Deffered Payment Lc
LC in which payment is made after agreed time period in installment basis or in a lumpsump as in usance lc is known as deferred payment lc. this type of lc is normally used where a payment is required to make by lc for availing (buying) services rather than goods itself. a deffered payment lc is also used where in a portion of the value of goods is paid, and rest is paid after verification of goods by buyer or after assessing the value of goods taking into account the quality, shortages etc.
installment LC
Installment Lc calls for shipment of goods in specified qunatit on stated dates or periods. since this credit is for shipment in specifically stated installments. it is called installment credit. an installment credit is similar to any simple lc with partial shipment. however a simple lc with partial shipments doesn't specify quantities and dates of such partial shipments.
Sight lc
The lc against which payment is made at first sight of credit confirmed import documents asked in the credit is called the sight lc. beneficiary may or may not be called upon to draw a draft under sight lc
Friday, April 29, 2011
Transferable LC / Reimbursement LC
Transferable LC
a transferable lc it the one that can be transferred partially or fully by the original beneficiary ( known as first beneficiary ) to one or multiple other parties ( known as second beneficiary ). it is normally used when the first beneficiary does not supply the merchandise himself, but is a middle man and thus wishes to transfer part or all of his rights and obligations to the actual supplier as secondary beneficiary. a transferrable credit is also used when the first beneficiary is not able to export the entire order, thus transfers rest to others. but passing on of the credit to the third beneficiary by the second beneficiary is prohibited. a credit is transferable only when a credit specifically states as transferable.
Reimbursement LC
Any standard lc having special payment conditions that, the negotiating bank is authorized to claim and get the payment against the lc directly from the opening bank's nominated agency bank after presentation of credit confirmed documents is known as reimbursement LC or direct reimbursement Lc. In most of the cases payment of the import, thus is already effected prior to receipt of the documents and consignment by the importer.
a transferable lc it the one that can be transferred partially or fully by the original beneficiary ( known as first beneficiary ) to one or multiple other parties ( known as second beneficiary ). it is normally used when the first beneficiary does not supply the merchandise himself, but is a middle man and thus wishes to transfer part or all of his rights and obligations to the actual supplier as secondary beneficiary. a transferrable credit is also used when the first beneficiary is not able to export the entire order, thus transfers rest to others. but passing on of the credit to the third beneficiary by the second beneficiary is prohibited. a credit is transferable only when a credit specifically states as transferable.
Reimbursement LC
Any standard lc having special payment conditions that, the negotiating bank is authorized to claim and get the payment against the lc directly from the opening bank's nominated agency bank after presentation of credit confirmed documents is known as reimbursement LC or direct reimbursement Lc. In most of the cases payment of the import, thus is already effected prior to receipt of the documents and consignment by the importer.
Needs of Letter of credit
The goods manufactured in one country can be sold to the market of another country either for consumption or for resale purpose. This purchase sale relationship between two or more countries is the basis feature of foreign trade.
The need for a lc generally arises whenever any two parties ( importer and exporter ) get into a contract to buy and sell something. in any international trading activity as the parties to it reside in two different places. ofter in two different countries, the issue of confidence or credit worthiness of both the parties arises. a party might be big or prestigious even then the other party always will have to think from a worst case scenario. i,e the other party might default and might renege in its obligation. it is to tide over such things that the instrument of lc is invoked.
with the prespective of buyer the need of lc is
Desired quantity and quality of the goods in time.
a managed cash flow, with the bank finance.
an assuring third party.
convenient payment channel
protection against regulatory errors.
with the prespective of seller the need of lc is
timely payments
an assuring third party.
payment to be received on own locations
The need for a lc generally arises whenever any two parties ( importer and exporter ) get into a contract to buy and sell something. in any international trading activity as the parties to it reside in two different places. ofter in two different countries, the issue of confidence or credit worthiness of both the parties arises. a party might be big or prestigious even then the other party always will have to think from a worst case scenario. i,e the other party might default and might renege in its obligation. it is to tide over such things that the instrument of lc is invoked.
with the prespective of buyer the need of lc is
Desired quantity and quality of the goods in time.
