Report on Letter of credit

2. A Report On: HHooww TToo OOppeenn LLeetttteerr OOff CCrreeddiitt
Prepared For: SSiirr MMuummttaazz HHaassssaann
Prepared By: MMuuhhaammmmaadd WWaasseeeemm
Roll No: 11220044113366
DATED: 88tthh
,, AApprriill,, 22001155

3. TTAABBLLEE OOFF CCOONNTTEENNTTSS
S.No Topic Page No
01 Executive summary
02 Introduction
03 Letter of credit
04 Types of L/C
05 How to open L/C
06 Availability
07 Documents call for under L/C
08 Standard form of documentation
09 Intr. Trade payment methods
10 Risk in L/C transaction
11 Conclusion
13 Appendix (A)
14 Appendix (B)
15 Bibliography
16 Index

4. EEXXEECCUUTTIIVVEE SSUUMMMMAARRYY
WWhhaatteevveerr sseeccttoorr yyoouu mmiigghhtt bbee llooccaatteedd,, yyoouu mmaayy hhaavvee ttoo ooppeenn aa lleetttteerr ooff ccrreeddiitt
tthhrroouugghhoouutt yyoouurr pprrooffeessssiioonnaall ccaarreeeerr oonnee ddaayy..
AA lleetttteerr ooff ccrreeddiitt iiss aa mmeetthhoodd ooff sseeccuurriinngg ppaayymmeenntt ttoo aa vveennddoorr.. WWhheenn aa sseelllleerr
aasskkss aa bbuuyyeerr ttoo oobbttaaiinn aa lleetttteerr ooff ccrreeddiitt,, iitt mmeeaannss tthhee sseelllleerr wwoouulldd lliikkee ttoo eennssuurree
ppaayymmeenntt ffoorr aa pprroodduucctt hhee sseellllss ttoo tthhaatt ccuussttoommeerr.. TTyyppiiccaallllyy lleetttteerrss ooff ccrreeddiitt aarree
iissssuueedd bbyy aa bbaannkk.. TThhee mmoosstt ccoommmmoonn ffoorrmmss aarree ssttaannddbbyy lleetttteerrss ooff ccrreeddiitt ffoorr
ddoommeessttiicc ttrraannssaaccttiioonnss aanndd ddooccuummeennttaarryy lleetttteerrss ooff ccrreeddiitt ffoorr iinntteerrnnaattiioonnaall
ttrraannssaaccttiioonnss..
LLeetttteerr ooff ccrreeddiitt iiss aa ppaayymmeenntt mmeetthhoodd iinn iinntteerrnnaattiioonnaall ttrraaddee wwhhiicchh iiss uusseedd bbyy
aallmmoosstt aallll sseeccttoorrss ffrroomm tteexxttiillee ttoo mmaacchhiinneerryy,, ffoooodd mmaannuuffaaccttuurriinngg ttoo
ccoonnssttrruuccttiioonn,, ooiill ttrraaddiinngg ttoo ccuussttoommeerr ggooooddss.. YYoouu mmaayy aassssuummee tthhaatt tthheerree aarree
bbiigg ddiiffffeerreenncceess eexxiisstt oonn lleetttteerr ooff ccrreeddiitt aapppplliiccaattiioonn pprroocceessss ffoorr aallll tthheessee
ddiiffffeerreenntt sseeccttoorrss.. BBuutt tthhiiss iiss nnoott ccoorrrreecctt.. YYoouu hhaavvee ttoo ffoollllooww ssiimmiillaarr pprroocceedduurreess
wwhheenn ooppeenniinngg aa lleetttteerr ooff ccrreeddiitt rreeggaarrddlleessss ooff tthhee sseeccttoorr yyoouu mmaayy bbee llooccaatteedd..
TTwwoo ttyyppeess ooff LL//CC iiss wwiiddeelleeyy uusseedd aarroouunndd tthhee gglloobbee wwhhiicchh iiss RReevvooccaabbllee LL//CC aanndd
IIrrrreevvooccaabbllee LL//CC aanndd tthhee ffoolllloowwiinngg ppaarrttiieess aarree iinnvvoollvveedd iinn lleetttteerr ooff ccrreeddiitt;;
AApppplliiccaanntt ooff LL//CC,, LL//CC iissssuuiinngg bbaannkk,, bbeenneeffiicciiaarryy ppaarrttyy,, aaddvviissiinngg bbaannkk,, ccoonnffiimmiinngg
bbaannkk,, nneeggoottiiaattiinngg bbaannkk aanndd sseeccoonndd bbeenneeffiicciiaarryy.. TTyyppiiccaallllyy,, tthhee ddooccuummeennttss aa
bbeenneeffiicciiaarryy hhaass ttoo pprreesseenntt iinn oorrddeerr ttoo rreecceeiivvee ppaayymmeenntt iinncclluuddee aa ccoommmmeerrcciiaall
iinnvvooiiccee,, bbiillll ooff llaaddiinngg,, aanndd ddooccuummeennttss pprroovviinngg tthhee sshhiippmmeenntt wwaass iinnssuurreedd
aaggaaiinnsstt lloossss oorr ddaammaaggee iinn ttrraannssiitt.. HHoowweevveerr,, tthhee lliisstt aanndd ffoorrmm ooff ddooccuummeennttss iiss
ooppeenn ttoo iimmaaggiinnaattiioonn aanndd nneeggoottiiaattiioonn aanndd mmiigghhtt ccoonnttaaiinn rreeqquuiirreemmeennttss ttoo
pprreesseenntt ddooccuummeennttss iissssuueedd bbyy aa nneeuuttrraall tthhiirrdd ppaarrttyy eevviiddeenncciinngg tthhee qquuaalliittyy ooff
tthhee ggooooddss sshhiippppeedd,, oorr tthheeiirr ppllaaccee ooff oorriiggiinn..

