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Principles Of Banking

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Presentation Topic:
LETTER OF CREDIT

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Group Name:
Principles Of Banking
 Hafsa Fakhar
 Tania Toufeeq
 Kanwal Ijaz
Dazzler’s
Presented ByPresented By:

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Principles Of Banking
The original Habib Bank began modestly in Bombay in 1941 when it
commenced operations with a fixed capital of 25,000 rupees.
Under the privatization policy of Government of Pakistan Bank AL Habib was
incorporated as a Public Limited Company in October 1991.
The Bank has a network of three hundred and sixty six branches.

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Methods Of Payments
Principles Of Banking
 Cash in Advance
 Documentary collection
 Open account
 Letter of Credit L/C

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What is a Letter Of Credit?
Principles Of Banking
• A documentary credit, or letter of credit is an
undertaking issued by a bank for the account of the
buyer (applicant), to pay the seller (beneficiary)
provided the terms and conditions of the
documentary credit are complied with.
• A documentary credit, or L/C, usually satisfies the
seller’s desire for cash payment and the buyer’s
desire for credit.

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Parties involves in Letter of Credit
Principles Of Banking
Importer / Buyer
Issuing Bank / Importer Bank
Exporter / Seller
Paying Bank / Negotiating Bank

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Types Of Letter Of Credit
Principles 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

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Benefits Of Letter Of Credit
Principles Of Banking
To the Exporter:
 Payment protection
 Reliance on issuing bank’s
credit rather than buyer’s
 Rapid, local source
repayable, if payable at a
U.S. bank
To the Importer:
 Documentary evidence that the
ordered goods have been shipped on
time
 Assurance that necessary clearance
documents will be provided
 Payment deferred until goods are
shipped and documents presented

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Benefits Of Letter Of Credit
Principles Of Banking
To the Bank:
 Source of Income
 Increase in Balance
 New Relations
 Better Reputation

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Procedure Of Opening Letter Of Credit
Principles Of Banking
Agreement ImporterExporter
 Importer and Exporter enter into
a sales agreement

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Principles Of Banking
Application
Importer
Issuing Bank
 Importer applies for a letter of
credit with the Issuing Bank

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Principles Of Banking
Letter of
Credit
Issuing
Bank
U.S.
Bank
 Issuing Bank advises the letter of credit to
U.S. Bank, usually via SWIFT
L/C

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Principles Of Banking
Beneficiary
U.S. Bank
 U.S. Bank authenticates the L/C
and advises L/C to beneficiary

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Principles Of Banking
Exporter
Goods
Importer
Goods
 Exporter prepares the documents
and ships the goods

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Principles Of Banking
 Exporter sends shipping documents
to U.S Banks for examination
Exporter
Documents
FBM U.S. Bank

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Principles Of Banking
 Assuming clean documents, U,S Bank pays exporter
by debiting Issuing Banks’s account or upon receipt
of funds from a separate reimbursing bank.
Documents sent to Issuing Bank.
Documents
Exporter
Issuing Bank
U.S. Bank

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Principles Of Banking
 Issuing Bank examines documents and delivers to
importer against payment. Importer takes
possession of goods by presenting documents.
Goods
Docs
Issuing
Bank
Documents
Importer

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Principles Of Banking
 The exporter has been paid, the importer has their
goods, the banks have been reimbursed, and the cycle
is complete!
Goods
Agreement
Documents
Letter of
Credit Application Documents
Exporter Importer
Issuing
BankLetter of credit
Documents
U.S. Bank

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Adding a confirmation
or engagement to
purchase documents:
Agreement
Application
Letter of
Credit
Letter of
Credit Documents
Documents
Exporter
Issuing
Bank
Advising
Bank
Documents
Goods
Importer
Confirm.
Bank

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Documents of Letter of Credit
Principles Of Banking
 Financial Documents:
• Bill of Exchange
• Co-accepted Draft
 Commercial Documents:
• Invoice
• Packing list
 Shipped Documents:
• Insurance policy

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Documents of Letter of Credit
Principles Of Banking
 Shipping Documents:
• Transport Documents
• Insurance Certificate
• Commercial Documents
• Legal Documents
 Transport Documents:
• Bill of Lading
• Airway Bill
• Truck / Lorry receipt
• Railway receipt

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Risk situation In Opening Letter of Credit
Principles Of Banking
 Fraud Risks:
The payment will be obtained for nonexistent or worthless merchandise
against presentation by the beneficiary of forged or falsified documents.
 Sovereign and regulatory Risks:
Performance of the documentary credit may be prevented by
government action outside the control of the parties.

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Principles Of Banking
 Legal Risks:
• Possibility that performance of a Documentary Credit may be
disturbed by legal action related directly to the parties and
their 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

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Principles 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 issued
a reimbursement undertaking.

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Principles Of Banking

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Principles Of Banking

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Principles Of Banking

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References:
Principles Of Banking
 http://en.wikipedia.org/wiki/Letter_of_credit
 Bank Al Habib
 Bo0ks

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Principles Of Banking
Questions
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