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Documentary Letter of Credit

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¨ ¨It is an instrument by which a bank undertakes to make payment to a seller on production of documents drawn in accordance with the terms of the credit ¨

¨The letter of credit is governed by the provisions of UCPDC – 600. It is 6th edition, first in 1933.

Parties to Letter of Credit

¨Applicant : The buyer of goods

¨Issuing Bank : Buyer’s bank

¨Advising Bank : To whom LC is sent for onward transmission to the seller

¨Beneficiary : The party to whom, the LC is addressed i.e. seller

¨Negotiating Bank : The bank to whom the beneficiary will present the documents

¨Reimbursing Bank : Third bank, which repays/settles the funds at request of issuing bank

¨Confirming Bank : The bank, which undertake the responsibility of issuing bank on his failure

Types of Letter of Credits 

¨Documents against Payment LC : Where payment is made against documents ( D/P LC )

¨Documents against Acceptance LC :  Where payment is made on maturity date ( D/A LC )

¨Irrevocable LC : ¨ Issuing bank can amend/cancel LC with the consent of beneficiary (Seller)

     Revocable LC :  Issuing bank can amend/cancel LC without the consent of beneficiary (Seller)

¨With Recourse : ¨Where the beneficiary holds himself liable to the holder of the bill, if dishonoured.

¨Without Recourse : ¨Where the beneficiary does not hold himself liable, if the bill is dishonoured.

Types of Letter of Credit (Contd.)

¨Red Clause LC :Where the LC permit the negotiating bank to grant of packing credit to the beneficiary at issuing bank’s responsibility ¨

¨Green Clause LC :LC permits the advance for storage of goods in addition to pre-shipment advance ¨

¨Stand by LC :  It is similar to performance bond or guarantee. The beneficiary can submit the claim along with requisite documents to issuing bank ¨

¨Revolving LC : The amount of drawing made under LC would be reinstated and made available to the beneficiary again ¨Standby Letter of Credit : ¨As per RBI guidelines, such LC can be issued as a document of promise in respect of non performance situation specially as a substitution of guarantee. While opening standby LC Banks observe International Standby Practices 98. ¨

¨Red Clause LC :Where the LC permit the negotiating bank to grant of packing credit to the beneficiary at issuing bank’s responsibility ¨

¨Green Clause LC : LC permits the advance for storage of goods in addition to pre-shipment advance ¨

¨Stand by LC : It is similar to performance bond or guarantee. The beneficiary can submit the claim along with requisite documents to issuing bank ¨

¨Revolving LC :The amount of drawing made under LC would be reinstated and made available to the beneficiary again

¨Standby Letter of Credit : ¨As per RBI guidelines, such LC can be issued as a document of promise in respect of non performance situation specially as a substitution of guarantee. While opening standby LC Banks observe International Standby Practices 98. ¨

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