Lesson-9 on Foreign Exchange

Question: What is Letter of Credit (L/C)?

Answer:

Ø    It is a commitment of making payment by a bank on behalf of importer to the exporter upon fulfillment of certain terms & conditions.

Ø    According to the UCPDC-600 L/C means any arrangement, however, named or described i.e., irrevocable & there by constitute a definite undertaking of the issuing bank to honour a compiling presentation.

Question: What are Parties involved in L/C?

Answer:

Core Parties

01. The issuing Bank

02. The confirming Bank (If any)

03. The Beneficiary

Other Parties involved in L/C

01. The applicant

02. Advising Bank

03. The Nominated bank

04. The reimbursing Bank

05. The presenter

06. The transferring Bank

Issuing Bank

Issuing Bank means the bank that issues a credit at the request of an applicant or on its own behalf.

Confirming Bank

Ø    Confirming Bank means the bank that adds its confirmation to a L/C upon the request of the issuing Bank.

Ø    Confirmation means a definite undertaking of the confirming bank in addition to the issuing bank to honour or negotiate a compiling presentation.

Beneficiary

Beneficiary means the party in whose favor a L/C is issued.

Applicant

Applicant means the party on whose favor a L/C is issued.

Advising Bank

Ø    Advising Bank gives the proof of apparent authenticity of the L/C to the seller.

Ø    Forwards the original L/C to the beneficiary

Nominated Bank

Nominated bank means the bank with which L/C is available

Reimbursing Bank

Reimbursing Bank means the bank, appointed by the issuing bank to reimburse the claims of payment of the claiming Bank.

Claiming Bank

Claiming bank means the nominated bank which claims the payment from the reimbursing bank.

Presenter

Presenter means a beneficiary or bank or other party that makes presentation of documents.

Transferring Bank

Transferring Bank means nominated bank that transfer the L/C which is authorized by issuing bank

Question: What is Back to Back L/C?

Answer:

One credit backs another. The seller/beneficiary of mother L/C stands as security to advising bank for opening second credit.

Question: What is the Operational Procedure in L/C?

Answer:

01. Issuing

02. Advising

03. Confirmation & Amendment

04. Presentation

05. Settlement

a)     Settlement by Payment

b)    Settlement by acceptance

c)     Settlement by Negotiation (Bank will purchase documents/drafts)

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