This document provides information about various types of letters of credit (LC), terms related to LCs, required documentation, and guidelines for LC transactions. It defines common LC types like sight LC, usance LC, and revolving LC. It describes key parties in an LC like the issuing bank, advising bank, and negotiating bank. It lists important documents required for LC transactions like commercial invoices, bills of lading, certificates of origin, and insurance policies. It also discusses international standards like UCP600, ISBP, and Incoterms that govern LC practices.

1. MILINA JOSHI

2. A letter of Credit is a conditional written undertaking
issued by the bank on behalf of the importer (applicant) to
the exporter (beneficiary) to pay for the goods or services,
provided the documents submitted conform strictly with
the terms and conditions of the credit.

3. •DC is a facility provided by the bank in order to facilitate International
transaction.
•Assures payment, as long as the terms and conditions of DC are
complied with.
•Assures payment on the basis of the documents alone and not based
on the goods or services to which it may refer.

4. REVOCABLE LC :
Revocable LC are the LCs where buyer and the issuing bank can
easily manipulate the seller as they can amend the LC or cancel it
without prior approval from the seller. So, according to UCPDC
600, all LCs are irrevocable and is no more in use.

5. IRREVOCABLE LC :
Irrevocable LCs are such LCs, where amendments and
cancellation of the same will be in approval of both
buyer and seller. The next party has right to either
accept or reject the changes.
SIGHT LC :
Sight LCs are such LCs where payment is made at sight
ie immediately against the bills presented by the
beneficiary.

6. USANCE LC :
Usance LC or Acceptance LC or Time Credit or Term Credit
are one where payment is made after certain time.
DEFERRED PAYMENT LC :
A letter of credit that is paid a fixed number of days
after shipment or presentation of prescribed documents.

7. CONFIRMED LC :
A second guarantee, in addition to a letter of credit, that commits to
payment of the letter of credit. A confirmed letter of credit is
typically used when the issuing bank of the letter of credit may have
questionable creditworthiness and the seller seeks to get a second
guarantee to assure payment.
BACK TO BACK LC :
Two letters of credit (LCs) used together to help a seller finance the
purchase of equipment or services from a subcontractor. With the
original LC from the buyer's bank in place, the seller goes to his own
bank and has a second LC issued, with the subcontractor as
beneficiary.

8. REVOLVING LC :
Single L/C that covers multiple-shipments over a long period.
Instead of arranging a new L/C for each separate shipment,
the buyer establishes a L/C that revolves either in value (a
fixed amount is available which is replenished when exhausted)
or in time (an amount is available in fixed installments over a
period such as week, month, or year).
RED CLAUSE LC :
A specific type of letter of credit in which a buyer extends an
unsecured loan to a seller. Red Clause Letters of Credit permit
documentary credit beneficiaries to receive funds in advance.

9. GREEN CLAUSE LC :
A condition in a guarantee document that allows
a purchaser to receive advances ahead of shipment
against collateral property represented by warehouse
receipts .
TRANSFERRABLE LC :
A letter of credit that permits the beneficiary of the letter to
make some or all of the credit available to another party,
thereby creating a secondary beneficiary. The party that
initially accepts the transferable letter of credit from the
bank is referred to as the first beneficiary. The bank issuing
the letter of credit must approve the transfer.

10. STANDBY LC :
A standby letter of credit and a bank guarantee are similar
things, and they're most often used when making
international transactions.

11. ISSUING BANK :
Buyer's or importer's bank which establishes (opens) a letter of
credit (L/C) in favor of a beneficiary (seller or exporter), forwards it
to an advising bank for delivery to the beneficiary, and commits
itself to honor demand drafts drawn by the beneficiary against
the amount specified in the L/C. Also called opening bank.

12. ADVISING BANK :
Advising bank (usually in the exporter's country) of an issuing
bank (usually in the importer's country) that receives a letter of
credit (L/C) from the issuing bank for authenticating it and
informing ('advising') the exporter (the L/C's beneficiary) that a
L/C has been opened by the importer in the exporter's favor.
NEGOTIATING BANK :
In documentary credit, usually the beneficiary's bank which
agrees to pay the beneficiary by purchasing a negotiable
instrument (importer's or buyer's draft).

13. CONFIRMING BANK :
Bank in an exporter's country which guarantees that the letter of
credit established by the importer (for the benefit of the
exporter) will be honored once the conditions therein are fully
complied with.
REIMBURSING BANK :
In letter of credit (L/C) arrangements, the bank (often, but not
always the issuing bank) that serves as
a source of funds for payment to the L/C's beneficiary.

