REPORT ON LETTER OF CREDIT HOW TO OPEN L.C

2. A Report On : How To Open Letter Of Credit
Prepared For : Sir Mumtaz Hassan
Prepared By : Abdul Latif
Roll No : 1204101
DATED : 8th
April, 2015

3. TTAABBLLEE OOFF CCOONNTTEENNTTSS
S.No Topic Page No
01 Executivesummary 01
02 Introduction 02
03 Letter of credit 03
04 How to open L/C 04
05 CharacteristicsOfLetter Of Credit 05
06 Documentscall for under L/C 07
07 Standard form of documentation 08
08 Intr. Tradepayment methods 09
09 Risk in L/C transaction 10
10 Conclusion 12
11 Appendix (A) 13
12 Appendix (B) 14
13 Bibliography 15
14 Index 16

4. EEXXEECCUUTTIIVVEE SSUUMMMMAARRYY
A letter of credit is a method of securing payment to a vendor. When a
seller asks a buyer to obtaina letter of credit, it means the seller would like
to ensure payment for a product he sells to that customer. Typically letters
of credit areissued by a bank. The most common forms are standby letters
of credit for domestic transactions and documentary letters of credit for
international transactions.
Letter of credit isa payment method in internationaltradewhich is used by
almost all sectors from textile to machinery, food manufacturing to
construction, oiltrading tocustomer goods. You mayassume that there are
big differences exist on letter of credit application process for all these
different sectors. But this is not correct. You have to follow similar
procedureswhen opening a letter of credit regardless of the sector you may
be located.
Two types of L/C is wideley used around the globe which is Revocable L/C
and Irrevocable L/C and the following parties are involved in letter of
credit; ApplicantofL/C, L/C issuing bank, beneficiaryparty, advisingbank,
confiming bank, negotiating bank and second beneficiary. Typically, the
documentsa beneficiaryhasto present in order to receive payment include
a commercial invoice, bill of lading, and documents proving the shipment
was insured against loss or damageintransit. However, the list and form of
documents is open to imagination and negotiation and might contain
requirements to present documents issued by a neutral third party
evidencing the quality of the goods shipped, or their place of origin.

5. IINNTTRROODDUUCCTTIIOONN
When you hear the phrase letter of credit, it might be natural to think it
would refer to a document verifying that you arecreditworthy, but that isn't
the case. a letter of credit is a document issued by a third party that
guarantees payment for goods or services when the seller provides
acceptable documentation. letters of credit are usually issued by banks or
other financial institutions, but some creditworthy financial services
companies, like insurance companies or mutual funds, might issue letters
of credit under certain circumstances.
The purpose of this report is to get deeper knowledge of the procedure to
open letter of credit. In this regard we were advised to visit any bank and
collect the relevant informationregarding Letter of Credit. We have visited
the Habib Metro Bank ( Bahudarabad Branch).The branch manager was
really co-operative and he gave us not only his precious time but also his
valuable and practical insights on Letter of credit as he has years of
experience in this feild.
This report helped us a lot and a great addition in our knowledge.Now we
are fimiliar with procedure of opening letter of credit .

6. LLEETTTTEERR OOFF CCRREEDDIITT
DDEEFFIINNIITTIIOONN::
A conditionalguarantyof payment madeby a bankto the nameof
beneficiarygranting that paymentwillbe madeprovided that the term of
credit aremade. This term will statethat thebeneficiarymust submit
satisfied document toa stated bankat a certaindate.
DDEEFFIINNIITTIIOONN AACCCCOORRDDIINNGG TTOO EENNCCYYCCLLOOPPAAEEDDIIAA::
L/C. A binding document thata buyer can request from his bank in order to
guarantee that the payment for goods will be transferred tothe seller.
Basically, a letter of credit gives theseller reassurancethat he will receive
the payment for the goods. In order for the payment to occur, the seller has
to present the bank with the necessaryshipping documents confirmingthe
shipment of goods withina giventime frame. It is often used in
internationaltrade toeliminate risks such as unfamiliaritywith theforeign
country, customs, or politicalinstability.
TTYYPPEESS OOFF LL//CC::
There aretwo types of Letter of Credit.
1) Revocable L.C
The Revocable L.C can be amended and cancel without theexporter
permissionon knowledge.
2) IrrevocableL.C
An IrrevocableL.C cannot amended and cancelwithout the
permissionor knowledge of the exporter.

