LETTER OF CREDIT IN EXPORT AND IMPORT

Letters of credit is often also called as Documentary Credits. So there is no difference in letter of credit and Documentary credit. Both are the same things.

Letter of Credit is issued by Buyer’s Bank (i.e. Importer’s Bank) on behalf of Buyer or Importer to the Seller’s Bank (i.e. Exporter’s Bank) and Buyer’s bank undertakes to pay for the goods/ services to the Exporter/ Beneficiary upon submission of clean documents as per terms and conditions of Letter of Credit.

Letter of Credit is widely used as payment instrument for Export and Import or International Trade. This helps us Exporter to enter in business with a new client. In this exporter gets a guarantee of payment from buyer’s bank as per terms and conditions laid down in the letter of credit.

PARTIES WHICH ARE INVOLVED TO A LETTER OF CREDIT

(i)     Applicant / Opener – Applicant is the buyer of goods or services i.e. Importer who request his bank of open a letter of credit in his behalf.

(ii)    Issuing Bank – The bank who opens the letter of credit on behalf of applicant and undertakes to execute payment as per terms and conditions of letter of credit.

(iii)    Beneficiary – Beneficiary is the seller of goods or services i.e. exporter in whose favor letter of credit is opened and he gets the payment on presentation of complying documents as terms and conditions of L/c

(iv)    Advising Bank – Advising bank is bank who advises the LC and confirms its authenticity of beneficiary. Generally this bank is located in the country of beneficiary.

(v)     Confirming Bank – Upon authorization of the L/c issuing bank an additional bank can add its guarantee to the Letter of Credit and undertakes responsibility for payment/ acceptance. Generally this bank operates in the country of beneficiary. For exporter point of view it is beneficial to have confirmation added in the letter of credit.

(vi)    Nominated Bank –  It is bank which is located in the country of beneficiary and authorized by Issuing bank to receive, negotiate the documents and make payment to the exporter/ beneficiary under the issued Letter of credit.

(vii)   Reimbursing Bank – Reimbursing bank normally have the Nostro Account of Letter of Credit Issuing Bank and from this account payment is made to the nominated bank for further payment transfer to exporter or beneficiary. They are authorized to honour the payment claim made under the letter of credit by paying, accepting by negotiating bank.