14. DOCUMENTS:
Banks deal in documents and not in goods and so
documentation is very important and a critical factor for
obtaining payments against the goods shipped to the buyer.
There should be no negligence while preparing and
checking documents. All documents should be consistent
and have contents as specified in the Letter of Credit.
Any extra information given, which is even though
consistent in the documents, will be ignored and it is
suggested such information is not provided, as such
information if not consistent with other details, will create
problems since it is a discrepancy for obtaining payments.

15. PROFORMA INVOICE :
Proforma invoice or sales contract is a contract between
buyer and seller for the sale of goods.
COMMERCIAL INVOICE :
Commercial Invoice is the basic document in any trade. It
is accounting bill made out by the beneficiary to the
applicant for goods sold which contains, Date , Name and
address of the buyer/seller, Proforma invoice and LC
Number, Description of goods, unit price, quantity of goods
and value of goods, Harmonic code and terms of sale.

16. BILL OF EXCHANGE :
A written, unconditional order by one party (the drawer) to another
(the drawee) to pay a certain sum, either immediately (a sight bill) or
on a fixed date (a term bill),
for payment of goods and/or services received. The drawee accepts the
bill by signing it, thus converting it into a post-dated check and
a binding contract.
B/E is an unconditional order in writing, addressed by one person to
another, signed by the person giving it, requesting the person to whom
it is addressed to pay on demand or at a fixed or determinable future
time, a sum of certain amount to or to the order of a specified person,
or to bearer.
B/E has three basic parties:
Drawer-who draws the bill,
Drawee-who makes the payment.
Payee- to whom the payment is made.

17. TRANSPORT DOCUMENT
AIRWAY BILL :
Acknowledgement issued by the Airline Company or their authorized agents
stating that goods have been received for dispatch by air to named consignee at
the address stated therein. Unlike B/L ,AWB is not a negotiable instrument or
document of title to goods because it is merely an acknowledgement of goods.
BILL OF LADING :
B/L is issued for movement of goods by waterway. It is a receipt given by the
Ship owner or their authorized agent stating goods are shipped on the specified
vessel and date. It will be delivered to the person mentioned thereon or to the
order. It is normally issued in sets of three so that copies may be sent by
separate mail in order to minimize the delay and expenses that would result
due to loss in transit. Types : clean, claused, charter party, through etc
TRUCK RECEIPT / CONSIGNMENT NOTE :
It is issued by truck or Rail transport company where goods are delivered
against surrender of consignee copy.

18. PACKING LIST :
Is a document which shows the nature and number of
goods put in each packet/container cartoon etc, with
distinctive number or marks. This is generally needed by
the importer when importing different types of sizes of
merchandise to identify the nature of goods in each
package.
CERTIFICATE OF ORIGIN :
Certificate of Origin specifies the country of manufacturer
or growth of goods and is generally issued by the Chamber
of Commerce.

19. INSURANCE POLICY :
Certain risks are inherent in all types of business. Risks may however be greater
in export trade because of the longer distance between source of supply and
delivery. It is therefore necessary to insure goods during the transit period.
Insurance is a system of protection against losses which result due to accidental
happening. Insurance indemnifies such losses and provides protection for the
value of the goods being exported.
Under a letter of Credit transaction the insurance document must satisfy the
following requirements:
1.It must be specified i.e. Policy/Certificate.
2.It must be issued /signed by Insurance Co/authorized agent.
3.Value must be expressed in the currency of the credit.
4. Date must be on or before the date of shipment.
5. Value must be 10% over the invoice value at the minimum.
6. Cover all stipulated risks.
7. Indicate where and by whom claims are payable preferably in buyer’s country.
8.Indicate accurate description of goods consistent with other documents.
9.It should indicate the port of shipment and destination of insurance
coverage.

20. INTERNATIONAL GUIDELINES :
INCOTERMS :
The Incoterms rules or International Commercial
Terms are a series of pre-defined commercial terms
published by the International Chamber of
Commerce (ICC) that are widely used in
International commercial transactions.

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22. UCPDC :
The Uniform Customs and Practice for Documentary Credits (UCP) is a
set of rules on the issuance and use of letters of credit. This practice has
been standardized by the ICC (International Chamber of Commerce)
by publishing the UCP in 1933 and subsequently updating it
throughout the years. The ICC has developed and moulded the UCP by
regular revisions, the current version being the UCP600. There are 39
articles under UCPDC 600.
ISBP :
ISBP 745 (International Standard Banking Practices) was conceived as
an intelligent checklist of procedures formed by
ICC (International chamber of commerce) for document checkers to
follow in examining the documents presented
under letters of credit.
URR :
The URR 725 are the Uniform Rules for Bank-to-Bank
Reimbursements under Documentary Credits ICC publication No. 725.
URR 725 was approved by the ICC national committees at the ICC
Banking Commission in April 2008. URR 725 has been effective since 01
October 2008.