7. HHOOWW TTOO OOPPEENN LLEETTTTEERR OOFF CCRREEDDIITT
A business called the InCosmetika from time to time imports goods from a
business called ACME, which banks with the ABC Bank. InCosmetika holds an
account at the Commonwealth Bank. InCosmetika wants to buy $500,000 worth
of merchandise from ACME, who agrees to sell the goods and give InCosmetika
60 days to pay for them, on the condition that they are provided with a 90-day
letter of credit for the full amount. The steps to get the letter of credit would be as
follows:
 The Commonwealth Bank sends a copy of the LC to the ABC Bank, which
notifies ACME that payment is available and they can ship the merchandise
InCosmetika has ordered with the full assurance of payment to them.
 On presentation of the stipulated documents in the letter of credit and
compliance with the terms and conditions of the letter of credit, the
Commonwealth Bank transfers the $500,000 to the ABC Bank, which then
credits the account of ACME for that amount.
 Note that banks deal only with documents required in the letter of credit and
not the underlying transaction.
 Many exporters have mistakenly assumed that the payment is guaranteed
after receiving the LC. The issuing bank is obligated to pay under the letter of
credit only when the stipulated documents are presented and the terms and
conditions of the letter of credit have been met.

8. CCHHAARRAACCTTEERRIISSTTIICCSS OOFF LLEETTTTEERR OOFF CCRREEDDIITT
NNEEGGOOTTIIAABBIILLIITTYY
Letters of credit are usually negotiable. The issuing bank is obligated to pay not only
the beneficiary, but also any bank nominated by the beneficiary. Negotiable
instruments are passed freely from one party toanother almost in the same way as
money. Tobe negotiable, the letter of credit must include an unconditional promise
to pay, on demand or at a definite time. The nominated bank becomes a holder in due
course. As a holder in due course, the holder takes the letter of credit for value, in
good faith, without notice of any claims against it. A holder in due course is treated
favorably under the UCC.
The transaction is considered a straight negotiation if the issuing bank's payment
obligation extends only to the beneficiary of the credit. If a letter of credit is a straight
negotiation it is referenced on its face by "we engage with you" or "available with
ourselves". Under these conditions the promise does not pass to a purchaser of the
draft as a holder in due course.
RREEVVOOCCAABBIILLIITTYY
Letters of credit may be either revocable or irrevocable. A revocable letter of credit may
be revoked or modified for any reason, at any time by the issuing bank without
notification. A revocable letter of credit cannot be confirmed. If a correspondent bank
is engaged in a transaction that involves a revocable letter of credit, it serves as the
advising bank.
Once the documents have been presented and meet the terms and conditions in the
letter of credit, and the draft is honored, the letter of credit cannot be revoked. The
revocable letter of credit is not a commonly used instrument. It is generally used to
provide guidelines for shipment. If a letter of credit is revocable it would be
referenced on its face.

9. The irrevocable letter of credit may not be revoked or amended without the
agreement of the issuing bank, the confirming bank, and the beneficiary. An
irrevocable letter of credit from the issuing bank insures the beneficiary that if the
required documents are presented and the terms and conditions are complied with,
payment will be made. If a letter of credit is irrevocable it is referenced on its face.
TTRRAANNSSFFEERR AANNDD AASSSSIIGGNNMMEENNTT
The beneficiary has the right to transfer or assign the right to draw, under a credit
only when the credit states that it is transferable or assignable. Credits governed by
the Uniform Commercial Code (Domestic) maybe transferred an unlimited number
of times. Under the Uniform Customs Practice for Documentary Credits
(International) the credit may be transferred only once. However, even if the credit
specifies that it is nontransferable or nonassignable, the beneficiary may transfer
their rights prior to performance of conditions of the credit.
SSIIGGHHTT AANNDD TTIIMMEE DDRRAAFFTTSS
All letters of credit require the beneficiary to present a draft and specified documents
in order to receive payment. A draft is a written order by which the party creating it,
orders another party topay money to a third party. A draft is also called a bill of
exchange.
There are twotypes of drafts: sight and time. A sight draft is payable as soon as it is
presented for payment. The bank is allowed a reasonable time to review the
documents before making payment.
A time draft is not payable until the lapse of a particular time period stated on the
draft. The bank is required to accept the draft as soon as the documents comply with
credit terms. The issuing bank has a reasonable time to examine those documents.
The issuing bank is obligated to accept drafts and pay them at maturity.

