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How to issue a Letter of Credit
Letter of Credit is quite literally a letter that extends a line of credit to an individual or business entity. A bank on behalf of one of its customers writes it. A letter of credit is a banking mechanism that allows importers to offer secure terms to exporters. Here discuss about the procedure need to follow to open a Letter of Credit.
Considered Factors of the L/C Applicant:
- Account holder of the bank: first of all, L/C applicant must be a client of the bank. If a new client comes in for opening L/C, he/she has to open an account with Bank first.
- Trustworthiness: this is the vital issue while considering about opening the L/C. the past experience of dealings with that person is considered. For a new applicant, his/her previous dealings with other banks are considered.
- Volume of business: the volume of business is also a major factor to be considered.
- Post-import retirement: Post-import retirement is another factor that will have to be considered for opening L/C.
- Detailed analysis of financial condition: Detailed analysis of financial condition of the applicant is required for the process, especially for a new applicant.
- And finally the personal relationship of the applicant with the bank or its high officials plays a vital role in opening L/C.
Documents required while applying for L/C:
In credit operation, all parties deal with documents, and not with goods, services and/or other performance to which documents may relate. Thus documentation has foremost important in all types of L/C processing and operations. The following documents are required for opening L/C with Bank for a new applicant.
- Trade License (up to date)
- Import Registration Certificate (IRC) (up to date)
- Tax Identification Number (TIN) (up to date)
- VAT Registration Certificate (up to date)
- Membership Certificate of a bona fide trade body (up to date)
- Chamber Membership Certificate
- L/C Application (in letterhead pad of the client)
- LCA (L/C Application) form-duly filled in and signed by the importer
- IMP Form- duly filled in and signed by the importer
- Charge documents
- Supplier’s Credit Report
- Applicant’s Credit Report
- Other necessary papers depending on the nature of import.
Operations of Documentary Letter of Credit:
The following 05(five) major steps are involved in the operations of a documentary letter of credit.
- Amendment (if necessary)
- Presentation and
L/C Issuing Process:
The generalized process of L/C issuing in Bank is explained below. For a business customer approached for the first time, the process will start with opening an account with the bank.
Step 1: Application in company’s letterhead pad
First of all, the person shall have to submit an application written or printed in the company’s letterhead pad. In the application he/she will have to mention the name of the products to be imported, margin and so on. The applicant shall have to apply for the required forms of the bank.
Step 2: Discussion between Bank and the party
After receiving the application form, the Bank pays attention to the issues mentioned below;
- The products that are going to be imported are considered. Because there are restrictions by the government on some products.
- The quoted rates are specially analyzed as there also some restrictions by the government.
Step 3: Collecting forms and depositing those with necessary documents:
In this step, the applicant collects the L/C application form, LCA Form and IMP Form from the bank. These forms are to be filled up by the client. The forms and all other necessary documents are then deposited at the desk of the dealing officer.
Step 4: Checking Documents
All the documents are checked out by the dealing officer. He/she checks specially the quoted rates, the terms and conditions of the indent or pro forma invoice and the validity of the documents. Generally the person from whom the forms are collected is engaged in checking out the documents.
Step 5: Putting L/C No.
After checking the documents and L/C No. is given. Generally the officer who checks the documents puts the L/C No.
tep 6: Preparing offering sheet
The offering sheet is prepared by the dealing officer. Usually the officer who checks the documents prepares the offering sheet.
Step 7: Singing offering sheet
The offering sheet is then signed by the officer having the authority to open the L/C of the specified amount. If it is within the maximum limit of the amount (for which the L/C is applied) of the SAVP or branch manager, he can sign it. But if it is beyond his/her limit proposal must be sent to the head office, either for case-to-case sanction or for credit limit. Generally, in Bank , SAVP or branch managers forward the documents to the head office to approve L/C authorize. are empowered to open an L/C without communicating with the head office, if the L/C amount is within his / her limit.
