CHAPTER-THREE

LETTER OF CREDIT(L/C)

3.1 DEFINITION OF L/C

On behalf of the importer if the bank undertakes to make payment to the foreign bank is known as documentary credit or letter of credit.
A letter of credit is an instrument issued by a bank to a customer placing at the letters disposal such agreed sums in foreign currency as stipulated. An importer is a country request his bank to open a credit in foreign currency in favour of his exporter at a bank in the letters country. The letter of credit is issued against payment of amount by the importer or against satisfactory security. The L/C authorizes the exporter to draw a draft under is terms and sell to a specified bank in his country. He has to hand over to the bank, will the Bill of exchange, shipping documents and such other papers as may be agree upon between the exporter and the importer. The exporter is assured of his payment because of the credit while the importer is protected because documents in respect of export of goods have to be delivered by the exporter to the paying bank before the payment is made.

3.2 From of letter of credit

A letter of credit (L/C) may be two forms. These as below :
i) Revocable letter of credit.
ii) Irrevocable letter of credit.


(i) Revocable L/C : If any letter of credit can be amendment or change of any clause or canceled by consent of the exporter and importer is known as revocable letter of credit.

A revocable letter of credit can be amended or canceled by the issuing bank at any time without prior notice to the beneficiary. It does not constitute a legally binding undertaking by the bank to make payment. Revocation is possible only nntil the documents have been honoured by the issuing bank or its correspondent. Thus a revocable credit does not usually provide adequate security for the beneficiary.

(ii) Irrevocable L/C : If any letter of credit can not be changed or amendment without the consent of the importer and exporter is known as irrevocable letter of credit.

An irrevocable credit constitutions a firm undertaking by the issuing bank to make payment. It therefore, gives the beneficiary a high degree  of assurance that he will paid to his goods or services provide he complies with terms of the credit.

3.3 TYPES OF LETTER OF CREDIT

Letter of Credit are classified into various types according to the method of settlement employed. All credits must clearly indicate in major categories.

i) Sight payment credit.
ii) Deferred payment credit.
iii) Acceptance credit.
iv) Negotiation credit.
v) Red close credit.
vi) Revolving credit.
vii) Stand by credit.
viii) Transferable credit.

(i) Sight payment credit : The most commonly used credits are sight payment credits. These provide for payment to be made to the  beneficiary immodestly after presentation of the stipulated documents on the condition that the terms of the credit have been complied with. The banks are allowed reasonable time to examine the documents.

(ii) Deferred payment credit : Under a deferred payment credit the beneficiary does not receive payment when his presents the documents but at a later date specified in the credit. On presenting the required documents, he received the authorized banks written undertaking to make payment of maturity. In this way the importer gains possession of the documents before being debited for the amount involved.

In terms of its economic effect a deterred payment credit is equivalent to an acceptance credit, except that there is no bill of exchange and therefore no
possibility of obtaining money immediately through a descant transaction. In certain circumstances, how ever, the banks payment undertaking can be used as collateral for an advance, though such as advance will normally only be available form the issuing or confirming bank. A discountable bill offers wider scope.