A letter of credit (LC), also known as a documentary credit or bankers commercial credit, is a payment mechanism used in international trade to provide an economic guarantee from a creditworthy bank to an exporter of goods. A letter of credit is extremely common within international trade and goods delivery, where the reliability of contracting parties cannot be readily and easily determined. Its economic effect is to introduce a bank as underwriting the credit risk of the buyer paying the seller for goods.

1. TOPIC: LETTER OF CREDIT
Millat Khan Afridi
B.Com (Part – I)
ICB G-6/3, Islamabad
February 5, 2017
Class Presentation
SUBJECT: MONEY, BANKING & FINANCE

2.  Introduction
 Definition
 Parties of L.C
 Opening of L.C
 Kinds of L.C
 Mechanism of L.C
 Advantages of L.C
 Risks in L.C
CONTENTS

3. INTRODUCTION
• Commercial Banks Issue L.C
• In International Trade
• Transfer of Money & Investments
• Surety by the Exporter and Security by the
Importer
• Rules by ICC in U.C.P (Uniform Customs Practices)

5. DEFINITIONS
• According to Frank Henious:
“The letter of Credit is a written instrument issued by Buyer’s Bank authorizing
the Seller to draw in accordance with certain terms and conditions“.
• According to Pritchard:
“The letter of credit is a commitment on the part of the buyer’s banks to pay or
accept draft drawn upon it provided such drafts do not exceed a specified amount".
Main Points of Definition
 A written commitment or instrument
 Given by Importer’s bank
 For Paying the certain amount to the Exporter

6. PARTIES OF LETTER OF CREDIT
IMPORTER IMPORTER’S
BANK
EXPORTER EXPORTER’S
BANK
Importer: Who buys goods from Foreign Country
Exporter: Who sells goods to Another Country
Importer's Bank: Which issues the LC and assures payment to the Exporter’s Bank
Exporter’s Bank: The bank whose name the L.C is issued.

7. OPENING OF LETTER OF CREDIT
Agreement
Preparation of Documents
Contact with Bank
Importer License
Application Form
Scrutiny of Application
Undertaking
Margin Requirement
Issuance of L.C
Confirmation
Delivery of Goods
Payment

8. KINDS OF LETTER OF CREDIT
Following are the Main Kinds of L.C
Confirmed L.C
(Confirmed by the bank)
Documentary L.C
(with conditions and attached Documents)
Clean L.C
(Without any Conditions & attached documents)
Un-confirmed L.C
(Only notify beneficiary, not assume any liability)
Revocable L.C
(Cancelled LC by Bank due to any reason)
Irrevocable L.C
(Payment is confirmed and none can cancel it)
Fixed L.C
(Fixed amount and cancelled after payment)

9. KINDS OF LETTER OF CREDIT
Freely Negotiable L.C
(Exporter can get payment from any bank)
Special L.C
(Restricted to particular bank named in the LC)
Revolving L.C
(Renew attar payment for the same amount)
Transferable L.C
(Endorsement is allowed in favor of any person)
Red Clause L.C
( Provision of loan for Packing and shipment)
Green Clause L.C
(Loan for Packing, shipment as well as Storage)
Back to Back L.C
(Receiver of payment is not actual supplier but
buyer of the goods from the exporter)

10. MECHANISM OF LETTER OF CREDIT
1 • Contract b/w Exporter and Importer.
2 • LC Application to the importer’s bank by the Importer.
3 • Applicant’s bank issues LC to the Beneficiary’s bank.
4 • Beneficiary’s Bank issues LC to the Exporter.
5 • Exporter dispatches goods.
6 • Exporter send documents of the dispatched goods to his bank.
7 • Beneficiary’s bank receives docs. and pays the amount mentioned in LC.
8 • Beneficiary’s bank send detailed Docs. of dispatched goods and payment.
9 • The applicant’s bank pays the amount of LC to the Beneficiary’s bank.
10 • The Applicant Bank send docs. to the Importer.
11 • The Importer pays the amount of LC to its bank.
12 • The Importer Receives the dispatched goods.
Stage by Stage Process

11. MECHANISM OF LETTER OF CREDIT
Flow Chart for Letter of Credit
Importer/ Exporter/

12. CONTRACT
DOCS
GOODS
DOCS
EXPORTERIMPORTER
DOCUMENTS
DOCUMENTS
PAYMENT
Letter of
Credit
EXPORTER’S
BANK
IMPORTER’S
BANK
LCApp.
Letter
of
Credit
GOODS
PAYMENT
MECHANISM OF LETTER OF CREDIT
DAIGRAMETICAL PRESENTAION
1
2
3
4
5
6
78
9
10
11
12

13. TO IMPORTERS
ADVANTAGES OF LETTER OF CREDIT
Facility for Importers:
 Only Proportionate amount is to be deposited instead of
full amount
 Importers feel free from the Payment burden
 LC builds importer’s confidence to demand goods from any
where
around the world without fear of betrayal.
 It is surety tool for the importers in importing process.
Increase in Credit Standing:
 LC increases Credit Standing of Importers
 Due to high credit standing they effectively carry their
business

14. TO BANK
ADVANTAGES OF LETTER OF CREDIT
Income of Bank:
 Increase in Bank's income
 Charges and commission on issuing, advising, confirming
LC and negotiating the documents.
Increase in Accounts of Bank:
 Opening of account to receive and obtain LC
 Which results in the increase in Bank accounts

15. TO EXPORTER
ADVANTAGES OF LETTER OF CREDIT
Facility for Exporters:
 Exportation of goods to foreign countries with confident
 Pre-finance to meet business needs
Pre-Finance (under Red and Green Clause LCs):
 Pre-shipment Finance
 Packing Finance
 Storage Finance

16. OTHERS
ADVANTAGES OF LETTER OF CREDIT
 Facility of Payment
 Progress of International Trade
 Economic Development
 Tension Free
 Legal Protection
 Confidence
 Compensation of Losses

17. RISKS TO BE FACED
3.The Beneficiary’s
documents must comply
with the terms and
conditions of the Letter
of Credit for Issuing
Bank to make the
payment.
4. The Beneficiary is
exposed to the
Commercial risk on
Issuing Bank, Political
risk on the Issuing
Bank’s country and
Foreign Exchange Risk in
case of Fixed Date LC.
1. Since all the parties
involved in Letter of
Credit deal with the
documents and not
with the goods, the
risk of Beneficiary
not shipping goods
as mentioned in the
LC is still persists.
2. The Letter of Credit
as a payment
method is costlier
than other methods
of payment such as
Open Account or
Collection.

18. SUMMARY
 Introduction
 Definition
 Parties of L.C
 Opening of L.C
 Kinds of L.C
 Mechanism of L.C
 Advantages of L.C
 Risks in L.C

19. YOUR QUESTIONS?
E-mail: afridimillat@gmail.com
Facebook: www.facebook.com/millatafridi11
Website: www.researcherpak.blogspot.com

20. THANK YOU
E-mail: afridimillat@gmail.com
Facebook: www.facebook.com/millatafridi11
Website: www.researcherpak.blogspot.com