Letter of Credit: Meaning, Importance and Required Document

• 

Letter of Credit -LIC

Letter of Credit- L/C is the basis of a very large volume of international trade. Through this instrument, importer promise to pay by his bank. This feature of letter of credit provides large security to exporter. Thus it is document containing the guarantee of a bank to honour drafts drawn on it by the exporter under certain conditions and amounts. Following things should be carefully examined in relation to L/C by the exporter:

(i) That he can meet the terms and conditions.
(ii) Terms and conditions are conform to the basic contract he has entered into with the importer.

In case of any variance exporter should contact to bank and importer to arrange for an amendment.

According to International Chamber of Commerce, “Banker’s documentary credit is an arrangement however, named or described, whereby a bank acting at the request and in accordance with the instructions of a customer is to make payment to or to order to a third party or is to pay, accept or negotiate bills of exchange drafts) drawn by the beneficiary, or authorise such payments to be made on such drafts to be paid, accepted or negotiated, by another bank, against stipulated documents and compliance with stipulated terms and conditions.”

Following are the parties to the letter of credit:

1. Owner i.e. the buyer or importer,
2. Issuer or issuing bank in the importer’s county,
3. Beneficiary in favour of which credit is issued;
4. Confirming bank in exporter’s country.
5. Notifying bank.
6. Paying Bank
7. Negotiating bank.

L/C can be of following types –

1. Clean L/C
2. Documentary L/C
3. Cash L/C4. Acceptance LIC
5. Assignable L/C
6. Non-assignable L/C
7. Revocable L/C.

Importance of Export Credit
Or
Purposes for which Export Credit is Needed

These are as under:

1. Credit fulfils the expenditures which are meet on the
2. transportation of goods to the port.
3. When exporter provides credit facility to importer, he requires credit.
4. Credit is needed to fulfil the requirements of exporter.
5. Exporter has to face hard competition in the foreign market regarding quality and prices, so exporter needs credit facility.
6. Export credit is also required for the execution of export promotion schemes.
7. Export credit is needed for making payment of insurance premium etc.

Documents required under a Letter of Credit

Detail of goods, ship, voyage rent etc. should be given in the application to be submitted for opening an account for credit . Principal amount of credit, commission etc. should be written in the documents. Bill of lading, certificate of origin, certificate of weight etc. should be presented with bank.

Following documents are required under the letter of credit –

1. Bill of Lading
2. Invoice or Commercial Invoice,
3. Insurance Policy/Insurance Certificate
4. Other documents e.g.

(i) Consular Invoice
(ii) Railway Receipt (R/R) or Air Consignment Note
(iii) Certificate of Quality
(iv) Certificate of Origin
(v) Certificate of Weight Note
(vi) Export Licence
(vii) Letter of Hypothecation of Goods.

Bill of Lading (B/L), Invoice, Certificate of origin have already been discussed in this book at appropriate place. Rest of documents in brief can be enumerated here.

1. Insurance Policy/Insurance Certificate Marine- insurance policy is essential to acquire credit facility. Insurance policy is prepared with the name of bank. Insurance certificate can also be used in place of insurance policy.

2. Consular Invoice – This certificate is issued by consular of importer’s country in the exporting country. Exporter sends this document to the importer.

3. Railway Receipt (R/R) or Air Consignment Note – If goods are consigned by railway or aeroplane, these documents are required for credit. Railway receipt is prepared in two copies and air consignment note is prepared in triplicate.

4. Certificate of Quality- This certificate is issued by Standard Institution or office. It is a certificate of quality of product.

5. Certificate of Weight Note – This certificate is needed in relation to such goods weight of which is variable.

6. Export License – Copy of Export License should also be presented along with the bill.

7. Letter of Hypothecation of Goods – Through this document exporter mortgaged his goods with the bank. Thus ownership of goods is transferred to bank.

Letter of hypothecation is not required in case of fixed-terms documentary credit.

Disclaimer