a managed cash flow, with the bank finance.
an assuring third party.
convenient payment channel
protection against regulatory errors.
with the prespective of seller the need of lc is
timely payments
an assuring third party.
payment to be received on own locations
BACK TO BACK LC
A back to back lc is also called as countervailing credit. the beneficiary of an irrevocable export lc may have to purchase goods from another party to enable him to execute the export. he may require necessary finance to purchase the relative goods for that purpose he may approach his bank by exhibiting and lodging the said export lc to establish another import lc in favour of another party to import raw materials required to execute the export. such an import lc is known as back to back lc as it has the backing of export lc received in favour of the exporter. the payment of back to back lc is made only after the realization of proceeds of the export lc in full amount which is incorporated as an additional conditions in such back to back lc . these types of lc are quite popular in Nepalese garment exporters who requires to import fabrics from back to back import lc to execute their export order of ready made garments.
Red Clause LC
Also known as anticipatory Letter of credit a red clause LC allows the beneficiary to avail finances in advance to execute the required order in LC. Normally, payment against the LC to the beneficiary is effected on post shipment stage. I.e against the shipping documents. In some cases it may be possible for the exporter to enter into an arrangement with its importer to provide the former with pre-shipment finance, for the procurement of raw materials, processing and packing the goods. by establishing a red clause LC.such a letter of credit provides for either an immediate payment to the beneficiary of full or part amount of the credit or payment to the beneficiary of part amounts form time to time as per the terms indicated in the credits against delivery of specified documents.these payments are made in-anticipation of the exporter shipping the goods and submitting the relatives documents under the credit at a later date.
revolving lc
This LC allows to make the shipment of the goods in prescribed times and value as mentioned in the lc on revolving basis and payment is made accordingly. after drawing is made the credit reverts to its original amount for re use by beneficiary without requiring specific amendment to the credit. there are two types of revolving credit. in the first type of revolving credit credit gets reinstated immediately after a drawing is made. for example, if a credit is opended for Rs 100000. and beneficiary draws an instruments for Rs. 100000. immediately after the drawing the credit, reverts to its original value of Rs 100000. allowing beneficiary to draw again and so on. in the second type of revolving credit the credit reverts to original amount only after it is confirmed by the issuing bank which normally occurs after the documents reach the issuing bank.
LC
Letter of credit is a conditional bank undertaking of payments. It is a written undertaking by a bank ( issuing bank ) given to the seller ( beneficiary ) at the request, and on the instruction of the buyer ( applicant ) to pay at sight or at a determinable future date up to a stated sum of money, within a prescribed time limit and against stipulated documents or other conditions. The issuing bank is putting out its credit and good name for the sake of the buyer.
Letter of credit are commanly used to reduce credit risk to sellers in both domestic and international sales arrangements. by having a bank issue a letter of credit, in essence one is substituting the bank's credit worthiness for that of the customer. Almost all foreign trade in Nepal is carried out through Letter of Credit but other few methods such as Dcoumentary Collection, advance payment, cash against documents etc are also popular in foreign trade.
Letter of credit are commanly used to reduce credit risk to sellers in both domestic and international sales arrangements. by having a bank issue a letter of credit, in essence one is substituting the bank's credit worthiness for that of the customer. Almost all foreign trade in Nepal is carried out through Letter of Credit but other few methods such as Dcoumentary Collection, advance payment, cash against documents etc are also popular in foreign trade.
Revolving LC
This LC allows to make the shipment of the goods in prescribed times and value as mentioned in the lc on revolving basis and payment is made accordingly. after drawing is made the credit reverts to its original amount for re use by beneficiary without requiring specific amendment to the credit. there are two types of revolving credit. in the first type of revolving credit credit gets reinstated immediately after a drawing is made. for example, if a credit is opended for rs. 100000. and beneficiary draws an instruments for rs. 100000. immediately after the drawing the credit, reverts to its original value of rs 100000. allowing beneficiary to draw again and so on. in the second type of revolving credit the credit reverts to original amount only after it is confirmed by the issuing bank which normally occurs after the documents reach the issuing bank.
