What is Letter of Credit (L/C)/Documentary Credit/How Letter of Credit (LC) Dealings and Transactions Works/LC Types...:

There are four payment methods work in the international trade field. They are - 1. Advance Payment 2. Open Account (Consignment Sale) 3. Documentary Collection (Document against Payment (D/P) and Document against Acceptance (D/A) 4. Documentary Credit (Governed by UCPDC, eUCP etc.)

Therefore, Letter of credit (LC), also called Documentary Credit, is one of the international payment methods. As per UCPDC 600 (Article 2) "Credit means any arrangement, however named or described, that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honour a complying presentation." A credit is issued subject to UCP current edition that is UCP 600 which is current. Generally, Documentary Credit is issued through SWIFT Message Type (MT) 700. By nature a Credit is irrevocable (that is cannot be Changed, Amended, or Cancelled without all parties concent; specially Beneficiary, Issuing Bank, Applicant and Advising Bank's concent required) as per UCP 600, Article - 03, "A Credit is irrevocable even if there is no indication to that credit".

Hence, Credit is issued by a bank (a non-bank can also issue credit) which provides definite (irrevocable) undertaking to a named beneficiary to make payment if complying presentation is made. Documentary Credit is a guarantee for a payment (honour) by the issuing bank to the beneficiary (exporter) if he/she makes complying presentation of documents as per LC terms and conditions or as required by LC. Though Documentary Credit is governed by UCP; whenever UCP and Local Laws contradict, the local law will prevail. As international dealings, there are different factors (such as accuracy, genuineness, sufficiency, etc) works in such trade dealing and payment transaction.

There are a number parties involved in the Documentary Credit, they are:
1. Applicant (Importer)
2. Beneficiary (Exporter) who is also called Supplier
3. Issuing Bank (Also called as Applicant's Bank)
4. Advising Bank (Also called as Beneficiary's Bank)
5. Nominated Bank (with which the credit also be available)
6. Negotiating Bank
7. Confirming Bank
8. Reimbursing Bank
9. Transferring Bank

How Letter of credit (LC) dealings and transactions works?
1. There are a Buyer and Seller agreement to supply specified goods or services
2. The Seller offers a quotation (also may be sales contract, proforma invoice, etc.) to the Buyer
3. The Buyer accepts the quotation/the sales contract
4. The Buyer (Applicant) goes to his bank (LC issuing bank) and request to issue a LC as per the Sales Contract
5. The Applicant and Issuing Bank have some regulatory formalities and business dealing obligations, after that
6. The Issuing Bank (Also called as Applicant's Bank/Importer's Bank) issue LC (mostly through SWIFT) in favour of named Beneficiary (that is Exporter) and sent the LC to Advising Bank (Beneficiary's Bank/Exporter's Bank)
7. The Advising Bank inform the Beneficiary that a LC is received from the ...issuing bank and advise the LC to the Beneficiary (the Exporter)
8. After receiving the LC, the Beneficiary (the Exporter) starts its procedures to send the goods as per LC terms and conditions to the Buyer (the Importer)
9. The Beneficiary (the Exporter/Seller/Shipper) ships the goods to, in general, Buyer's (the Importer's) country through Transports (by Ship/by Air/by Road/ or by using Multimodal Transport)
10. The Exporter (The Seller/Shipper) collects the relevant transports/shipping documents from respective transport authority (which proves evidence of sending of goods to the buyer)
11. With all documents as per LC terms and conditions, the Beneficiary (Exporter/Seller) presents the documents to the Advising bank/Confirming bank or any other nominated bank.
12. The Advising bank/Confirming bank will check the documents and if they comply as per LC terms and conditions; send the documents to issuing bank, and apply to the LC issuing bank for reimbursement for payment to the Beneficiary (Exporter/Seller).
13. The LC issuing bank receives all the documents and check whether they are as per LC terms and conditions; if found comply (that is complying presentation is made) then the Issuing bank honours/makes payment/reimburses to the Advising Bank or Confirming bank as per agreed payment types (at Sight/Deferred/Acceptance)
14. The Beneficiary (the Exporter) receives fund from the Advising Bank or Confirming bank
15. The Buyer (the Importer) collects documents from his bank/issuing bank and presents the documents for customs clearance and release of the goods from port.

Types of Letter of credit (LC):
1. Revocable Letter of credit
2. Irrevocable Letter of credit
3. Confirmed Letter of credit
4. Red Clause Letter of credit
5. Green Clause Letter of credit
6. Transferable Letter of credit
7. Transferred Letter of credit
8. Clean Letter of credit
9. Confirmed Letter of credit
10. Unconfirmed Letter of credit
11. Restricted Letter of credit
12. Unrestricted Letter of credit
13. Deferred Letter of credit
14. Usance Letter of credit
15. Sight Letter of credit
16. Back to Back Letter of credit
17. Standby Letter of Credit (SBLC)
18. Revolving Letter of credit
19. Commercial Letter of credit
20. Barter Letter of credit
21. UPAS Letter of credit
22. Master LC
23. Cash LC
24. Acceptance Credit
25. Negotiation Credit
26. Freely Available Credit
27. May Add Credit
28. Operative Credit
29. Inoperative Credit
30. Revolving Credit
31. Cumulative Credit
32. Non-Cumulative Credit
33. Installment Credit (as per UCP600 Article 32)
34. Travelers Letter of Credit
35. Reinstate Credit
36. And more...

Published Date: 14/07/2023