Letter of Credit: A Letter of Credit, simply defined, is a written instrument issued by a bank

at the request of its customer, the Importer (Buyer), whereby the bank promises to pay the
Exporter (Beneficiary) for goods or services, provided that the Exporter presents all
documents called for, exactly as stipulated in the Letter of Credit, and meet all other terms
and conditions set out in the Letter of Credit. A Letter of Credit is also commonly referred to
as a Documentary Credit.

Rights, Duties and Responsibilities of Parties Involved in a Letter of Credit:

Applicant: Applicant is the party who opens Letter of Credit. Normally, buyer of goods is
the Applicant who opens letter of credit. Letter of credit is opened as per his instruction and
necessary payment is arranged to open Letter of credit with his bank. The applicant arranges
to open letter of credit with his bank as per the terms and conditions of Purchase order and
business contract between buyer and seller. So Applicant is one of the major parties involved
in a Letter of credit.

Beneficiary: Beneficiary is one of the main parties under letter of credit. Beneficiary of
Letter of credit gets the benefit under Letter of credit. Beneficiary is the party under letter of
credit who receives amount under letter of credit. The LC is opened on Beneficiary partys
favor. Beneficiary party under letter of credit submits all required documents with is bank in
accordance with the terms and conditions under LC.

Issuing Bank: Issuing bank is the ultimate payer of the letter of credit. Even if other banks
do not pay to the beneficiary against a complying presentation, issuing bank must pay the
letter of credit amount. Provided that the stipulated documents are presented to the nominated
bank or to the issuing bank and that they constitute a complying presentation, the issuing
bank must honor if the credit is available by:

Sight payment, deferred payment or acceptance with the issuing bank;

Sight payment with a nominated bank and that nominated bank does not pay;
Deferred payment with a nominated bank and that nominated bank does not incur its
deferred payment undertaking or, having incurred its deferred payment undertaking,
does not pay at maturity;
Acceptance with a nominated bank and that nominated bank does not accept a draft
drawn on it or, having accepted a draft drawn on it, does not pay at maturity;
Negotiation with a nominated bank and that nominated bank does not negotiate.
Issuing banks responsibilities will be effective as soon as letter of credit issued. As a
result an issuing bank is irrevocably bound to honor a complying presentation as of
the time it issues the credit.

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Advising Bank: Advising bank is the bank that advises the credit at the request of the issuing
bank. An advising bank that is not a confirming bank advises the credit and any amendment
without any obligation to honor. Its duties and responsibilities are

A letter of credit can be advised to an exporter via an advising bank.

According to the letter of credit rules advising bank has no payment responsibility
against the exporter as long as the advising bank that is not a confirming bank. The
advising bank advises the letter of credit and any amendment without any undertaking
to honour or negotiate.

Advising bank has two main responsibilities against the beneficiary of the letter of
credit. First of all the advising bank must signify that it has satisfied itself as to the
apparent authenticity of the letter of credit or amendment. Secondly the advising bank
must ensure that the advice of the lc accurately reflects the terms and conditions of the
letter of credit or amendment received from the issuing bank.

Nominated Bank: Nominated bank is the bank with which the credit is available or any bank
in the case of a credit available with any bank. Its duties and responsibilities are mainly two
categorized

Payment Responsibility: Provided that the stipulated documents are presented to the
nominated bank and that they constitute a complying presentation, the nominated
bank should honor if the credit is available by sight payment, deferred payment or
acceptance with a nominated bank. Alternatively the nominated bank can negotiate
the complying presentation if letter of credit is available by negotiation with the
nominated bank.
Acceptance of Presentation Responsibility: If a letter of credit is available with a
nominated bank, then the authorized nominated bank should accept the presentation
of the beneficiary. Once again please kindly keep in mind that the acceptance of
presentation does not give any payment obligation to the nominated bank.

