letter of credit (2)

8/3/2019 Letter of Credit (2)

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Rashid Kaskar Roll No. 15

Mukhtar Kasmani Roll No. 16

Irfan Khan Roll No. 19

Samad Khan Roll No. 21

Naqeeb Sakharkar Roll No. 32Mohammed Adil Roll No. 40

.

Project Submitted To Prof .Vardharajan


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Negotiability : Letters of credit are usually negotiable. The issuingbank is obligated to pay not only the beneficiary, but

also any bank nominated by the beneficiary.

Revocability : A revocable letter of credit may be revoked or modifiedfor any reason, at any time by the issuing bank without

notification.

Transfer and Assignment : The beneficiary has the right to transfer or assign theright to draw, under a credit only when the creditstates that it is transferable or assignable.

Sight and Time Drafts : All letters of credit require the beneficiary to present adraft and specified documents in order to receive

payment. A draft is a written order by which the party

creating it, orders another party to pay money to a 3rdparty.

Standby Letter of Credit : The standby letter of credit serves as a secondarypayment mechanism. A bank will issue a standby letter

of credit on behalf of a customer to provide assurances

of his ability to perform under the terms of a contractbetween the beneficiary.


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Advantages & disadvantages of letter of credit

Advantages of Letter of Credit:1. The beneficiary is assured of payment as long as it complies with the terms and

conditions of the letter of credit. The letter of credit identifies which documentsmust be presented and the data content of those documents. The credit risk is

transferred from the applicant to the issuing bank.

2. The beneficiary can enjoy the advantage of mitigating the issuing banks

country risk by requiring that a bank in its own country confirm the letter ofcredit. That bank then takes on the country and commercial risk of the issuing

bank and protects the beneficiary.

3. The beneficiary minimizes collection time as the letter of credit accelerates

payment of the receivables.

4. The beneficiarys foreign exchange risk is eliminated with a letter of credit

issued in the currency of the beneficiarys country.


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Disadvantages of Letter of Credit.1.Since all the parties involved in Letter of Credit deal with the

documents and not with the goods, the risk of Beneficiary notshipping goods as mentioned in the LC is still persists.

2.The Letter of Credit as a payment method is costlier than other

methods of payment such as Open Account or Collection

3.The Beneficiarys documents must comply with the terms and

conditions of the Letter of Credit for Issuing Bank to make the

payment.

4.The Beneficiary is exposed to the Commercial risk on Issuing

Bank, Political risk on the Issuing Banks country and Foreign

Exchange Risk in case of Usage Letter of Credits


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PURPOSE OF LETTER OF CREDIT

In International trade, the buyer and the seller who are located in different

countries may not know each other and hence many times the problem of Buyers

Creditworthiness hampers the trade between the buyer and the seller.

The main objectives of the buyer and the seller in any international trade and

contradictory in terms of Buyer will always try to delay the payment while theseller would like to receive funds at the earliest.To mitigate this problem, Seller

always request Buyer to arrange for a Letter of Credit to be issued by Buyers

Bank.

Upon issuance of Letter of Credit, the Buyers bank replaces its ownCreditworthiness to that of the Buyer, it undertakes to reimburse the Seller for the

value of the Letter of Credit Irrevocably provided two underline conditions are

fulfilled by the Seller:

1.All the documents stated in the LC are presented;

2.All the terms and conditions of the LC are complied with


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Documents Necessary for Letter of CreditFollowing are some documents which are essential for letter o

Commercial Documents : Invoice, Packing list.

Financial Documents : Bill of exchange, Mutually ac Official Documents : Embassy legalization, Licenscertificate,

Origin certificate.

Shipping Documents : Insurance certificate, transpolegal documents.

Transport Documents : Bill of lading, lorry or truck re

Railway receipt, CMC receipt, Delive


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Revocable letter of credit : Just like the name says the LC can berevoked by the Issuing Bank without the agreement of the

beneficiary.

Irrevocable letter of credit : Can not be cancelled or amended without all

the parties agreement.

Standby letter of credit : Guarantee of payment. If the beneficiary

does not get paid from its customer it can then

demand payment from the Bank by forwarding the

copy of the invoice that was not paid and supporting documentation.


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If I ship goods,

will you pay?

Documentary Credits like a Letter of Credit or L/C is the mostpreferred form of payment for goods in international trade as it solvesissues ofmutual mistrust by using banks as arbiters.

ExporterImporter

If I pay, will you

ship the goods?

Ok, Ill ask my bank

to open a L/C

Great!


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Using a

Letter of Credit


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Common problems associated with the letters of credit process are listed below.

Documents required by the credit are missing.

Documents required to be signed are not signed.

The credit amount is exceeded. The credit has expired or the documents are presented late.

Shipment was short or late.


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"Sellers may have one or more of the following problems:

The shipment schedule cannot be metweather extremes.mechanical or IT breakdownborder crossing delayed

The stipulations concerning freight costs are unacceptable;The price becomes too low due to exchange rates fluctuations;

The quantity of product ordered is not the expected amount;

The description of product is either insufficient or too detailed;

which effects the customs classification and the tariff appliedThe stipulated documents are difficult or impossible to obtain."

export permits.permit for hazardous materials.permission for the truck to cross some int'l border


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Sample Letter of Credit


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