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seller.
No doubt that the letter is addressed to the seller, but it is not mailed to the seller
directly, but through the bank abroad, and buyers bank request the sellers bank to
hand over this letter to the seller.
Why not to dispatch to seller directly.
This letter specifically guarantee/undertake to make the payment to the seller
immediately after shipment or on future fixed date if agreement is to pay on usance
basis.
Now seller is confident that he would surely get the payment for the goods he would
be selling some one abroad, and with whom he has no other relations and even not
knowing buyer otherwise.
Seller would dispatch the goods, would prepare set(s) of documents mentioned in
letter of credit and would submit to the bank abroad. That bank after thorough scrutiny
would debit the account of buyers bank (if value of letter of credit is stated in the
currency of sellers bank) or if the currency is alien currency to that bank than that
sellers bank would claim the amount from other bank on behalf of buyers bank and it
would be paid, as in this a copy of this letter of credit is also mailed to that third bank;
authorizing that bank to honour the claim of sellers bank.
(THIS POINT IS TO BE ELABORATED MORE IN SESSION)
Sellers bank after making payment to the seller would dispatch documents to the bank
of buyer.
At this point one end of the guarantee is settled as the seller got his value for the goods
he sold.
Now the goods are coming to the country of buyer; through Air Craft or Ship and
simultaneously the documents are also traveling from the country of seller to the country
of buyer.
The goods have been shipped in favour of buyers bank and only that bank is entitled
to get the goods released from the carrier or by a nominee of buyers bank. Reason
being the buyers bank has made the payment to the seller and this value is yet to be
received from the buyer.
On receipt of documents the buyers bank would intimate the buyer and would
request buyer to come and collect documents; after making payment in local currency.
As discussed in class that in Pakistan when goods are imported our importer makes
payment in Local currency, where as the buyers bank account was debited in foreign
currency. It indicates that the bank has made payment on behalf of buyer and this
payment would be termed as Sale of Foreign Currency to the buyer.
Later on buyer would come and would authorize its bank to debit his account and
hand over the documents, and to remind you these are the documents on the basis of
those the seller received the value of his goods, and now when the these are being
handed over to the buyer; bank would get its money.
As already stated that Goods were shipped in the favour of buyers bank and only that
bank or its nominee is entitled to get the goods released. So after receiving money from
buyer, the buyers bank would authorize the buyer to get the goods cleared and take its
delivery. This process of transferring the title of goods is done through endorsement.
Now the final end of the guarantee is also settled as the buyer would get the goods
addressed to the beneficiary, having an undertaking that he would get the value of
goods shipped by him, but strictly in terms of letter of Credit.
OTHER RELATED TERMINOLOGIES
FOB Free on board
C&F Cost and Freight
CIF Cost Insurance and Freight