dissertation report

1. ①
LETTER OF CREDIT
Dissertation submitted in partial fulfilment of the requirements for the award of the
Degree of BBA (Bachelor Of Business Administration)
of
SHRI GURU RAM RAI UNIVERSITY
By
Priyanshi Gurung
Enrolment No. – R190425081
Under the guidance of
Mr.Sandeep Badoni
(Associate Professor)
SCHOOL OF MANAGEMENT AND COMMERCE STUDIES
SHRI GURU RAM RAI UNIVERSITY

2. ②
Certificate of Originality
This is to certify that the dissertation titled letter of credit is an original work of priyanshi
gurung and is being submitted in partial fulfilment for the award of bachelor’s in business
management of Shri Guru Ram Rai University Patel Nagar, Dehradun under my supervision.
DATE: SIGNATURE OF GUIDE

3. ③
Declaration by the Student
I hereby declare that letter of credit is the result of the project work carried out by me under
the guidance of Mr.sandeep badoni in partial fulfilment for the award of Bachelor In
Business Management by Shri Guru Ram Rai University.
DATE
SIGNATURE OF STUDENT

4. ④
Acknowledgment
The satisfaction and euphoria that accompany the successful completion of any task is
incomplete without the mention of people who made it possible.
So, I take this as a great opportunity to pen down a few lines about the people to whom my
acknowledgment is due.
It is with the deepest sense of gratitude that I wish to place on record my sincere thanks to
my project guide Mr. Sandeep Badoni for providing me inspiration, encouragement,
guidance, help and valuable suggestions throughout the project.
I hereby would like to thank one and all, from the bottom of my heart, those who have
helped me & constantly motivated me for writing this project report.

5. ⑤
TABLE OF CONTEXT
S.N.O CONTENT PG.NO
1 Acknowlegement 5
2 Chapter I - Introduction 6-14
3 Chapter - II - Literature Review 15-21
4 Chapter- III
Research methodology and
sample
22-24
5 Chapter-IV
Data Analysis and Interpretation
25-27
6
Chapter- V
Findings, Recommendations &
Conclusion
28-30

6. ⑥
CHAPTER - 1
INTRODUCTION
A Letter of Credit
(LC)
is a document that
guarantees the
buyer’s payment to
the sellers. It is
issued by a bank and
ensures timely and
full payment to the
seller. If the buyer is
unable to make such
a payment, the bank
covers the full or the
remaining amount
on behalf of the
buyer.
A letter of credit is
issued against a
pledge of securities
or cash. Banks
typically collect a
fee, ie, a percentage
of the size/amount of
the letter of credit.
‘Letters of Credit’
also known as
‘Documentary
Credits’ is the most
commonly accepted
instrument of
settling international
trade payments. A
Letter of Credit is an
arrangement
whereby Bank acting
at the request of a
customer (Importer / Buyer), undertakes to pay for the goods / services, to a third party
(Exporter / Beneficiary) by a given date, on documents being presented in compliance with the conditions
laid down.Thus, for international trade, where buyers and sellers are far apart in two different countries, or
even continents, the letter of credit acts as a most convenient instrument, giving assurance to the sellers of
goods for payment and to the buyers for shipping documents, as called for under the credit.

7. ⑦
In order to bring uniformity in matters pertaining to letters of credit documents and transactions,
International Chambers of Commerce (ICC), established in 1919 and headquartered in Paris, has framed
uniform rules and procedures for issuance and handling of transactions under letters of credit, so that parties
to letters of credit transactions uniformly interpret various terms and are bound by a common rule.
These rules and procedures are called Uniform Customs and Practices for Documentary Credits (UCPDC).
The UCPDC was first brought out in 1933, and has been revised from time to time in 1951, 1962, 1974,
1983, and 1993 with the last revision in 2007. The current update of UCPDC is the publication No. 600 of
ICC, which has been implemented with effect from 1.7.2007.
Letter of Credit can be defined as 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 delivery 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, or political instability.
1.1 Mechanism of Letter of Credit:
Here lets assume that the payment will be made by the advising bank.
1. Here there is a contract between the exporter and the customer in which the need for a Letter of Credit is
specified.
2. Then the customer requests his bank to issue a Letter of Credit.
3. Customer’s bank then issues a Letter of Credit via the Advising Bank. 4. Advising Bank then passes on the
terms of Letter of Credit to the exporter.
4. Exporter nearly always requests amendments to the Letter of Credit and copies requests to the Advising
Bank.
5. Customer goes ahead and requests his bank to issue an amendment.
7. Then the amendment is issued.
8. Amendment is then advised to exporter.
9. Goods are then dispatched.
10. Documents required by the Letter of Credit are presented to the Advising Bank.
11. Payment is then made by the Advising Bank to the exporter.