10. DDOOCCUUMMEENNTTSS CCAALLLLEEDD FFOORR UUNNDDEERR LL..CC
 FFIINNAANNCCIIAALL DDOOCCUUMMEENNTTSS
Bill of Exchange, Co-accepted Draft
 CCOOMMMMEERRCCIIAALL DDOOCCUUMMEENNTTSS
Invoice, Packing list
 SSHHIIPPPPIINNGG DDOOCCUUMMEENNTTSS
Transport Document, Insurance Certificate, Commercial, Official or Legal
Documents
 OOFFFFIICCIIAALL DDOOCCUUMMEENNTTSS
License, Embassy legalization, Origin Certificate, Inspection Cert , Phyto-sanitary
Certificate
 TTRRAANNSSPPOORRTT DDOOCCUUMMEENNTTSS
Bill of Lading (ocean or multi-modal or Charter party), Airway bill, Lorry/truck
receipt, railway receipt, CMC Other than Mate Receipt, Forwarder Cargo Receipt,
Deliver Challan...etc
 IINNSSUURRAANNCCEE DDOOCCUUMMEENNTTSS
Insurance policy, or Certificate but not a cover note. Pre shipment packing list.

11. SSTTAANNDDAARRDD FFOORRMMSS OOFF DDOOCCUUMMEENNTTAATTIIOONN
When making payment for product on behalf of its customer, the issuing bank
must verify that all documents and drafts conform precisely to the terms and
conditions of the letter of credit. Although the credit can require an array of
documents, the most common documents that must accompany the draft include:
CCOOMMMMEERRCCIIAALL IINNVVOOIICCEE
The billing for the goods and services. It includes a description of merchandise,
price, FOB origin, and name and address of buyer and seller. The buyer and seller
information must correspond exactly tothe description in the letter of credit.
Unless the letter of credit specifically states otherwise, a generic description of the
merchandise is usually acceptable in the other accompanying documents.
BBIILLLL OOFF LLAADDIINNGG
A document evidencing the receipt of goods for shipment and issued by a freight
carrier engaged in the business of forwarding or transporting goods. The
documents evidence control of goods. They also serve as a receipt for the
merchandise shipped and as evidence of the carrier's obligation to transport the
goods to their proper destination.
WWAARRRRAANNTTYY OOFF TTIITTLLEE
A warranty given by a seller to a buyer of goods that states that the title being
conveyed is good and that the transfer is rightful. This is a method of certifying
clear title to product transfer. It is generally issued to the purchaser and issuing
bank expressing an agreement to indemnify and hold both parties harmless.
LLEETTTTEERR OOFF IINNDDEEMMNNIITTYY
Specifically indemnifies the purchaser against a certain stated circumstance.
Indemnification is generally used to guaranty that shipping documents will be
provided in good order when available.

12. INTERNATIONAL TRADE PAYMENT
METHODS
AADDVVAANNCCEE PPAAYYMMEENNTT
where the buyer parts with money first and waits for the seller to forward the
goods
DDOOCCUUMMEENNTTAARRYY CCRREEDDIITT
subject to icc's ucp 600, where the bank gives an undertaking (on behalf of
buyer and at the request of applicant ) to pay the shipper ( beneficiary ) the
value of the goods shipped if certain documents are submitted and if the
stipulated terms and conditions are strictly complied.
here the buyer can be confident that the goods he is expecting only will be
received since it will be evidenced in the form of certain documents called for
meeting the specified terms and conditions while the supplier can be confident
that if he meets the stipulations his payment for the shipment is guaranteed by
bank, who is independent of the parties to the contract.
DDOOCCUUMMEENNTTAARRYY CCOOLLLLEECCTTIIOONN
subject to icc's urc 525, sight and usance, for delivery of shipping documents
against payment or acceptances of draft, where shipment happens first, then
the title documents are sent to the [collecting bank] buyer's bank by seller's
bank [remitting bank], for delivering documents against collection of
payment/acceptance
DDIIRREECCTT PPAAYYMMEENNTT

13. where the supplier ships the goods and waits for the buyer to remit the bill
proceeds, on open account terms.