Stand By LC
A stand by LC is not an ordinary letter of credit but it is a sort of standby or back up credit.These credit are generally used as a substitute for performance guarantee or for securing loans. A drawing under a stand by credit is made only when the beneficiary requires claiming the sum for the non performance of the job or as stipulated in the credit or contract between the applicant and beneficiary. The documents generally called for under such credits are simple statement of claim or proof of delivery of goods or certificates of non performance. This type of letter of credit is opended mostly by banks in countries where by law they are precluded from issuing guarantees and is such cases this type of credit issued as substitute for performance or other financial guarantees. Even though standby credit is mere substitute for guarantee, it has been developed as an all purpose financial support instrument. No transport document is demanded under this credit.
Confirmed / Unconfirmed LC
When the Letter of credit is guaranteed by adding payment confirmation by the advising bank or any third bank ( Confirming Bank ) on behalf of the opening bank, it is termed as a confirmed LC otherwise it is an unconfirmed LC. The confirming bank also becomes a party to the contract of LC after confirming it. Generally, the confirmation to a credit is desired by beneficiary from a bank known to him preferably the one located in his country so that his risk becomes localized and he can deal easily with a local bank rather than dealing with a bank abroad which has issued the LC. A confirmed LC is preferred when the beneficiary is not able to ensure payment surety from the issuing bank and or have less faith on it. confirmed LC is costly since it includes the confirmation charge from the confirming bank. The LC is confirmed by another bank only when it is advised to do so by the issuing bank. Confirmation can be added only to irrevocable and not to the revocable credits.
Revocable / Irrevocable LC
LC, which can be cancelled or amended by the applicant at any time within the validity without prior consent of the beneficiary, is called Revocable LC, In normal course any amendment to or cancellation of letter of credit is done only with the consent of the parties of letter of credits i.e issuing bank, applicant and beneficiary. However under a revocable Letter of credit the applicant or issuing bank can amend or cancel the same without the consent of other parties or notice because the issuing bank is reserved with the right to revoke the same without notice to other parties. revocable letter of credit are very rarely used.a re-vocabel LC must indicate so in the letter of credit itself. in absence of which LC will be deemed as irrevocable as per UCPDC 500.
LC which can not be cancelled or amended within the validity without prior consent of the parties involved in Lc. especially beneficiary is called irrevocable LC. At Lc that does not specifically indicate as revocable is deemed as irrevocable LC.
LC which can not be cancelled or amended within the validity without prior consent of the parties involved in Lc. especially beneficiary is called irrevocable LC. At Lc that does not specifically indicate as revocable is deemed as irrevocable LC.
Letter of credit ( LC)
Letter of Credit
Letter of credit is a conditional bank undertaking of payments. It is a written undertaking by a bank ( issuing bank ) given to the seller ( beneficiary ) at the request, and on the instruction of the buyer ( applicant ) to pay at sight or at a determinable future date up to a stated sum of money, within a prescribed time limit and against stipulated documents or other conditions. The issuing bank is putting out its credit and good name for the sake of the buyer.
Letter of credit are commanly used to reduce credit risk to sellers in both domestic and international sales arrangements. by having a bank issue a letter of credit, in essence one is substituting the bank's credit worthiness for that of the customer. Almost all foreign trade in Nepal is carried out through Letter of Credit but other few methods such as Documentary Collection, advance payment, cash against documents etc are also popular in foreign trade.
Letter of credit is a conditional bank undertaking of payments. It is a written undertaking by a bank ( issuing bank ) given to the seller ( beneficiary ) at the request, and on the instruction of the buyer ( applicant ) to pay at sight or at a determinable future date up to a stated sum of money, within a prescribed time limit and against stipulated documents or other conditions. The issuing bank is putting out its credit and good name for the sake of the buyer.
Letter of credit are commanly used to reduce credit risk to sellers in both domestic and international sales arrangements. by having a bank issue a letter of credit, in essence one is substituting the bank's credit worthiness for that of the customer. Almost all foreign trade in Nepal is carried out through Letter of Credit but other few methods such as Documentary Collection, advance payment, cash against documents etc are also popular in foreign trade.
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