Letter of Credits (Commercial Documentary Credits)
A letter of credit is a Bank undertaking of payment separate from the sales or other contracts on which it is based. It is a way of reducing the payment risks associated with the movement of goods.
Expressed more fully, it is a written undertaking by a bank given to the seller (beneficiary) at the request, and in accordance with the buyer’s (applicant) instructions to effect payment — that is by making a payment, or by accepting or negotiating bills of exchange (drafts) — up to a stated amount, against stipulated documents and within a prescribed time limit.
Types of Letters of Credit
A transferable letter of credit allows the beneficiary to act as a middleman and transfer his rights under a letter of credit to another party or parties who may be suppliers of the goods. To be transferable, a letter of credit must be so marked by the issuing bank which can only do so on the applicant’s specific instructions. The applicant should be aware that any second beneficiary, the probable supplier, is usually a party not likely known to the applicant.
A red clause letter of credit incorporates a clause, traditionally written in red, which authorizes the bank acting as the negotiating or paying bank to pay the beneficiary in advance of shipment. This enables the purchase and accumulation of goods from a number of different suppliers, and the arrangement of shipment in accordance with the letter of credit terms.
Although not recorded on a letter of credit, “back-to-back” is a term used in transactions involving two irrevocable letters of credit. Such transactions originate when a seller receives a letter of credit covering goods which must be obtained from a third party who in turn requires a letter of credit. The “second” issuing bank looks to the first issuing bank for reimbursement after paying under the second letter of credit.
Standby letters of credit may apply in general to transactions which are based on the concept of default by the applicant in performance of a contract or obligation. In the event of default, the beneficiary is permitted to draw under the letter of credit. Standby letters of credit may be used as a substitute for performance guarantees, or issued to guarantee loans granted by one firm to another, thereby securing payment to the creditor in the event the other party fails to repay its obligation on the due date. Even if the applicant claims to have performed, the bank issuing the letter of credit is obliged to make payment provided the beneficiary produces complying documents, usually a sight draft, and a written demand for payment
International trade procedure in which a bank in the importer’s country acts on behalf of an exporter for collecting and remitting payment for a shipment.
The exporter presents the shipping and collection documents to his or her bank (called the Remitting Bank) which sends them to the Bank in the importer’s country.
The importer’s bank (called the Collecting bank) hands over shipping and title documents (required for taking delivery of the shipment) to the importer in exchange for cash payment (in case of ‘documents against payment' instructions) or a firm commitment to pay on a fixed date (in case of ‘documents against acceptance' instructions).
This facility (pre shipment and post shipment) is available to exporters on the following:
This short term facility, generally granted for 90 days is available for settlement of both sight and usance documentary credits, Collections and open account payments on behalf of our customers. It provides the customer with the flexibility to manage his cash flow.
Remittances in Foreign currency
Remittances are made to beneficiaries in major currencies; Great Britain Pound Sterling (GBP), United States Dollar (USD), Euro (EUR), Swiss Franc (CHF), Australian Dollar (AUD) and South African Rand (ZAR), including also Bangladesh Takka(BDT) and Sri Lanka rupees(LKR)
We also effect INR Remittances thru MONEY 2 INDIA, without any charging any commission and charges to customer.