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Letters of Credit (L/C) Value creation through process innovations!

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Page 1: Letters of Credit

Letters of Credit (L/C)

Value creation through process innovations!

Page 2: Letters of Credit

A documentary credit is the written promise of a bank, undertaken on behalf of a buyer, to pay a seller the amount specified in the credit provided the seller complies with the terms and conditions set forth in the credit.

What is L/C ?

Value creation through process innovations !

Page 3: Letters of Credit

How does L/C function ?

Banks act as intermediaries to collect payment from the buyer in exchange for the transfer of documents that enable the holder to take possession of the goods.

The seller is assured that payment will be made by a party independent of the buyer so long as the terms and conditions of the credit are met.

The buyer is assured that payment will be released to the seller only after the bank has received the title documents called for in the credit.

Value creation through process innovations !

Page 4: Letters of Credit

Types of Credits

Letter of Credits

Standard credits

Revocable (cancellable)

Irrevocable (non-cancellable)

Confirmed (Buyer’s bank &

another bank guarantee payment)

Un-Confirmed (Only buyer’s bank

guarantees payment)

Specialized credits

Revolving Credits

Red Clause Credits

Standby Credits

Transferable Credits

Back-to-back Credits

Value creation through process innovations !

Page 5: Letters of Credit

Value creation through process innovations !

Issuance of L/C

Buyer / Importer

Buyer / Importer

Beneficiary / Exporter

Advising / Confirming

Bank

4.Advice of L/C

3.Request to Advice &

confirm L/C

1.Purchase &

Sales Agreement

2.Request for a L/C

Page 6: Letters of Credit

Value creation through process innovations !

Payment under L/C

Buyer / Importer

Buyer / Importer

Beneficiary / Exporter

Advising / Confirming

Bank

3.Payment

1.Shipment of

Goods

3.Payment

2.Documents

2.Document

3.Payment

2.Documents

Page 7: Letters of Credit

Advantages Importer is assured of payment to exporter only if all

terms & conditions of L/C would be met Importer is able to negotiate more favorable trade

terms with the exporter

Disadvantages L/C doesn’t guard import from exporter shipping

inferior quality and / or lower quantity of goods Its importer’s responsibility to ascertain reputation of

exporter. It is important for important to have line of credit

before the bank could issue L/C

Value creation through process innovations !

Advantages & Disadvantages to the

Importer

Page 8: Letters of Credit

Advantages Risk of payment relies upon the creditworthiness of

the Issuing bank & not on creditworthiness of the importer

If L/C is not issued as agreed, exporter is not obligated to ship against it.

Disadvantages Importers might be unable to open L/C due to the lack

of credit facilities with their bank Documents must be prepared and presented in strict

compliance with requirements stipulated in L/C & cannot modify it.

Value creation through process innovations !

Advantages & Disadvantages to the

Exporter

Page 9: Letters of Credit

Beneficiary name Credit amount Validity period for presentation of the document Beneficiary bank name Payment type availability Desired documents Notify address Merchandise description Confirmation order

Value creation through process innovations !

Key points for Buyer in L/C

Page 10: Letters of Credit

L/C date expired prior to its presentation Inconsistent description of goods Changes included in the invoice not authorized in

the credit Mismatch of amount mentioned in invoice and

draft Ports of loading and destination are wrongly

mentioned Key documents are unattached or have wrong

information Invoice or statement is not signed by appropriate

authority

Value creation through process innovations !

Common Defects in L/C

Page 11: Letters of Credit

L/C doesn’t ensure that the goods actually shipped are as ordered.

L/C doesn’t insulate buyers and sellers from other disagreements or complaints arising from their relationship.

Value creation through process innovations !

Limitations of L/C

Page 12: Letters of Credit

Get in touch

Genex Logistics(Genex LogiSolutions Pvt. Ltd.)

681, Sec 16B, Pocket B, Dwarka, New Delhi - 110075

 Tel: +91-11-28035020

Mobile: +91-9810404438 

Email: [email protected]: www.genexlogistics.in

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Value creation through process innovations !

For queries on L/C

Page 13: Letters of Credit

Thank You!!

Value creation through process innovations !