Letter of credit


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Letter of credit

  1. 1. 1Principles Of Banking
  2. 2. 2Presentation Topic:LETTER OF CREDIT
  3. 3. 3Group Name:Principles Of Banking Hafsa Fakhar Tania Toufeeq Kanwal IjazDazzler’sPresented ByPresented By:
  4. 4. 4Principles Of BankingThe original Habib Bank began modestly in Bombay in 1941 when itcommenced operations with a fixed capital of 25,000 rupees.Under the privatization policy of Government of Pakistan Bank AL Habib wasincorporated as a Public Limited Company in October 1991.The Bank has a network of three hundred and sixty six branches.
  5. 5. 5Methods Of PaymentsPrinciples Of Banking Cash in Advance Documentary collection Open account Letter of Credit L/C
  6. 6. 6What is a Letter Of Credit?Principles Of Banking• A documentary credit, or letter of credit is anundertaking issued by a bank for the account of thebuyer (applicant), to pay the seller (beneficiary)provided the terms and conditions of thedocumentary credit are complied with.• A documentary credit, or L/C, usually satisfies theseller’s desire for cash payment and the buyer’sdesire for credit.
  7. 7. 7Parties involves in Letter of CreditPrinciples Of BankingImporter / BuyerIssuing Bank / Importer BankExporter / SellerPaying Bank / Negotiating Bank
  8. 8. 8Types Of Letter Of CreditPrinciples Of Banking Irrevocable L/C Revocable L/C Confirmed L/C Unconfirmed L/C Deferred L/C With Resource L/C Without Resource L/C Documentary L/C Clean L/C Fixed L/C Revolving L/C Back to back L/C Red Clause L/C Green Clause L/C
  9. 9. 9Benefits Of Letter Of CreditPrinciples Of BankingTo the Exporter: Payment protection Reliance on issuing bank’scredit rather than buyer’s Rapid, local sourcerepayable, if payable at aU.S. bankTo the Importer: Documentary evidence that theordered goods have been shipped ontime Assurance that necessary clearancedocuments will be provided Payment deferred until goods areshipped and documents presented
  10. 10. 10Benefits Of Letter Of CreditPrinciples Of BankingTo the Bank: Source of Income Increase in Balance New Relations Better Reputation
  11. 11. 11Procedure Of Opening Letter Of CreditPrinciples Of BankingAgreement ImporterExporter Importer and Exporter enter intoa sales agreement
  12. 12. 12Principles Of BankingApplicationImporterIssuing Bank Importer applies for a letter ofcredit with the Issuing Bank
  13. 13. 13Principles Of BankingLetter ofCreditIssuingBankU.S.Bank Issuing Bank advises the letter of credit toU.S. Bank, usually via SWIFTL/C
  14. 14. 14Principles Of BankingBeneficiaryU.S. Bank U.S. Bank authenticates the L/Cand advises L/C to beneficiary
  15. 15. 15Principles Of BankingExporterGoodsImporterGoods Exporter prepares the documentsand ships the goods
  16. 16. 16Principles Of Banking Exporter sends shipping documentsto U.S Banks for examinationExporterDocumentsFBM U.S. Bank
  17. 17. 17Principles Of Banking Assuming clean documents, U,S Bank pays exporterby debiting Issuing Banks’s account or upon receiptof funds from a separate reimbursing bank.Documents sent to Issuing Bank.DocumentsExporterIssuing BankU.S. Bank
  18. 18. 18Principles Of Banking Issuing Bank examines documents and delivers toimporter against payment. Importer takespossession of goods by presenting documents.GoodsDocsIssuingBankDocumentsImporter
  19. 19. 19Principles Of Banking The exporter has been paid, the importer has theirgoods, the banks have been reimbursed, and the cycleis complete!GoodsAgreementDocumentsLetter ofCredit Application DocumentsExporter ImporterIssuingBankLetter of creditDocumentsU.S. Bank
  20. 20. 20Adding a confirmationor engagement topurchase documents:AgreementApplicationLetter ofCreditLetter ofCredit DocumentsDocumentsExporterIssuingBankAdvisingBankDocumentsGoodsImporterConfirm.Bank
  21. 21. 21Documents of Letter of CreditPrinciples Of Banking Financial Documents:• Bill of Exchange• Co-accepted Draft Commercial Documents:• Invoice• Packing list Shipped Documents:• Insurance policy
  22. 22. 22Documents of Letter of CreditPrinciples Of Banking Shipping Documents:• Transport Documents• Insurance Certificate• Commercial Documents• Legal Documents Transport Documents:• Bill of Lading• Airway Bill• Truck / Lorry receipt• Railway receipt
  23. 23. 23Risk situation In Opening Letter of CreditPrinciples Of Banking Fraud Risks:The payment will be obtained for nonexistent or worthless merchandiseagainst presentation by the beneficiary of forged or falsified documents. Sovereign and regulatory Risks:Performance of the documentary credit may be prevented bygovernment action outside the control of the parties.
  24. 24. 24Principles Of Banking Legal Risks:• Possibility that performance of a Documentary Credit may bedisturbed by legal action related directly to the parties andtheir rights and obligations under the documentary credit. Risks to the Applicant:• Non-Quality delivery of goods• Short shipment• Inferior• Early/Late Shipment• Damaged in transit• Failure of Bank via Issuing bank / Collection Bank
  25. 25. 25Principles Of Banking Risk to the Issuing Bank:• Insolvency of the Applicant• Fraud Risk• Legal Risk Risks to the Reimbursing Bank:• No obligation to reimburse the Claiming Bank unless it has issueda reimbursement undertaking.
  26. 26. 26Principles Of Banking
  27. 27. 27Principles Of Banking
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  29. 29. 29References:Principles Of Banking http://en.wikipedia.org/wiki/Letter_of_credit Bank Al Habib Bo0ks
  30. 30. 30Principles Of BankingQuestions?