents.
  11. 11. INSPECTION CERTIFICATE • Such indicates that the goods have been examined and found to be as ordered. • Should be specify by whom the certificate is to be issued; otherwise, the same general comments as in the case of the certificate of origin apply.
  12. 12. PACKING LIST • Requested by the buyer • To assist in identifying the contents of each package or container. • Must show the shipping marks and number of each package. • Is not usually required to be signed.
  13. 13. DEFINITIONS OF TERMS IN L/C • Date of Issuance: Actual date at which the LC document has been issued by the issuing bank for the applicant • Date and place of expiry of DC: Date and place at which the LC document expires. It is usually at the place of the exporter. After this date the LC • Applicants name and address: The buyer party who has opened the LC. The party that reaches to the issuing bank for opening or issuing a new LC. Applicants name is usually a company’s name who is buying the product form the exporter.
  14. 14. DEFINITIONS OF TERMS IN L/C • Beneficiary’s Name and Address: Name and the address of the exporter party It is the exporting company who exports the goods and receives the proceeds from the applicant party. • Currency and amount in figures: Currency of the country in which the trade is taking place. Usually the exporter country’s currency in case of imports in Nepal. Exporters in Nepal the invoicing is done in foreign currency.
  15. 15. DEFINITIONS OF TERMS IN L/C • Percentage credit amount tolerance: The +- variation amount in the quantity or at the total value amount of LC that is allowed. • EG: If an order of 100 pieces of umbrella @ $1= $ 100 LC is opened and a % credit amount tolerance of 10% is given then you are allowed to ship a total value of $900 to $1100. A variation of $100 or 10 units up or down is allowed.
  16. 16. DEFINITIONS OF TERMS IN L/C • Maximum credit Amount: maximum amount of the sum in FX that is provided by the issuing bank for the purchasing of the goods under LC • Drafts at: A sight or a time draft can be issued for payment For (DAP) Sight Draft is used and for (DAA) time draft is used
  17. 17. DEFINITIONS OF TERMS IN L/C • Drawee: Bank who is given the instruction to pay the beneficiary or the Payee. • Deferred/ Mixed Payment Details: Arrangement in which debt does not have to be repaid until sometime in the future. • Partial Shipments: Refers to Delivery of an order in two or more consignments.
  18. 18. DEFINITIONS OF TERMS IN L/C • Transshipment: Indicate whether or not transshipment is allowed. Choice depends on the method of shipment/transport document used. During the course of voyage, merchandise is unloaded and reloaded from one vessel to another vessel.
  19. 19. DEFINITIONS OF TERMS IN L/C • Description of Goods &/or Services: Brief description of the merchandise. common practice is to use a Purchase Order or Performa Invoice number banks deal in documents and not in goods. • 46 A: Documents Required Commercial Invoice Transport Documents
  20. 20. DEFINITIONS OF TERMS IN L/C • Shipment to be made from Name of the place/port from which the goods will be shipped • For transportation to Name of the place/port to which the goods will be shipped • Latest Shipment Date It is the latest mutually acceptable date for the shipment to be made. Commonly known as the “Not Later Than”
  21. 21. DEFINITIONS OF TERMS IN L/C • Multimodal Transport Document. • On Board Marine/Ocean Bill of Lading • Air Transport Document. • Trucking/Rail Bill of Lading • Insurance Documents • Packing List • Inspection Certificate • Weight List
  22. 22. DEFINITIONS OF TERMS IN L/C • 47 B: Additional Conditions Transport Documents issued by Freight Forwarders Acceptable the services of a freight forwarder to transport goods and prepare documents relating to the shipment are often used by the exporters Advice Beneficiary by Phone or Fax include instructions as to who the Advising Bank must call or fax upon its receipt.
  23. 23. DEFINITIONS OF TERMS IN L/C 71 B: Charges Indicate who will pay the Exporter’s banking charges along with the charges of any other bank The Issuing Bank charges are always the responsibility of a party, the Applicant