8. ⑧
12. Issuing Bank’s account with the Advising Bank will then be debited.
13. Documents are then passed to the Issuing Bank.
14. Documents are finally passed to the customer enabling him to use the Bill of Lading to obtain goods if sent
by sea and payment made by customer to Issuing Bank.
1.2 Parties involved in an LC
Main parties involved:
Applicant An applicant (buyer) is a person who requests his bank to issue a letter of credit.
Beneficiary A beneficiary is basically the seller who receives his payment under the process.
 Issuing bank
The issuing bank (also called an opening bank) is responsible for issuing the letter of credit at the request of
the buyer.
 Advising bank
The advising bank is responsible for the transfer of documents to the issuing bank on behalf of the exporter
and is generally located in the country of the exporter.
Other parties involved in an LC arrangement:
 Confirming bank
The confirming bank provides an additional guarantee to the undertaking of the issuing bank. It comes into the
picture when the exporter is not satisfied with the assurance of the issuing bank.
 Negotiating bank
The negotiating bank negotiates the documents related to the LC submitted by the exporter. It makes
payments to the exporter, subject to the completeness of the documents, and claims reimbursement under the
credit.
(Note:- Negotiating bank can either be a separate bank or an advising bank)
 Reimbursing bank
The reimbursing bank is where the paying account is set up by the issuing bank. The reimbursing bank honors
the claim that settles the negotiation/acceptance/payment coming in through the negotiating bank.
 Second Beneficiary
The second beneficiary is one who can represent the original beneficiary in their absence. In such an
eventuality, the exporter’s credit gets transferred to the second beneficiary, subject to the terms of the transfer.

9. ⑨
 1.3 Letter of Credit - Process
The entire process under LC consists of four primary steps
Step 1 - Issuance of LC
After the parties to the trade agree on the contract and the use of LC, the importer applies to the issuing bank to
issue an LC in favor of the exporter. The LC is sent by the issuing bank to the advising bank. The latter is
generally based in the exporter’s country and may even be the exporter’s bank. The advising bank (confirming
bank) verifies the authenticity of the LC and forwards it to the exporter.
Step 2 - Shipping of goods
After receipt of the LC, the exporter is expected to verify the same to their satisfaction and initiate the goods
shipping process.
Step 3 - Providing Documents to the confirming bank
After the goods are shipped, the exporter (either on their own or through the freight forwarders) presents the
documents to the advising/confirming bank.
Step 4 - Settlement of payment from importer and possession of goods
The bank, in turn, sends them to the issuing bank and the amount is paid, accepted, or negotiated, as the case
may be. The issuing bank verifies the documents and obtains payment from the importer. It sends the
documents to the importer, who uses them to get possession of the shipped goods.

10. ⑩
1.4 Letter of Credit with Example
Suppose Mr A (an Indian Exporter) has a contract with Mr B (an importer from the US) for sending a
shipment of goods. Both parties being unknown to each other decide to go for an LC arrangement.
The letter of credit assures Mr A that he will receive the payment from the buyer and Mr B that he will have a
systematic and documented process along with the evidence of goods having been shipped.
From this point on, this is how a letter of credit transaction would unveil between Mr A & Mr B:-
Mr B (buyer) goes to his bank that is the issuing bank (also called an opening bank) and issues a Letter of
Credit.
The issuing bank further processes the LC to the advising bank (Mr A's bank).
The advising bank checks the authenticity of the LC and sends it to Mr A.
Now that Mr A has received the confirmation he will ship the goods and while doing so he will receive a Bill
of Lading along with other necessary documents.
Further, he will send these documents to the negotiating bank.
The negotiating bank will make sure that all necessary requirements are fulfilled and accordingly make the
payment to Mr A (the seller).
Additionally, the negotiating bank will send all the necessary documents to the issuing bank.
Which again the issuing bank will send to Mr B (Buyer) to confirm the authenticity.
Once Mr B has confirmed he will make the payment to the issuing bank.
And the issuing bank will pass on the funds to the negotiating bank.
To understand the process clearly refer to this image:

11. 11
1.5 How does Letter of Credit Work?
LC is an arrangement whereby the issuing bank can act on the request and instruction of the
applicant (importer) or on their own behalf. Under an LC arrangement, the issuing bank can
make a payment to (or to the order of) the beneficiary (that is, the exporter). Alternatively,
the issuing bank can acceptthe bills of exchange or draft that are drawn by the exporter. The
issuing bank can also authorize advising or nominated banks to pay or acceptbills of
exchange.
Fee and charges payable for an LC
There are various fees and reimbursements involved when it comes to LC. In most cases, the
payment under the letter of credit is managed by all parties. The fees charged by banks may
include:
Opening charges, including the commitment fees, charged upfront, and the usance fee that is
charged for the agreed tenure of the LC.
Retirement charges are payable at the end of the LC period. They include an advising fee
charged by the advising bank, reimbursements payable by the applicant to the bank against
foreign law-related obligations, the confirming bank’s fee, and bank charges payable to the
issuing bank.
1.6 Benefits Of A Credit Letter
Expanding Your Company Internationally in a Safe Way
A letter of credit allows trading partners to do business with undisclosed parties or in new
business relationships. It assists them in rapidly extending their company into new
geographies.
 Exceptionally adaptable
A letter of credit may be tailored to your specific needs. All trade parties should have terms
and conditions that fit their needs and come up with a joint list of clauses. It can also be
customized from one exchange to the next if the trading parties are the same.

12. 12
 Money is given to the seller if the terms are met.
A letter of credit establishes the issuing bank's independence from the commitments of the
trading partners, as well as any conflicts that might arise as a result of those obligations. The
bank just has to verify if the beneficiary's papers meet the letter of credit's terms and
conditions before paying the maximum sum.
 Buyers may use it as a credit certificate.
The creditworthiness of the importer or consumer is transferred to the issuing bank by a
letter of credit. If an importer is backed by a well-established and larger entity, such as a
bank, he can conductmany transactions at once.
 There is no credit risk for the seller.
In the event that the retailer or importer goes bankrupt, a letter of credit protects the seller or
exporter. Since the importer's creditworthiness has been passed to the issuing bank, it is the
bank's responsibility to pay the amount specified in the letter of credit. As a result, a letter of
credit protects the exporter against the liability of the importer's company.
 For creditworthy parties, it is simple to implement.
A letter of credit may be written in a matter of minutes. The seller or exporter must present
evidence of commodity type and quantity, as well as shipping certificates, to validate his
argument that the items have been delivered, according to the original terms and conditions.
The advising bank would check the paperwork and process the payment in full.
 In disputed transactions, payment is guaranteed.
In the event of a disagreement between trade parties, the exporter has the option of
withdrawing the funds as agreed in the letter of credit and resolving the issue later in
arbitration. The courts characterize the beneficiary's entitlement to the whole sum as "pay
now, litigate later."
 Payments made on time result in better cash flow planning.
A letter of credit ensures that the volume and timing of an exporter's cash flows are both
predictable. He can prepare ahead of time for his funding needs, lowering his risk.

13. 13
 Sellers will get pre-shipment financing.
A letter of credit may be used to provide pre-shipment finance for the exporter. This aids him
in filling any funding holes that might exist.
1.7 The Disadvantages Of Letter Of Credit
 Bank Fee (additional cost)
The costof doing business is increased by using a letter of credit. Banks charge a premium
for this service, which will rise dramatically if the parties wish to add any extra functionality
 Formalities that take up a lot of time
In a letter of credit, the necessary paperwork and formalities can be more. This could
increase the costof doing business.
 Misuse Possibility - Fraud Risk
A letter of credit has complicated laws, and certain well-known buyers or sellers can take
advantage of them. A letter of credit exposes the importer to a significant chance of theft.
The bank would pay the exporter based on the shipping records rather than the products' real
condition. If the standard does not match what was settled upon, a dispute will occur.
 Currency hazard
A letter of credit is therefore subject to currency risk. In the letter of credit, there would be an
agreed-upon currency. At least one of the parties would be using a different currency, putting
them at risk from currency fluctuations. It may also be advantageous.
 Time Is Running Out
A letter of credit has an expiration date, so the exporter has a certain amount of time to
supply the goods by whatever means necessary. This haste will also result in a disaster.
 Issuing Bank Risk of Default
The creditworthiness of the importer is transferred to the issuing bank through a letter of
credit. So, even though the issuing bank defaults, the exporter still faces a payment risk.
Though the exporter can stop it if the advising bank promises payment, the costof the letter
of credit will rise as a result.

