Types of lc/dc

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Querist : Anonymous

Querist : Anonymous (Querist)

14 January 2014 How many types of Letter of Credit/documentary Credit available?

RAMESH KUMAR VERMA

RAMESH KUMAR VERMA (Expert)
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14 January 2014 good morning anonymous,

Letter of Credit L/c also known as Documentary Credit is a widely used term to make payment secure in domestic and international trade. The document is issued by a financial organization at the buyer request. Buyer also provide the necessary instructions in preparing the document.

The International Chamber of Commerce (ICC) in the Uniform Custom and Practice for Documentary Credit (UCPDC) defines L/C as:

"An arrangement, however named or described, whereby a bank (the Issuing bank) acting at the request and on the instructions of a customer (the Applicant) or on its own behalf :

Is to make a payment to or to the order third party ( the beneficiary ) or is to accept bills of exchange (drafts) drawn by the beneficiary.
Authorised another bank to effect such payments or to accept and pay such bills of exchange (draft).
Authorised another bank to negotiate against stipulated documents provided that the terms are complied with.

A key principle underlying letter of credit (L/C) is that banks deal only in documents and not in goods. The decision to pay under a letter of credit will be based entirely on whether the documents presented to the bank appear on their face to be in accordance with the terms and conditions of the letter of credit.

A letter of credit is basically a guarantee from a bank that a particular seller will receive a payment due from a particular buyer. The bank guarantees that the seller will receive a specified amount of money within a specified time. In return for guaranteeing the payment, the bank will require that strict terms are met. It will want to receive certain documents - for example shipping confirmation - as proof.

Types of letter of credit

There are five commonly used types of letter of credit. Each has different features and some are more secure than others. The most common types are:

irrevocable
revocable
unconfirmed
confirmed
transferable

Other types include:

standby
revolving
back-to-back

Sometimes a letter of credit may combine two types, such as ‘confirmed’ and ‘irrevocable’.
Irrevocable and revocable letters of credit

A revocable letter of credit can be changed or cancelled by the bank that issued it at any time and for any reason.

An irrevocable letter of credit cannot be changed or cancelled unless everyone involved agrees. Irrevocable letters of credit provide more security than revocable ones.
Confirmed and unconfirmed letters of credit

When a buyer arranges a letter of credit they usually do so with their own bank, known as the issuing bank. The seller will usually want a bank in their country to check that the letter of credit is valid.

For extra security, the seller may require the letter of credit to be ‘confirmed’ by the bank that checks it. By confirming the letter of credit, the second bank agrees to guarantee payment even if the issuing bank fails to make it. So a confirmed letter of credit provides more security than an unconfirmed one.
Transferable letters of credit

A transferable letter of credit can be passed from one ‘beneficiary’ (person receiving payment) to others. They’re commonly used when intermediaries are involved in a transaction.
Standby letters of credit

A standby letter of credit is an assurance from a bank that a buyer is able to pay a seller. The seller doesn’t expect to have to draw on the letter of credit to get paid.
Revolving letters of credit

A single revolving letter of credit can cover several transactions between the same buyer and seller.
Back-to-back letters of credit

Back-to-back letters of credit may be used when an intermediary is involved but a transferable letter of credit is unsuitable.

Uniform customs and practice for documentary credit

To standardise terms and procedures and avoid misunderstandings, a set of international rules for letters of credit have been developed by the International Chamber of Commerce (ICC).

Most commercial letters of credit are governed by these rules, which are referred to as Uniform Customs and Practice for Documentary Credits (UCP). The current version of the rules is UCP 600, which came into effect on 1 July 2007.

The UCP standards give definitions of important terms that are used in letters of credit. When referring to letters of credit, banks and others involved in international trade will generally use the UCP definitions of key terms and phrases.

UCP also sets out general documentary requirements and standard practices for handling letters of credit.

Further information

http://agriexchange.apeda.gov.in/Ready%20Reckoner/LETTER_OF_CREDIT.aspx

Querist : Anonymous

Querist : Anonymous (Querist)

17 January 2014 Dear Expert,

You mean to say that the LC/DC confirming Bank will pay money in any circumstances if the LC/DC issuing bank will not pay !!

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