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 are creditworthy, 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 information regarding 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::
“L/C. A binding document that a buyer can request from his bank in order to
guarantee that the payment for goods will be transferred to the seller.
Basically, a letter of credit gives the seller reassurance that he will receive the
payment for the goods. In order for the payment to occur, the seller has to
present the bank with the necessary shipping documents confirming the
shipment of goods within a given time frame. It is often used in international
trade to eliminate risks such as unfamiliarity with the foreign country,
customs, orpolitical instability.”
TTYYPPEESS OOFF LLEETTTTEERR OOFF CCRREEDDIITT
There most common types of letterof credit are:
RREEVVOOCCAABBLLEE LL//CC::
TheRevocable L.Ccan be amended and cancel without theexporter
permission on knowledge.
IRREVOCABLE L.C
An Irrevocable L.C cannot amended andcancel without thepermission or
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 wouldbe as follows:
 InCosmetika goes to The Commonwealth Bank and requests a $500,000
letter of credit, with ACMEas the beneficiary.
 The Commonwealth Bank can issue an LC either on approval of a standard
loan underwriting process or by InCosmetika funding it directly with a
deposit of $500,000 plus fees which are typically between 1% and 8% of
theface value of the LC.
 The Commonwealth Bank sends a copy of the LC to the ABC Bank, which
notifies ACME that payment is available and they can ship themerchandise
InCosmetikahas ordered with thefull assuranceof payment tothem.
 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 theaccount of ACMEfor that amount.
 Note that banks deal only with documents required in the letter of credit
and not theunderlying 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 theletter of credit have been met.

8. AAVVAAIILLAABBIILLIITTYY
LC being an irrevocable undertaking of the issuing bank makes available the
Proceeds, to the Beneficiary of the Credit provided, stipulated documents
strictly complying with the provisions of the LC, UCP 600 and other
international standard banking practices, are presented to the issuing bank,
then:
I. if the Credit provides for sight payment – by payment at sight against
compliant presentation
II. if the Credit provides for deferred payment – by payment on the maturity
date(s) determinable in accordance with the stipulations of the Credit; and
of course undertaking to pay on due date and confirming maturity date at
thetime of compliant presentation
III. (A) if the Credit provides for acceptance by the Issuing Bank – by
acceptance of Draft(s) drawn by the Beneficiary on the Issuing Bank and
payment at maturity of such tenor draft, or
(B). if the Credit provides for acceptance by another drawee bank – by
acceptance and payment at maturity Draft(s)drawn by the Beneficiary
on the Issuing Bank in the event the drawee bank stipulated in the
Credit does not accept Draft(s) drawn on it,
IV. or by payment of Draft(s) accepted but not paid by such drawee bank at
maturity;
V. if the Credit provides for negotiation by another bank – by payment
without recourse to drawers and/or bona fide holders, Draft(s) drawn by
the Beneficiary and/or document(s) presented under the Credit, (and so
negotiatedby the nominatedbank )
VI. Negotiation means the giving of value for Draft(s) and/or document(s) by
the bank authorized to negotiate, viz the nominated bank. Mere
examination of the documents and forwarding the same to LC issuing bank
for reimbursement, without giving of value / agreed to give, does not
constituteanegotiation.