14. RRIISSKKSS SSIITTUUAATTIIOONN IINN LLCC TTRRAANNSSAACCTTIIOONN
FRAUD RISKS
The payment will be obtained for nonexistent or worthless merchandise against
presentation by the beneficiary of forged or falsified documents.
Credit itself may be forged.
RISKS TO THE APPLICANT
Non-delivery of Goods
Short Shipment
Damaged in transit
Foreign exchange
Failure of Bank viz Issuing bank / Collecting Bank
SOVEREIGN AND REGULATORY RISKS
Performance of the Documentary Credit may be prevented by government
action outside the control of the parties.
LEGAL RISKS
Possibility that performance of a Documentary Credit may be disturbed by legal
action relating directly to the parties and their rights and obligations under the
Documentary Credit
FORCE MAJEURE AND FRUSTRATION OF CONTRACT
Performance of a contract – including an obligation under a Documentary
Credit relationship – is prevented by external factors such as natural disasters
or armed conflicts

15. RISKS TO THE CONFIRMING BANK
If Confirming Bank’s main risk is that, once having paid the Beneficiary, it
may not be able to obtain reimbursement from the Issuing Bank because of
insolvency of the Issuing Bank or refusal of the Issuing Bank to reimburse
because of a dispute as to whether or not payment should have been made
under the Credit.
RISKS TO THE ISSUING BANK
Insolvency of the Applicant
Fraud Risk, Sovereign and Regulatory Risk and Legal Risks
RISKS TO THE REIMBURSING BANK
No obligation to reimburse the Claiming Bank unless it has issued a
reimbursement undertaking.
RISKS TO THE BENEFICIARY
Failure to Comply with Credit Conditions
Failure of, or Delays in Payment from, the Issuing Bank
Credit Issued by Party other than Bank
RISKS TO THE ADVISING BANK
The Advising Bank’s only obligation, if it accepts the Issuing Bank’s
instructions – is to check the apparent authenticity of the Credit and advising
it to the Beneficiary

16. CCOONNCCLLUUSSIIOONN
A letter of credit is a method of securing payment to a vendor. When a
seller asks a buyer to obtaina letter of credit, it means the seller would like
to ensure payment for a product he sells to that customer. Typically letters
of credit areissued by a bank. The most common forms are standby letters
of credit for domestic transaction and documentary letters of credit for
international transactions.

17. AAPPPPEENNDDIIXX((AA))
Letter Of Credit: A letter of credit is a document from a bank guaranteeing that a seller
will receive payment in full as long as certain delivery conditions have been met. In the
event that the buyer is unable to make payment on the purchase, the bank will cover the
outstanding amount.
Letter Of Indemnity: It is the document by which two parties to a misrepresentation
against third parties settle their differences in advance should a third party in the future
make a valid claim as a result of the misrepresentation.
request to present these documents to the buyer for payment, indicating
Documentary Credit: The documentary credit is one of the most secure payment
methods in international trade, offering the exporter a conditional payment guarantee
from the importer's bank.
forward documents related to the export of goods to the buyer's bank with a
Irrevocable L/C: An irrevocable letter of credit cannot be changed or
Commercial Invoice : A commercial invoice is a document used in foreign trade. It is
used as a customs declaration provided by the person or corporation that is exporting an
item across international borders.
DeferredPayment: temporary postponement of the payment of an outstanding bill or
debt, usually involving repayment by instalments.
Documentary collection: A process, in which the seller instructs his bank to
Bill Of Lading: A detailed list of a ship's cargo in the form of a receipt given by
cancelled unless everyone involved agrees. Irrevocable letters of credit provide more
security than revocable ones.
Revocable L/C: A revocable letter of credit can be changed or cancelled by the bank
that issued it at any time and for any reason.
Sight Payment: A payment due on demand. An at sight payment will require the party
receiving the good or service to pay a certain sum immediately upon being presented
with the bill of exchange.

18. AAPPPPEENNDDIIXX((BB))

19. BBIIBBLLIIOOGGRRAAPPHHYY
 www.smedia.org
 www.wikipedia.org
 www.businessdictionary.com
 www.investopedia.com

20. IINNDDEEXX
Documentarycollection
DocumentaryCredit:
IrrevocableL/C
Issuing Bank
CommercialInvoice
Deferred Payment
Letter of credit:
Letter of Indemnity
Revocable L/C:
Sight Payment