Import and Export Letter of Credit

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Since we now know the basic definition of a guarantee, an Letter of Credit (LC) is similar to guarantee but the major difference is the person who requests the Bank to issue an LC.

For Eg: a payment guarantee is requested by the supplier or contractor from the person who undertakes to pay him for his job and he visits the Bank to get a payment guarantee. But in an LC, if a person X intends to buy goods from Y who is a supplier, the buyer X visits the Bank and opens the LC in the name of the Y the seller as both the parties do not know each other and also do not want to suffer a loss. The buyer X will be satisfied that payment will be made by the Bank only if the required documents are provided by the seller and the seller will be satisfied that payment will be received by him if all the documentary conditions along with supply of goods are met.

LC is ideally requested by parties who do not know each other. LC is generally requested when importing some goods or exporting. Bank charges its commission which is a percentage of the LC amount plus courier and swift message charges as the documents are sent via courier whereas the actual LC is sent via a swift message transmitted between both Banks.

Once an LC is received by the supplier's Bank, they inform the supplier and request him to provide the required documents listed in the LC. The supplier ships the goods and provides all the required documents to his Bank to be forwarded to the issuing Bank. Once the documents are received by the issuing Bank, these are reviewed and discrepancies are brought to the notice of the suppliers Bank. If no discrepancies are found, the buyer is requested to make the payment and collect the documents so that goods can be taken into his possession from the port.

Payment will not be made by the Bank if documents do not match the requirements and payment will be made by the Bank if documents are as per the requirements mentioned in the LC. Physical verification of goods is not done by the Bank and if their is any discrepancy in the goods received and the documents provided, this has to be taken forward with the relevant authorities as Banks will not be a party to the dispute.