9. SSOOMMEE OOFF TTHHEE DDOOCCUUMMEENNTTSS CCAALLLLEEDD FFOORR
UUNNDDEERR LLCC
 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.

10. 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 andservices. 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 to the 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
thegoods totheir 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 thepurchaser against acertain statedcircumstance.
Indemnification is generally usedto guaranty that shipping documents willbe
provided in good order when available.

11. IINNTTEERRNNAATTIIOONNAALL TTRRAADDEE PPAAYYMMEENNTT MMEETTHHOODDSS
 AAddvvaannccee ppaayymmeenntt ((mmoosstt sseeccuurree ffoorr sseelllleerr))
Where the buyer parts with money first and waits for the seller to forward the
goods
 DDooccuummeennttaarryy CCrreeddiitt ((mmoorree sseeccuurree ffoorr sseelllleerr aass wweellll aass bbuuyyeerr))
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
stipulatedterms andconditions 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, whois independent of the parties to thecontract.
 DDooccuummeennttaarryy ccoolllleeccttiioonn ((mmoorree sseeccuurree ffoorr bbuuyyeerr aanndd ttoo aa cceerrttaaiinn
eexxtteenntt ttoo sseelllleerr))
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 ((mmoosstt sseeccuurree ffoorr bbuuyyeerr))
Where the supplier ships the goods and waits for the buyer to remit the bill
proceeds, on open account terms

12. RRIISSKKSS IINN LLCC TTRRAANNSSAACCTTIIOONN
FFrraauudd RRiisskkss
 The payment will be obtained for nonexistent or worthless merchandise
against presentation by thebeneficiary of forged orfalsified documents.
 Credit itself may be forged.
SSoovveerreeiiggnn aanndd RReegguullaattoorryy RRiisskkss
 Performance of the Documentary Credit may be prevented by government
action outsidethecontrol of theparties.
LLeeggaall RRiisskkss
 Possibility that performance of a Documentary Credit may be disturbed by
legal action relating directly to the parties and their rights and obligations
under theDocumentary Credit
FFoorrccee MMaajjeeuurree aanndd FFrruussttrraattiioonn ooff CCoonnttrraacctt
 Performance of a contract – including an obligation under a Documentary
Credit relationship – is prevented by external factors such as natural
disasters or armed conflicts
RRiisskkss ttoo tthhee AApppplliiccaanntt
 Non-delivery of Goods
 Short Shipment
 Inferior Quality
 Early /LateShipment
 Damagedin transit
 Foreign exchange
 Failure of Bank viz Issuing bank/ Collecting Bank
RRiisskkss ttoo tthhee IIssssuuiinngg BBaannkk
 Insolvency of theApplicant
 FraudRisk, Sovereign and Regulatory Risk and Legal Risks

13. RRiisskkss ttoo tthhee RReeiimmbbuurrssiinngg BBaannkk
 No obligation toreimburse theClaiming Bank unless it has issueda
reimbursement undertaking.
RRiisskkss ttoo tthhee BBeenneeffiicciiaarryy
 Failure toComply with Credit Conditions
 Failure of, or Delays in Payment from, theIssuing Bank
 Credit Issuedby Party other than Bank
RRiisskkss ttoo tthhee AAddvviissiinngg BBaannkk
 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 tothe Beneficiary
RRiisskkss ttoo tthhee NNoommiinnaatteedd BBaannkk
 Nominated Bank has made a payment to the Beneficiary against
documents that comply with the terms and conditions of the Credit and is
unable to obtain reimbursement from the Issuing Bank
RRiisskkss ttoo tthhee CCoonnffiirrmmiinngg BBaannkk
 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 towhether or not payment should have been made
under theCredit.