Step 8: Typing the L/C
After the approval of opening L/C is given, the L/C is typed in a structured format.
Step 9: Checking the L/C
A final check is done to find out any discrepancies after the typing is completed. This is done by the dealing officer who is generally in charge of the whole process.
Step 10: Crediting the account of the customer
On the basis of credit arrangement with the bank of r import financing, the customer’s account is affected with certain credit.
Step 11: Dispatching L/C
At the final stage, the L/C is dispatched through postage mail or telex or SWIFT or so forth.
Although this is the generalized process for issuing L/C, for the speed of the process sometimes the typing and checking of documents are done before the offering sheet is signed. Then after signing the L/C it is dispatched.
Advising a letter of Credit
Advising through a bank is prior of apparent of the credit to the seller. The process of advising a credit consists of forwarding the original credit to the beneficiary to whom it is addressed. Before forwarding the advising bank has to verify the signature(s) of the officer(s) of the opening bank in case of mail L/C & in case of should check BKE arrangement for authenticity of the SWIFT L/C and ensure that the terms and conditions of the credit are not in violation of the issuing bank does not undertake any liability.
Amendments to Letter of Credit
An amendment to L/C means to make a change to the terms of the credit. After opening a L/C either beneficiary or applicant sometimes observes that the terms and conditions laid down in the credit are not complete to serve their purpose. They need some changes or alteration to the credit to make it workable. This is done by the way of issuance of amendment to the L/C.
At the request of the applicant, as the issuing bank Bank only can issue amendment to the L/C. there can be more than one amendment to a credit. All the amendments form an integral part of the original credit. L/C amendments are to be communicated by authenticated telex, SWIFT or mail. If there is more than one amendment to a credit, all the amendments must bear the consecutive serial number so that the missing of any amendment can be identified by the advising bank or the beneficiary.
If the L/C is an irrevocable one, the amendment cannot be done without the consent of both the partied; i.e. the beneficiary and the applicant. Bank as the issuing bank can make amendments but if the beneficiary does not accept the amendment, it will not be effective. If the L/C is revocable, the applicant can make any amendment to the L/C at any time he desires and such amendment will be effective if the credit is not executed.
Presentation of Documents under L/C
The seller being satisfied with the terms and conditions of the credit proceeds to dispatch the required goods to the buyer and after that, has to present the documents evidencing dispatching of goods to the negotiating bank on or before the stipulated expiry date of the credit. If the documents are found in order, the bank will pay, accepts or negotiate to the issuing bank, either
= effect payment or
= reimburses in the pre-agreed manner.
Settlement of L/C
Settlement means fulfilling the commitment of issuing bank is regard to effect payment subject to satisfying the credit terms fully.
1.Settlement of Payment
2.Settlement of Acceptance
3.Settlement of Negotiation
1.Settlement of Payment
Here the seller presents the doc to the paying bank. In compliance presentation paying bank makes payment to the beneficiary and in case this bank is other than the issuing bank, then sends the doc to the issuing bank. If the issuing bank is satisfied with the requirements, payment is obtained by the paying bank from the issuing bank.
2.Settlement of Acceptance
Under this arrangement, seller submits the documents evidencing the shipment to the accepting bank accompanied by the draft drawn on the bank (where credit is available) at the specified tenor. After being satisfied with the documents, the bank accepts the docs and draft if it is a bank other than the issuing bank, then sends the docs to the issuing bank stating that it has accepted the draft and at maturity the reimbursement will be obtained in the pre-agreed manner.
3.Settlement of Negotiation
This settlement procedure starts with the submission of docs by the seller to the negotiating bank accompanied by the draft drawn on the drawee at sight or at a tenor, as specified in the credit. After scrutinizing that the docs meet the credit requirements, the bank may negotiate the draft. This bank, if other than the issuing bank, then sends the docs and the draft to the issuing bank. As usual, reimbursement will be obtained in the pre-agreed manner.