module 4 letter of credit types

8/12/2019 Module 4 Letter of Credit Types

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Presented by

Eldo G Zacharia KayyalathS3 MBA

Saintgits Institute of Management

For

Dr. Tommy J Eappan Tharayill

Professor, Saintgits Institute of

Management, Pathamuttom, Kerala


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In order to cater to the wide variety of

transactions and customers, different types of

letter of credit have evolved.

Revocable L/C

Irrevocable L/C

Revolving L/C

Transferable L/C

Back to Back L/C

Red Clause L/C Standby L/C


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Revocable L/C is issued by the issuing bank and

contains a provision that the bank may amend or

cancel the credit without the approval of thebeneficiary.

Provides least protection to the exporter


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Cannot be amended or cancelled without the

exporters prior approval

A confirmed Irrevocable L/C contains anextra protection. In addition to the issuing

banks commitment, a Confirming Bank adds

its own understanding to pay provided all

conditions are met.


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When the exporter is going to make shipments

on a continuing basis and a single L/C will

cover several shipments


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Transferable L/C permits the beneficiary to

transfer a part or whole of the credit in favor

of one or more secondary beneficiaries

This type of L/C is used by trader exporterswho act as middlemen between the importer

and manufacturers of the goods.

The trader intends to profit from the

difference between the original amount ofcredit and the amount transferred to

secondary beneficiaries.


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Here the beneficiary of the original L/C

requests a bank (usually the advising bank to

the original L/C) to open an irrevocable L/C

in favor of another party who may be theultimate manufacturer or supplier of the

goods.

The original L/C is a guarantee against the

second L/C


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A clause is printed in red ink on a normal L/C

authorizing the advising bank to make clean

advances to the exporter which are offset

against the export proceedings when thedocuments are finally presented.

In effect the importer makes unsecured loans

to the exporter in the latters currency.

This type of L/C is used when there exists aclose relationship between importer and

exporter.


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Standby L/C is actually a term covering a

wide variety of arrangements provides a

fallback guarantee to the supplier incase theprimary obligor fails to pay


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Applicant:The buyer or importer of goods

Issuing bank: Importers bank, who issues the L/C

Beneficiary:The party to whom the L/C is addressed.The Seller or supplier of goods.

Advising bank:Issuing banks branch or correspondentbank in the exporters country to whom the L/C issend for onward transmission to the beneficiary.

Confirming bank:The bank in beneficiarys country,

which guarantees the credit on the request of theissuing Bank.

Negotiating bank:The bank to whom the beneficiarypresents his documents for payment under L/C


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Bill of Lading: A Bill of Lading is considered themost important document involved in a shipment

of merchandise. An exporter receives a Bill ofLading when delivering the merchandise to theshipping company for transport to an importer.

Order Bill of Lading: An Order Bill of Lading is atitle document. Steamship companies issue one ormore original Order Bills of Lading per shipment,which allows an importer to claim merchandisewhen it arrives. An exporter normally endorses the

Bills of Lading "in blank," which means that theyare not endorsed to a specific person orinstitution. The party possessing any one of theoriginal Bills of Lading can take possession of thegoods.


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Airway Bill of Lading (Straight Bill of Lading):This instrument does not convey title. Airlinecompanies issue Straight Bills of Lading called

Airway Bills. Since an Airway Bill is issued onlyin non-negotiable form, an exporter consigns itto a specific person or institution. A copy ofthe Airway Bill accompanies a shipment, andan exporter is given the original to present

along with other required shipping documents.To take possession of the merchandise, a partyto which the merchandise is consigned needsto present proper identification. Therefore, if

the air shipment is consigned to a buyer, theseller might lose control of the merchandisebefore payment is made. To prevent this, anAirway Bill should be consigned to Zions Bank.


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Commercial Invoice: A Commercial Invoice is adocument that describes merchandise, as

stated in the Letter of Credit, and lists the

costs. An importer may agree to pay, inaddition to the cost of the merchandise,

charges involved in shipping the merchandise.

The description of the merchandise in the

Commercial Invoice and the description of themerchandise in the Letter of Credit must be

identical in every way.


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Insurance Policy: Issued by an underwritinginstitution, the Insurance Policy states that a

specified party will be reimbursed an amount

in the event merchandise is damaged ordestroyed. An Insurance Policy generally covers

accidental losses and covers voluntary losses

when a cargo must be sacrificed to save a ship.

For additional cost, losses caused by spoilage,war, civil disturbance, riots and other risks can

be included in the coverage. Because

commercial banks are not included in the

shipping business per se, questions regardingtypes of coverage should be referred to a

freight forwarder or a customs broker.


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THANK YOU

module 4 letter of credit types

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