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LC Presentation

The document provides an overview of letters of credit (LC), including: - An LC is a payment mechanism where a bank guarantees payment to a beneficiary if they present complying documents by a specified date. - Key parties include the opener (buyer), beneficiary (seller), issuing bank, advising/confirming banks. - The LC transaction involves three steps: issuance of the LC, shipment of goods, and presentation of complying documents for payment. - Important terms include payment terms (sight, usance), type (revocable, irrevocable), and required documents (invoice, transport documents, insurance, etc.). - LCs provide secured payment for sellers

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248 views

LC Presentation

The document provides an overview of letters of credit (LC), including: - An LC is a payment mechanism where a bank guarantees payment to a beneficiary if they present complying documents by a specified date. - Key parties include the opener (buyer), beneficiary (seller), issuing bank, advising/confirming banks. - The LC transaction involves three steps: issuance of the LC, shipment of goods, and presentation of complying documents for payment. - Important terms include payment terms (sight, usance), type (revocable, irrevocable), and required documents (invoice, transport documents, insurance, etc.). - LCs provide secured payment for sellers

Uploaded by

narasimhan_ca
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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LETTER OF CREDIT

Basic Understanding

Letter of Credit (L/C)


Introduction: What is a Letter of Credit?

Basic Facts: Revocable & Irrevocable Letter of Credit Sight & Usance Letter of Credit Confirmed Letter of Credit

Mechanics: How does a Letter of Credit transaction work?

Risk Analysis: Advantages & Disadvantages

What is L/C ?
document issued by a financial institution Written Undertaking on behalf of Buyer promising to effect payment in favour of the Beneficiary up to a stated sum of money within a prescribed time limit and against stipulated documents

In Simple Words,

provides an irrevocable payment undertaking to a beneficiary subject to complying


documents as stated in the credit
Adhering to terms as mentioned in the L/C

What is L/C - Key Principle

banks deal only in documents and not in goods decision to pay under a Letter of Credit will be based entirely on documents presented to the bank accordance with the terms and conditions

of the LC

It is prohibitive for the banks to physically check whether all merchandise has been shipped

exactly as per each letter of Credit

Why L/C
Allows supplier to access credit even before the goods can reach the buyer

Secured payment

Discount at better rates and take money upfront

L/C Vs. Bank Guarantee (BG)

L/C

BG

Opener

Purchaser

Seller

Purpose

Secure payment (performance)

Secure obligation (non performance)

Payment mode

Presentation

Invocation

Payment trigerred by

Supplier

Purchaser

Parties to L/C
Opener / Applicant Beneficiary Applicants Banker Beneficiarys Banker Advising Bank Confirming Bank Negotiating Bank

Purchaser Seller

Optional Optional

Terms used in LC
Payment Terms Sight : Payable upon receipt of documents by the Buyers Bank Usance : Payable on the due date I.e. after credit period

Type of LC
Revocable : LC can be cancelled on request of Buyers Irrevocable : LC can be cancelled only on request of Seller (Recovcable LCs are not to be opened RBI Guideliens) Revolving : Amount of LC is reinstated after every presentation without amendment

for a specific period


Milestones Latest Shipment Date Latest Negotiation Date / Presentation period Expiry Date

Other General terms in LC


Transhipment

Partial / Full Shipment

Bank Charges

Documents required (not exhaustive) Invoice

Transport Document
Insurance certificate Packing List Other documents

How does LC operate


The mechanics of a Letter of Credit are easily understood when separated into the

following three steps

Issuance of LC Flow of Goods Flow of Documents & Payment

LC Issuance
Buyer/ Applicant Sales contract

Seller/ Beneficiary

Buyer applies for LC

Sellers bank authenticates LC and sends to seller

Issuing Bank

Buyers bank issues LC and sends to sellers bank

Advising Bank

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How LC operates
Buyer/ Applicant
The issuing bank debits the buyers account for the payment and releases the original documents Step 4

Shipment

Seller/ Beneficiary
On receiving the payment Sellers account is credited Step 5

Seller presents documents under the LC to its bank

Step 1

After scrutinizing the documents negotiating bank forwards them to the issuing bank Step 2

Issuing Bank

On checking for compliance with LC terms the issuing bank reimburses the negotiating bank by debiting the buyers account (immediate if sight LC / due date if usance LC) Step 3

Negotiating Bank

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How LC operates Full Flow

Seller

Sellers Bank

Buyers Bank

Despatch Goods

Lodge documents with Bank

Documents scrutiny and send to LC opening Bank

Inform docs arrival to Buyer Buyer

Buyers Bank

Collect goods

Bank handover docs for delivery

Buyer Collect docs from bank after payment/confirming payment

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General Rules relating to LC


Operational only upon happening of event for which LC is opened

Will not allow direct shipments of goods to Buyer

Can be encashed only if all conditions of the LC have been met

Governed by Uniform Customs and Practices for Documentary Credit under ICC 500

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Seller

ADVANTAGES

Confirmed Payment Shift Credit risk from Buyer to the Bank

Confirmed Order execution

Can be discounted and payment obtained upfront

DIS-ADVANTAGES
Discrepancy can hold / Delay the payment

LC Opening Bank going bankrupt

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Buyer

ADVANTAGES
For Seller to be paid, all terms and conditions have to be met Can negotiate better as the payment to seller is secured

DIS-ADVANTAGES

Quality / Quantity of goods cannot be ascertained

Bank deals only with documents and not with goods


Additional Cost Blocks Credit Lines

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Understanding for correct negotiation


Understanding the Intricacies of LC

Understanding all the Inco Terms CIF, FOB, EX-WORKS, C&F, FAS etc

Cost Monetary and Non-Monetary

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LC Operations at Hansen
Opening of LC Justification note as per Format Approved by HOD Fix Accountability

Documents required Purchase Order duly signed by relevant authority and accepted by

Seller or
Proforma Invoice

17

LC Operations at Hansen
Amendment to LC Justification note for Amendment Approved by HOD Fix Accountability Clarity on Bank Charges

Other Inputs

LC Requirement to be forecasted
Tentative Shipment date and payment date be informed Timelines as per LC be met

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THANK YOU

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