23. SWIFT :
Societyfor Worldwide Interbank Financial Telecommunica
tions. Global communication network that facilitates 24-
hour secure international exchange of payment instruction
s between banks, central banks, multinational
corporations, and major securities firms.
ISSUING (MESSAGE TEXT MT 700) :
MT 700 is a swift message type that is used by issuing
banks when openning a letter of credit. This swift message
is sent by the issuing bank to the advising bank

24. AMENDMENT (MESSAGE TEXT MT 707) :
MT 707 is a type of swift message which is used by
banks when issuing a amendment of a letter of credit.
MT 707 swift message is sent by the issuing bank to the
advising bank or advising bank to another advising
bank.
PAYMENT (MESSAGE TEXT MT 202) :
The MT202 is a payment message. This message is sent
by or on behalf of the ordering institution directly, or
through correspondent(s) to the financial institution
of the beneficiary.

25. REIMBURSEMENT (MESSAGE TEXT MT 740) :
MT 740 is a type of swift message which is used to
request the Receiver to honour claims for
reimbursement of payment(s) or negotiation(s) under
a documentary credit.
FREE FORMAT (MESSGE TEXT MT 799) :
MT 799 is a type of swift message which is used to
communicate with banks. An MT999 is the same as
MT799, just without this test code. Therefore, its
considered unauthenticated, and MT999 messages
have no value whatsoever, unless confirmed via a
separate test key.

26. The LCs opened in every country is governed by the rules
and principles of that country. Nepal Rastra Bank has
formulated various circulars for LC . General extracts from
Circular no. 580 which is the base to open LC are
highlighted as :

27. •The proforma invoice must contain Description of goods, brand
and model no. (if any), Country of origin, Rate, Quantity and total
amount, Incoterms, Payment terms (eg, sight, usance, deferred
payment with details), 8 digit Harmonic Code no. and Importer
and exporter’s name and address.
•Customs point must be compulsorily mentioned in LC and while
receiving documents, it has to bbe compulsorily mentioned either
in Invoice or Transport Document. If customs point has to be
changed, same should be approved by Banijya Bhibhag. While
opening LC, only one customs point has to be mentioned.
•If LC has to be amended for more than 10% of the LC value, same
has to be approved from Head office. But, if the amount doesn’t
exceed USD 1000, such approval need not be taken. None of the
LCs or amendments can be made with clause, “all discrepancies
acceptable”.

28. •Payment has to be made through Nostro Account to the
Negotiating Bank. Payment can’t be made to the beneficiary
directly via TT or Wire Transfer.
•Security Margin can be taken in form of Cash, Government
securities, earmarking limits of Current and Savings account,
earmarking limit of Overdraft or any funded facilities. 10%
security margin for industry and 2% security margin for trading
houses are taken as security margin.
•Industries can open usance LC as per agreement between
applicant and beneficiary whereas, in case of trading firms,
usance LC can’t be opened for more than 120 days.
•BCI (Business Credibility Information) is required to open
SIGHT LC above USD 50 thousand. If BCI report shows report
like, Credit Risk, high Credit Risk or Rating not determined,
proper internal approval has to be taken. But, if report shows,
Satisfactory/ Good Conduct Account, such approval need not be
taken. BCI report will be valid for a year.

29. •Documents can be settled in copy document to avoid
demurrage charges after proper verification and debiting cash
from customers but payment will be made after obtaining
original documents from negotiating bank.
•Certain goods are completely restricted by NRB to import
like, drugs, restricted medicines, alcohol that contain more
than 60% alcohol etc.
•To open LC for certain goods like, livestock, animal feed
supplement, medicines etc, proper approval from concerned
department has to be taken.
•For consumable goods like, milk, powder milk, drinking
water, fruit juice etc, approval from Khadya Bhibhag has to be
taken.

30. INTERNAL CIRCULAR :
Please refer Loans and Advances Circular no. 198 for functioning
of TFSU.
Also, refer Loans and Advances Circular no. 251 for Charges.
BRANCHES AND TFSU :
TFSU was established as a Controlling unit, uniformity and for
smooth operation of Trade Finance.
Branches must follow the below points for its smooth operation:
General Knowledge of LC
Collection of adequate and proper document
Filling up application form and memos properly
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