Any body provide information regarding letter of credit & Bank guarantee, in my during working to face problem non aware of this, requesting to please provide fundamental & conceptually knowledge
when open L.C/ Bank Guarantee ? When it used it in course activity in finance ??
06 October 2015
A letter of credit is written commitment document issued by a bank or other financial institutions to assure payment to seller on the basis of documentary proof on fulfillment of performance by seller as per terms and conditions mentioned in LC. Under an LC, the seller gets guarantee on payment of his sale of goods from the buyer’s bank.
There are various types of letters of credit like Revocable, Irrevocable, Confirmed, Unconfirmed, Clean & Documentary, Fixed, Revolving, Transferable, Back to Back etc. Most common and safe LC is Irrevocable Letter of Credit for both buyer and seller.
Procedures to get money under Letter of Credit at sight. ***************************************** Opening a Letter of Credit at sight is common practice in the export business. Under sight LC, the payment of export proceeds sent to seller’s bank by buyer’s bank immediately up on receipt of original shipping documents as per the terms and conditions mentioned on LC.
Once after completion of export customs clearance procedures, the exporter prepares all required documents as per the terms and conditions of letter of credit. These documents will be submitted with exporter’s bank, along with the original LC. Bank verifies all documents and make sure, the documentation is in order as per LC conditions. These documents will be sent to buyer’s bank and in turn to the buyer after necessary approval in documentation by seller’s bank. Once the buyer’s bank receives the documents, the export sales amount as per the said documents will be sent to exporter’s bank. However, the documentation of each consignment must be as per the conditions of LC at sight and the buyer’s bank has the right to reject payment on any violation of such documentation. This is the procedures under letter of credit at sight.
parties involved in an LC Letter of Credit. ******************************************* 1.Applicant of Letter of Credit 2.LC Issuing Bank :-Issuing Bank is the bank who opens letter of credit. Letter of credit is created by issuing bank who takes responsibility to pay amount on receipt of documents from supplier of goods (beneficiary under LC).
3.Beneficiary party (Beneficiary is one of the main parties under letter of credit. Beneficiary of Letter of credit gets the benefit under Letter of credit. Beneficiary is the party under letter of credit who receives amount under letter of credit. The LC is opened on Beneficiary party’s favor. Beneficiary party under letter of credit submits all required documents with is bank in accordance with the terms and conditions under LC.)
4.Advising Bank(Advising bank is another party involved under LC. Advising bank, as a part of letter of credit takes responsibility to communicate with necessary parties under letter of credit and other required authorities. The advising bank is the party who sends documents under Letter of Credit to opening bank.)
5.Confirming Bank(Confirming bank is one of the other parties involved in Letter of Credit. Confirming bank as a party of letter of credit confirms and guarantee to undertake the responsibility of payment or negotiation acceptance under the credit.)
6.Negotiating Bank(Negotiating bank is one of the main parties involved under Letter of Credit.
Negotiating Bank, who negotiates documents delivered to bank by beneficiary of LC. Negotiating bank is the bank who verifies documents and confirms the terms and conditions under LC on behalf of beneficiary to avoid discrepancies) 7.Reimbursing Bank(Reimbursing Bank is one of the parties involved in an LC. Reimbursing bank is the party who authorized to honor the the reimbursement claim of negotiation/ payment/ acceptance.)
8.Second Beneficiary :-Second beneficiary is one of the other parties involved in Letter of Credit. Second beneficiary who represent the first beneficiary or original beneficiary in their absence, where in the credits belongs to original beneficiary is transferable as per terms.)
Bank Guarantee *************** on the other hand A bank guarantee is a commercial instrument guaranteeing by bank to a party (parties) on behalf of his customer, assuring the beneficiary to effect payment on default of obligation.
As per Letter of Credit, once the obligation on production of documents on fulfillment of contract, the bank pays amount to beneficiary. However, in a bank guarantee, the beneficiary is paid on non fulfillment of obligation as per contract of BG.
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