14. 14
Chapter-II
Literature Review
2.1 Review Of Literature
 Research Papers
Vladimir Anatole ich's A Letter of Credit as an Instrument to Reduce Risks and Increase the
Quality of Foreign Trade Transactions
This research paper was about the history of international trade and the role of letters of
credit in promoting international trade in various countries such as Russia, India, and others.
It was useful in understanding the history of letters and then commenting on the current state
of affairs.
 Trade Finance Fundamentals International Trade Payment Strategies
Daniele Giovannucci is the author of this article. This research paper discussed a variety of
payment methods, but the commercial letter of credit was particularly useful for the research
and material, as it improved the reader's understanding of the letter of credit and its
applications.
Letter of Credit Risk Analysis Using the Principles of "Independence" and "Strict
Compliance" Yan Hao Ling Xiao, Yan Hao Ling Xiao, Yan Hao Ling
This research paper, which was published in the international Journal of Social Science,
discusses in detail the practical aspects of letter of credit and the risk associated with letter of
credit to the exporter and importer, as well as the other important aspects of letter of credit
and enforcement involved in these processes.

15. 15
2.2 IMPORTANCE OF LETTER OF CREDIT
A letter of credit is beneficial for both the parties as it assures the seller that he will receive his funds upon
fulfillment of terms of the trade agreement and the buyer can portray his creditworthiness and negotiate
longer payment terms, by having a bank back the trade transaction.
Using a letter of credit is important because it can ensure the buyer that they will only pay once the seller
has proof that the items have been shipped. The buyer does not have to make any unnecessary advanced
payments. The letter can also be used to show that you or your business is ready to conduct more purchases
with companies outside the country. This is necessary when conducting international trade and business.
On the other hand, a letter of credit can be an assurance to the seller if the buyer fails to make the payment.
Also, this letter can protect the seller from any legal risks, so long as the conditions are met.
Besides international trade, a letter of credit can also help companies and individuals secure enough funding
for their big projects. This letter can be used to verify the credit status of a corporation or person. If the
buyer cannot pay for their purchases, the financial institution will be the one to shoulder them.
The need for a letter of credit is a consideration in the course of negotiations between the buyer and seller
when the important matter of method of payment is being discussed.Payment can be made in several
different ways: * by the buyer remitting cash with his order
* by open account whereby the buyer remits payment at an agreed time after
receiving the goods;
* by documentary collection through a bank in which case the buyer pays the
collecting bank for account of the seller in exchange for shipping documents which would include, in most
cases, the document of title to the goods.In the aforementioned methods of payment, the seller relies entirely
on the willingness and ability of the buyer to effect payment.
When the seller has doubts about the credit-worthiness of the buyer and wishes to ensure prompt payment,
the seller can insist that the sales contract provides for payment by irrevocable letter of credit.
Furthermore, if the bank issuing the letter of credit (issuing bank) is unknown to the seller or if the seller is
shipping to a foreign country and is uncertain of the issuing bank’s ability to honor its obligation, the seller
can, with the approval of the issuing bank, request its bank — or a bank of international repute to assume the
risk of the issuing bank by confirming the letter of credit.

