Letter of credit is an instrument which is used for making the payments for the imports of goods. It is issued by the buyers bank in favor of the seller. Letter of credit is also known as documentary credit.
Definition
"A Letter of credit is a commitment on the part of the buyer's bank to pay or accept the draft drawn upon it provided such draft do not exceed a specified amount."
OR
"A letter of credit is an undertaking by a bank to meet the draft drawn pursuant to it beneficiary of the credit in accordance with the conditions laid down there in."
Parties To Letter Of Credit
1. Importer And Exporter
He is a person who purchases the goods from the other country or at whose request the letter of credit is opened and the exporter is a person who sells the goods or in whose favour the letter of credit is opened.
2. Opening Bank And Paying Bank
The Bank which issue credit letter is called the opening bank and the bank which makes payment to the exporter after receiving the letter of credit is called the paying bank.
Opening Of Letter Of Credit
1. Sales Contract
First of all there is a contract between importer and exporter for the purchase and sale of goods. Suppose a Pakistani importer has got an import license and an exporter in London agrees to sell him the required goods. So they will do an agreement.
2. Documents Preparation
After this documents of the contract between importer and exporter are prepared. In these documents all the particulars about the goods are written such as prices, quantity and quality of goods and mode of making the payments.
3. Contract With Bank
After this importer contracts with bank for the issuance of letter of credit and for this purpose submits the documents.
4. Application Form
If the bank is satisfied that the documents are correct then the bank asks the importer to submit an application form with necessary details discussed between importer and exporter like shipment, insurance and total value of goods. This application form must be signed by the importer.
5. Undertaking Form The Importer
The importer's bank obtains an undertaking from the application that he will purchase the documents at the mark up price prescribed by the state bank.
6. Margin Requirements
The state bank of Pakistan decides the percentage of amount to be paid to the opening bank by the importer, this amount is called the margin requirement. The margin requirement vary from the 10% to 25% of the total amount for which the L.C is opened.
7. Issuance Of Letter Of Credit
Bank issues the letter after the completion of all formalities. The letter of credit is written with the help of the application and it contains almost all the details and conditions mentioned in the application. The bank prepare the four copies of L.C and distributed among the four parties.
8. Dispatch Of Letter Of Credit
After the completion of copies of letter of credit, the bank sends the duplicate copy and original copy to the exporter's bank and request for sending the original copy to the exporters and to retain the duplicate copy in his own file. Suppose the Pakistani importer got the L.C in the favour of exporter in London. The importer's bank will sends the L.C to the exporter through his bank in London,
9. Information To The Seller
The exporter's bank sends the original copy of L.C to the exporter. Then the exporter makes the arrangement for the shipment of goods to the importer. After sending the goods he got the receipt from the shipping company.
10. Payments And Issuance of Documents
If the exporter's bank is satisfied with documents submitted by the exporter then he makes the payment to exporter. The importer's bank issues documents to the importer so that importer can receive goods.
No comments:
Post a Comment