Dear xcvbnm-ga,
Good day!
Letter of Credit is one of the most popular methods for receiving
payments of export proceeds. It offers maximum security to the
exporter. The general transaction can be described as follows:
Importer "I" opens a L/C through his bank "IB" which is advised to
exporter "E" through advising bank "EB". On presentation of the
required documents - those that are specified in the L/C (a copy of
the export order, invoice, etc.) - the exporter gets his payment. The
payment to the exporter is guaranteed if & only if all the conditions
mentioned in the L/C by the importer have been fulfilled by this
exporter. In the flow chart, L/C transaction can be viewed as follows:
makes payment
"IB" ------------> "EB"
^ ^
| opens | presents
| L/C | L/C
| |
"I" <------------ "E"
exports goods
This was a very general description of L/C. Now, let us examine it in
detail. Because L/Cs are very popular in the international trade, they
have been standardised with uniform rules framed by the International
Chamber of Commerce. These rules are known as "Uniform Customs and
Practices of Documentary Credit Publication" (UCPDC). Under these
rules, the parties to a L/C are:
1. Applicant - buyer or importer of goods
2. Issuing Bank - importer's bank who lends its name, i.e., credit
3. Advising Bank - correspondent of issuing bank in the exporter's
country
4. Beneficiary - seller or exporter of goods
5. Negotiating Bank - the bank to whom the beneficiary presents
documents for payment under this L/C
The L/C may be revocable or irrevocable. In the latter case, once
established, it can't be cancelled or amended by the importer without
the prior written permission of the exporter.
L/Cs come in many varieties:
1. Transferrable L/C - generally used where the original L/C is opened
in favour of the buying agent who in turn gets it transferred to
various parties
2. Revolving L/C - favored when periodic shipments are expected or
when buyer wants to obtain a better price by placing a bulk order
3. Transit L/C - is issued in one foreign country (say USA) with the
beneficiary in another country (say India) but is confirmed by a bank
in London
4. Back-to-back L/C - favoured when the identity of the ultimate buyer
is to be kept secret
5. Restricted and unrestricted L/C - credits that do not specify any
particular bank for negotiations are called unrestricted L/Cs.
Otherwise, restricted L/C
6. Red clause and green clause L/C - a clause that authorises the
negotiating bank to make an advance to the seller prior to the
shipments and tender of documents is found in the red clause L/C.
Green clause L/Cs, in addition to the advance payment, also entail
sorting out goods in the name of the bank. Such L/Cs are extensively
used in Australian wool trade.
The dictionary meaning of the term "Letter of Credit" is a letter
issued by a bank authorizing the bearer to draw a stated amount of
money from the issuing bank, its branches, or other associated banks
or agencies.
In trade circles, the term means a document issued by a bank which
guarantees the payment of a customer's drafts for a specified period
and up to a specified amount.
As far as more tips on the way in which international trade works, the
topic is too vast to be answered here :( There are different
theoretical explanations of international trade and there are enabling
mechanisms (L/C is one such). You can find out more information from
books related to international trade theory.
Additional links:
A nice explanation of the ins-and-outs of L/C can be found at this
link: http://www.bizhelp24.com/export_import/letter_of_credit.shtml
Search strategy:
"Letter of Credit"
://www.google.com/search?sourceid=navclient&q=%22Letter++of+Credit%22
I hope this addresses your query in a satisfactory manner :)
Regards,
reeteshv-ga |