16. 16
2.3 TYPES OF LETTER OF CREDIT
There are various types of letter of credit (LC) that prevails in trade transactions. In this post, we are
classifying them by their purpose. They are REVOCABLE LETTER OF CREDIT, IRREVOCABLE
LETTER OF CREDIT . REVOLVING LETTER OF CREDIT, TRANSFERABLE LETTER OF CREDIT,
BACK TO BACK LETTER OF CREDIT , RED CLAUSE LETTER OF CREDIT , GREEN CLAUSE
LETTER OF CREDIT , PAYMENT LETTER OF CREDIT , DEFERRED PAYMENT LETTER OF
CREDIT, ACCEPTANCE LETTER OF CREDIT , CONFIRMED LETTER OF CREDIT , STANDBY
CREDIT
2.3.1. REVOCABLE LETTER OF CREDIT
A revocable letter of credit is one which can be canceled or amended by the issuing bank at any time and
without prior notice to or consent of the beneficiary. From the exporter’s point of view such LCs are not safe.
Besides exporter cannot get such LCs confirmed as no bank will add confirmation to Revocable LCs.
However, if any bank has negotiated bills before receipt of notice of revocation, opening bank is liable to
honour its commitments. The LC should clearly state that the same is revocable. As per Article-3 of UCP
600, a credit is irrevocable even if there is no indication to that effect. Further UCP 600 does not provide for
revocable LCs and therefore such credits no longer exist.
2.3.2. IRREVOCABLE LETTER OF CREDIT
An Irrevocable Letter of Credit is one which cannot be canceled or amended without the consent of all
parties concerned.
2.3.3. REVOLVING LETTER OF CREDIT
A Revolving Letter of Credit is one where, under terms and conditions thereof, the amount is renewed or
reinstated without specific amendments to the credit being needed. It can revolve in relation to time and
value. This type of credit is generally used in local trade and
sometimes for import also. Such credits are opened for a stated amount and the drawings under the LC are
reinstated as soon as the documents are paid. The LC can be restricted to the individual amount of drawing
at a time as well as aggregate amount of drawings. The Issuing bank has to confirm to the negotiating bank
about the acceptance / payment of the documents for reinstatement of the amount in the LC. In revolving
LC for import, the maximum drawings and the validity would be to the extent permitted by the import
licence, if such imports are backed by Import Licence. Generally, we do not open Revolving LCs for import.
However in exceptional cases such L/C may be opened with adequate safeguards / conditions subject to
strict compliance of Foreign Trade Policy and Exchange Control Regulations particularly with reference to
aggregate drawings under such L/C & shipment dates etc.

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2.3.4. TRANSFERABLE LETTER OF CREDIT
A Transferable Credit is one that can be transferred by the original (first) beneficiary to one or more second
beneficiaries. When the sellers of goods are not the actual suppliers or manufacturers, but are
dealers/middlemen, such credits may be opened, giving the sellers the right to instruct the advising bank to
make the credit available in whole or in part to one or more second beneficiaries. The LC can be
transferred to more than one second beneficiary provided LC permits partial shipment and aggregate value
of amounts so transferred does not exceed value of original LC. The LC can be transferred only once and
only on terms stated in the credit, with the exception of :
- The amount of the Credit,
- Any unit price stated therein,
- The expiry date,
- The latest shipment date or given period for shipment,
- The period for presentation of documents,
any or all of which may be reduced or curtailed.
The percentage for which insurance cover must be effected may be increased to provide the amount of cover
stipulated in the credit. The LC is deemed to be transferable only if it is stated to be ‘Transferable’ in the LC.
Second beneficiary has no right to transfer to third beneficiary. However, he can retransfer to the first
beneficiary. As per our Bank’s policy, Transferable Import LCs is normally not opened.
However,transferable LCs can be opened in exceptional case, by specifying the second beneficiaries in the
LC itself or by amendment, provided.
i) Second beneficiaries should be specific and limited in number,
ii) Satisfactory credit report on second beneficiary should have been received. Further the second
beneficiary must be a shipper / manufacturer or supplier of goods.
iii) Second beneficiary should normally be residing in the same country. If resident of another country,
method of payment of second beneficiary’s country should conform to Exchange Control Regulations.
iv) Underlying contract indent/order should provide for such transfers.
2.3.5. BACK TO BACK LETTER OF CREDIT
In case of a transferable LC, the beneficiary can ask the nominated Bank to transfer the credit in favour of
his suppliers. But, where the credit is not transferable and in cases where in a middle man enters
into a contract to supply goods to be obtained from other suppliers but is unwilling to disclose the identity of
the buyer and the buyer also is unwilling to open a Transferable Letter of Credit, such Back to Back
credits are opened. Irrevocable letter of credit opened by the buyer, is used by the beneficiary as security
with his bank against which it agrees to open LC in favour of the actual supplier / manufacturer. The
beneficiary of the original L/C will become the applicant for the second set of L/C (back to back L/C). The
terms of back to back L/C will be almost identical to the L/C received from the buyer except to the extent
of amount, unit price and delivery dates, which will be prior to the expiry of original L/C.
The original credit which is offered as security / backing is called the PRINCIPAL CREDIT or
OVERRIDING CREDIT and the credit opened on its backing is called the BACK TO BACK credit or
COUNTERVAILING CREDIT.
2.3.6.RED CLAUSE LETTER OF CREDIT