14. CCOONNCCLLUUSSIIOONN
WWhhaatteevveerr sseeccttoorr yyoouu mmiigghhtt bbee llooccaatteedd,, yyoouu mmaayy hhaavvee ttoo ooppeenn aa lleetttteerr ooff ccrreeddiitt
tthhrroouugghhoouutt yyoouurr pprrooffeessssiioonnaall ccaarreeeerr oonnee ddaayy..
AA lleetttteerr ooff ccrreeddiitt iiss aa mmeetthhoodd ooff sseeccuurriinngg ppaayymmeenntt ttoo aa vveennddoorr.. WWhheenn aa sseelllleerr
aasskkss aa bbuuyyeerr ttoo oobbttaaiinn aa lleetttteerr ooff ccrreeddiitt,, iitt mmeeaannss tthhee sseelllleerr wwoouulldd lliikkee ttoo eennssuurree
ppaayymmeenntt ffoorr aa pprroodduucctt hhee sseellllss ttoo tthhaatt ccuussttoommeerr.. TTyyppiiccaallllyy lleetttteerrss ooff ccrreeddiitt aarree
iissssuueedd bbyy aa bbaannkk.. TThhee mmoosstt ccoommmmoonn ffoorrmmss aarree ssttaannddbbyy lleetttteerrss ooff ccrreeddiitt ffoorr
ddoommeessttiicc ttrraannssaaccttiioonnss aanndd ddooccuummeennttaarryy lleetttteerrss ooff ccrreeddiitt ffoorr iinntteerrnnaattiioonnaall
ttrraannssaaccttiioonnss..

15. AAPPPPEENNDDIIXX ((AA))
BBiillll ooff LLaaddiinngg: A detailed list of a ship's cargoin the form of a receipt given by
cancelled unless everyone involved agrees. Irrevocable letters of credit provide
more security than revocable ones.
CCoommmmeerrcciiaall IInnvvooiiccee : 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.
DDeeffeerrrreedd PPaayymmeenntt:: temporary postponement of thepayment of an
outstanding bill or debt, usually involving repayment by instalments.
DDooccuummeennttaarryy ccoolllleeccttiioonn: A process, in which the seller instructs his bank to
DDooccuummeennttaarryy CCrreeddiitt: The documentary credit is one of the most secure
payment methods in international trade, offering the exporter a conditional
payment guarantee from theimporter's bank.
forward documents relatedto theexport of goods tothe buyer's bankwith a
IIrrrreevvooccaabbllee LL//CC:: An irrevocable letter of credit cannot be changed or
IIssssuuiinngg BBaannkk:: The importer's bankwhich issued the letter of credit called the
issuing bank.
LLeetttteerr ooff ccrreeddiitt: 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, thebank will cover theoutstanding amount.
LLeetttteerr ooff IInnddeemmnniittyy:: It is thedocument by which twoparties toa
misrepresentation against third parties settletheir differences in advance
shoulda third party in the futuremakea valid claim as a result of the
misrepresentation.
request topresent thesedocuments tothebuyer for payment, indicating

16. RReevvooccaabbllee LL//CC: A revocable letter of credit can be changed or cancelled by
thebank that issuedit at any timeand for anyreason.
SSiigghhtt PPaayymmeenntt: A payment due on demand. An at sight payment will require
theparty receiving thegood or service topay a certain sum immediately upon
being presented with thebill of exchange.
themasterof theship tothe person consigning thegoods.
when and on what conditions these documents can be released tothebuyer.

17. AAPPPPEENNDDIIXX ((BB))
BBIIBBLLIIOOGGRRAAPPHHYY
 www.businessdictionary.com
 www.investopedia.com
 www.smedia.org
 www.wikipedia.org

18. IINNDDEEXX
BBiillll ooff LLaaddiinngg
CCoommmmeerrcciiaall IInnvvooiiccee
DDeeffeerrrreedd PPaayymmeenntt
DDooccuummeennttaarryy ccoolllleeccttiioonn
DDooccuummeennttaarryy CCrreeddiitt:
IIrrrreevvooccaabbllee LL//CC
IIssssuuiinngg BBaannkk
LLeetttteerr ooff ccrreeddiitt:
LLeetttteerr ooff IInnddeemmnniittyy
RReevvooccaabbllee LL//CC:
SSiigghhtt PPaayymmeenntt