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.
5Methods Of PaymentsPrinciples Of Banking Cash in Advance Documentary collection Open account Letter of Credit L/C
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.
7Parties involves in Letter of CreditPrinciples Of BankingImporter / BuyerIssuing Bank / Importer BankExporter / SellerPaying Bank / Negotiating Bank
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
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
10Benefits Of Letter Of CreditPrinciples Of BankingTo the Bank: Source of Income Increase in Balance New Relations Better Reputation
11Procedure Of Opening Letter Of CreditPrinciples Of BankingAgreement ImporterExporter Importer and Exporter enter intoa sales agreement
12Principles Of BankingApplicationImporterIssuing Bank Importer applies for a letter ofcredit with the Issuing Bank
13Principles Of BankingLetter ofCreditIssuingBankU.S.Bank Issuing Bank advises the letter of credit toU.S. Bank, usually via SWIFTL/C
14Principles Of BankingBeneficiaryU.S. Bank U.S. Bank authenticates the L/Cand advises L/C to beneficiary
15Principles Of BankingExporterGoodsImporterGoods Exporter prepares the documentsand ships the goods
16Principles Of Banking Exporter sends shipping documentsto U.S Banks for examinationExporterDocumentsFBM U.S. Bank
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
18Principles Of Banking Issuing Bank examines documents and delivers toimporter against payment. Importer takespossession of goods by presenting documents.GoodsDocsIssuingBankDocumentsImporter
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
20Adding a confirmationor engagement topurchase documents:AgreementApplicationLetter ofCreditLetter ofCredit DocumentsDocumentsExporterIssuingBankAdvisingBankDocumentsGoodsImporterConfirm.Bank
21Documents of Letter of CreditPrinciples Of Banking Financial Documents:• Bill of Exchange• Co-accepted Draft Commercial Documents:• Invoice• Packing list Shipped Documents:• Insurance policy
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
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.
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
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.