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Such letters of credit contain a clause which enables the beneficiary to avail of an advance before effecting
shipment to the extent stated in the LC. The clause used to be printed in red, hence the LC is called Red
Clause LC. The nominated bank provides the pee-shipment credit to the beneficiary as per the authority
given by the issuing Bank. In case the beneficiary fails to export the goods or fails to repay the advance the
nominated bank gets the amount paid by the issuing bank.
2.3.7.GREEN CLAUSE LETTER OF CREDIT
This is an extension of Red Clause Letter of Credit, in that it provides for advance not only for purchase of
raw materials, processing and/or packing but also for warehousing and insurance charges at the port pending
availability of shipping space. Generally advance is granted under this LC only after goods are put in bonded
warehouses etc. up to the period of eventual shipment. In such cases warehouse receipts are obtained as
security / documentary evidence.
2.3.8.PAYMENT LETTER OF CREDIT
Payment credit is a sight credit which is available for payment at sight basis against presentation of requisite
documents to the issuing bank or the nominated bank. In a payment credit, beneficiary may or may not be
called upon to draw a Bill of Exchange. In many countries, because of stamp duties even on sight bills,
drawing Bill of Exchange is dispensed with.
2.3.9. DEFERRED PAYMENT LETTER OF CREDIT
Deferred Payment Credit is an usance credit where, payment will be made by Issuing bank, on respective
due dates, determined in accordance with the stipulations of the credit, without the drawing of Bill of
Exchange. In a way, it is an extended payment credit. Under deferred payment credit, no Bill of Exchange
will be called upon to be drawn, but it must specify the maturity at which payment is to be made and how
such maturity is to be determined. Deferred payment arrangements for Imports, providing for payment
beyond 6 months from the date of shipment up to a period of less than three years are treated as Trade
Credits for which procedural guidelines laid down by RBI for External Commercial Borrowing and Trade
Credits are required to be followed.
2.3.10.ACCEPTANCE LETTER OF CREDIT
Acceptance Credit is similar to deferred payment credit except for the fact that in this credit drawing of a
usance Bill of Exchange is a must. 9 Under this credit, Bill of Exchange must be drawn on the specified
bank for specified tenor, and the designated bank will accept and honour the same, by making payment on
the due dates.
2.3.11.NEGOTIATION LETTER OF CREDIT
Negotiation Credit can be a sight credit or a usance credit. A Bill of Exchange is usually drawn innegotiation
credit. The draft can be drawn as per credit terms. In a negotiation credit, the negotiation can be restricted to
a specific bank or it may allow free negotiation, in which case it is called as ‘Freely Negotiable Credit’
whereby any bank who is willing to negotiate can do so. Under a negotiation credit, if the bank nominated as

19. 19
a negotiating bank refuses to negotiate, then the responsibility of issuing bank would be to pay as per terms
of that credit. However, if the Bill of Exchange is drawn at a tenor (on DA basis) the issuing bank can pay
less discount. In other words, in all circumstances under a negotiation credit, responsibility of the issuing
bank is to pay and it cannot say that it is the responsibility of the negotiating bank. A
bank which effectively negotiates draft(s)/document(s) buys them from the beneficiary, thereby becoming a
holder in due course.
2.3.12.CONFIRMED LETTER OF CREDIT
Confirmed Letter of Credit is a Letter of Credit to which another bank (bank other than the issuing bank) has
added its confirmation. This is to say, in a Confirmed Letter of Credit the beneficiary will have a firm
undertaking of not only the bank issuing the credit, but also of confirming bank. The bank which adds its
confirmation is called a confirming bank and it becomes a party to the contract of LC. Generally the
confirmation to a credit is desired by beneficiary from a bank known to him, preferably the one located in
his country so that his risk becomes localized and he can deal easily with a 10 local bank rather than deal
with a bank abroad which has issued the credit. But this type of LC is costlier to the parties concerned, since
there would be charges of confirming bank. The LC will be confirmed by another bank with prior
arrangement, only when it is advised to do so by the opening bank. Confirmation can be added only to
irrevocable credits and not to revocable credits. When a bank acts as an advising bank, it has the only
responsibility to verify the genuineness of the credit. But when it adds its confirmation, it becomes a prime
obligor like the issuing bank and undertakings to pay / negotiate / accept the documents as per the terms of
the credit.
2.3.13. STANDBY CREDIT
The standby credit is a documentary credit or similar arrangement however named or described which
represents an obligation to the beneficiary on the part of the issuing bank to make payment on account of
any indebtedness undertaken by the applicant, money borrowed or for any default by the
applicant in the performance of an obligation.
These credits are generally used as a substitute for financial guarantees. In countries like USA, Japan it is
not permissible to issue bank guarantees. Therefore, banks in these countries issue standby letter of credit in
situations where normally a letter of guarantee should have been issued. The document generally called for
under such credits is a simple statement of claim as certificate of non performance. The standby works as a
guarantee in the background of the underlying transaction and it is expected that it will never be drawn.
This facility may be extended on a selective banks for applicants with good track record. The nature of
transaction is clean and hence is risky
Chapter-III

20. 20
Research objectives &
Methodology
3.1 OBJECTIVES
Ultimately, the purpose of a letter of credit is to ensure successful business transactions between sellers and
buyers. Basically, you make a promise to pay a seller when you receive goods, and the seller accepts your
promise because the bank-issued letter of credit guarantees payment.
3.2 ResearchMethodology
The research approach used in this study is doctrinal methodology. There were no surveys conducted for this
study; instead, data was gathered from primary sources such as acts and laws, as well as secondary sources
such as journals, books, and blogs. The knowledge comes from reliable and legal sources. In addition, the
location where data was collected is specified in the final work.
The study is doctrinal rather than empirical, and it is focused on the hypothesis given above, which is only
an assumption made by the researcher in his project, and there is no definitive proof of it. As the research
progresses, it will become apparent whether the hypothesis holds true or is debunked. The citation style used
in this project will be Oscola fourth edition, with footnotes instead of endnotes, and all citation rules will be
followed in the project.
The study for this project is divided into the following sections:
Structure of Research Paper
Review of Literature
Statement of Problem
Hypothesis
Research Questions
Objectives of the Research
3.3 HYPOTHESIS
Hypothesis 1:
Ho: The excessive requirements in the letters of credit are sources of documentary discrepancies
Hypothesis 2:

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Ho: The ambiguous contexts of the Uniform Customs and Practice 500 are sources of documentary
discrepancies In this research, if the null hypothesis is rejected, the alternative cannot be
rejected. Therefore, the alternatives for the above hypotheses are as follows:
H1: The excessive requirements in the letters of credit are not sources of
documentary discrepancies
H2: The ambiguous contexts of the Uniform Customs and Practice 500 are not
sources of documentary discrepancies .The condition of this research is the null hypothesis is presumed true
until a preponderance of the evidence indicates that it is false.
Decision Rule for Hypothesis 1
The null hypothesis (first hypothesis) will be rejected if 45 % or less of the data shows
discrepancies of documents do not comply with the excessive terms and conditions of
letter of credit.
Decision Rule for Hypothesis 2
The null hypothesis (second hypothesis) will be rejected if 25 % or less of the
data shows discrepancies of documents do not comply with the contexts of Uniform
Customs and Practice.

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Chapter-IV
Data Analysis and Interpretation
3.4 METHODS AND DATA COLLECTION
The research employed in this study is e-research in nature. In the 21st century, business research has been
strongly influenced by two major trends in business: increased globalization and rapid growth of the internet
and other information technologies. These trends will continue, and likely accelerate, as the 21st century
progresses (Zikmund, 2003, p. 16–17). This research was conducted during the months of May 2006
through June of 2007. 500 web sites of banks, financial institutions, and related institutions worldwide were
reviewed to collect data about discrepancies posted online. Any sources that related to discrepancies of
export and import documents were examined and analyzed. This was to make sure the data are truly
representative of the population.
The checklist method was also employed as described by Leedy and Ormrod (Leedy & Ormrod, 2001, p.
197–198) that is, a list of characteristics, behaviors, or entities that a researcher is looking for. A researcher
would simply check whether each item on the list is presented and true. The characteristics of each
discrepancy found online were recorded, because these data were needed to analyze the cause of
discrepancies in import and export letter of credit documents. Books and documents were also surveyed at
libraries to ensure the validity and accuracy of the research. From e-research, 59 characteristics of
discrepancies in the export and import letters of credit were found. These characteristics of discrepancies
could happen because of several reasons.
The data identify the problem directly involved with import and export
documents; the data show the character, nature, and behavior of discrepancies that the
research was looking for.

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These data display on Table 1: Percentages of Characteristics
of Documentary Discrepancies as follows:
3.5 RESULT OF DATA ANALYSIS AND HYPOTHESES
Table 1 shows 49% of discrepant export and import documents do not comply
with excessive requirement of letter of credit. Therefore, the decision rule is:
DR: Hypothesis 1 is not rejected.
Table 1 also shows 29% of discrepant of export and import documents do not
comply with the ambiguous context of the Uniform Customs and Practice 500.
Therefore, the decision rule is:
DR: Hypothesis 2 is not rejected either.
Therefore, it is concluded that the excessive requirements of letters of credit and
the ambiguous contexts of the Uniform Customs and Practice are the sources of
documentary discrepancies.

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Chapter- V
Findings, Recommendations &
Conclusion
RECOMMENDATION
Prior to the issuance of the letter of credit, the exporters must be serious in negotiating with the importers
and be sure that excessive requirements and conditions are not included in the letter of credit. During this
stage of negotiation, it is easier to work out details in the letter of credit to avoid future discrepancies. The
exporters can bring many incentives to the table for negotiation. For instance, the exporter may motivate the
importers to make the deal easier by offering an incentive plan on the unit price, quality of merchandise, or
cost of transportation. Once the letter of credit is issued, it becomes much more difficult to negotiate. In the
case of shipping terms such as free on board (FOB) and Cost and Freight (CFR), the required documents
should be an invoice, transport document, and beneficiary’s certificate. The insurance certificate is needed in
the case of CIF (cost, insurance, and freight) only. If the importers need other documents such as certificate
of origin or special addendum, the exporters may send them directly to the importers as requested.
Exporters,importers, and bankers agree that the language of each article of the Uniform Customs and
Practice 500 is difficult to understand (International Chamber of Commerce, 2005, p.1).
The fact is that each article contains ambiguous language with interpretive phrasing that can be seen from
the following example: Article 31, unless otherwise stipulated in the credit, banks will accept a transport
document which does not indicate, in the case of carriage by sea or by more than one means of conveyance
including carriage by sea, that the goods are or will be loaded on deck. Nevertheless, banks will accept a
transport document which contains a provision that the goods may be carried on deck, provided that it does
not specifically state that they are or will be loaded on deck (International Chamber of Commerce, 1993, p.
5). The language and context about loading or shipping on deck in article 31 is ambiguous. It is very
difficult to understand if loading or shipping on deck is acceptable or not. This article should have stated
clearly that unless otherwise stipulated in the letter of credit, loading on deck or shipping on deck is not
acceptable. It is recommended that the International Chamber of Commerce must use a clearer language on
each article. Inappropriate contexts of the Uniform Customs and Practice must be changed. Each article
should be written in clear and concise language that can be understood easily for practice. Additionally, the
International Chamber of Commerce should provide a practical example for each article so that the
personnel who work in export and import businesses would be able to follow the guidelines easily. The
implementation of a clearer language should be executed for the next version. This will be the best way to
eliminate the discrepancies in presentation of import and export documents for payments and financing.

25. 25
Conclusion
After the research we find that the pros of letter of credit are far more than its
cons also there are some universal legislations that have been framed for letter of
credit but we find there is no specific legislation in countries they follow the
general international norm and they are also guided by foreign precedents. Hence
the hypothesis assumed in the beginning of the research stands absolutely true.

26. 26
Bibliography
Research Papers
* (REVISTA Vol39,2018 Pg31) 'last accessed 3/4/2020
* Daniele Giovannucc, Basic Trade Finance Tools: Payment Methods in International trade
(International Journal of Business of Social Science,Vol4 NO .9 August 2013
Sushmita P Malaya, Documentary Credit Law: An Indian Perspective (Cochin University of Science
September 2007
Books
* Dr Avtar Singh, LAW OF CONTRACT (A Study of the Contract Act, 1872) and Specific Relief (12th
edition, Eastern Book Company, 34, Lalbagh, Lucknow-226 001 under licence from EBC Publishing (P)
Ltd., Lucknow available at
End-Notes:
* (REVISTA Vol39,2018 Pg31)
* Daniele Giovannucc, Basic Trade Finance Tools: Payment Methods in International trade.
* (International Journal of Business of Social Science, Vol4 NO .9 August 2013
* Sushmita P Malaya, Documentary Credit Law: An Indian Perspective (Cochin University of Science
September 2007
* Dr Avtar Singh, LAW OF CONTRACT (A Study of the Contract Act, 1872) and Specific Relief (12th
edition, Eastern Book Company, 34, Lalbagh, Lucknow-226 001 under license from EBC Publishing (P)
Ltd., Lucknow
* A. G. Davis, The Law Relating to Commercial Letters of Credit, Sir Isaac Pitman & Sons Ltd., London
(1963), p. I.