Confirming Bank: Confirming bank is the bank that adds its confirmation to a credit upon
the issuing bank's authorization or request. Confirming bank may or may not add its
confirmation to a letter of credit. This decision is up to confirming bank only. However, once
it adds its confirmation to the credit confirming is irrevocably bound to honor or negotiate as
of the time it adds its confirmation to the credit. Even if the issuing bank fails to honor,
confirming bank must pay to the beneficiary. According to the letter of credit rules if the
stipulated documents are presented to the confirming bank or to any other nominated bank
and that they constitute a complying presentation, the confirming bank must:

Honour, if the credit is available by sight payment, deferred payment or acceptance

with the confirming bank

Honour, if the credit is available by sight payment with another nominated bank and
that nominated bank does not pay

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Honour, if the credit is available by negotiation with another nominated bank and that
nominated bank does not negotiate.

Negotiate, without recourse, if the credit is available by negotiation with the

confirming bank.

Reimbursing Bank: Reimbursing Bank shall mean the bank instructed and/or authorized to
provide reimbursement pursuant to a reimbursement authorization issued by the issuing bank.
Its duties and responsibilities are

Reimbursement authorization" means an instruction or authorization, independent

of the credit, issued by an issuing bank to a reimbursing bank to reimburse a claiming
bank or, if so requested by the issuing bank, to accept and pay a time draft drawn on
the reimbursing bank.

"Reimbursement undertaking" means a separate irrevocable undertaking of the

reimbursing bank, issued upon the authorization or request of the issuing bank, to the
claiming bank named in the reimbursement authorization, to honour that bank's
reimbursement claim, provided the terms and conditions of the reimbursement
undertaking have been complied with.

"Reimbursement claim" means a request for reimbursement from the claiming bank
to the reimbursing bank.

Second Beneficiary: Second beneficiary who represent the first beneficiary or original
beneficiary in their absence, where in the credits belongs to original beneficiary is
transferable as per terms.

I have explained above eight main parties involved in Letter of Credit. However, some of the
parties in letter of credit mentioned above may act as functions of one or more parties under
Letter of Credit.

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Due to frequent usage within the international collaboration, the names of Letter of Credit
types are given below:
1. Irrevocable LC. This LC cannot be cancelled or modified without consent of the
beneficiary (Seller). This LC reflects absolute liability of the Bank (issuer) to the other party.
2. Revocable LC. This LC type can be cancelled or modified by the Bank (issuer) at the
customer's instructions without prior agreement of the beneficiary (Seller). The Bank will not
have any liabilities to the beneficiary after revocation of the LC.
3. Stand-by LC. This LC is closer to the bank guarantee and gives more flexible
collaboration opportunity to Seller and Buyer. The Bank will honour the LC when the Buyer
fails to fulfill payment liabilities to Seller.
4. Confirmed LC. In addition to the Bank guarantee of the LC issuer, this LC type is
confirmed by the Seller's bank or any other bank. Irrespective to the payment by the Bank
issuing the LC (issuer), the Bank confirming the LC is liable for performance of obligations.
5. Unconfirmed LC. Only the Bank issuing the LC will be liable for payment of this LC.
6. Transferable LC. This LC enables the Seller to assign part of the letter of credit to other
party (ies). This LC is especially beneficial in those cases when the Seller is not a sole
manufacturer of the goods and purchases some parts from other parties, as it eliminates the
necessity of opening several LC's for other parties.
7. Back-to-Back LC. This LC type considers issuing the second LC on the basis of the first
letter of credit. LC is opened in favor of intermediary as per the Buyer's instructions and on
the basis of this LC and instructions of the intermediary a new LC is opened in favor of Seller
of the goods.
8. Payment at Sight LC. According to this LC, payment is made to the seller immediately
(maximum within 7 days) after the required documents have been submitted.
9. Deferred Payment LC. According to this LC the payment to the seller is not made when
the documents are submitted, but instead at a later period defined in the letter of credit. In
most cases the payment in favor of Seller under this LC is made upon receipt of goods by the
Buyer.
10. Red Clause LC. The seller can request an advance for an agreed amount of the LC
before shipment of goods and submittal of required documents. This red clause is so termed
because it is usually printed in red on the document to draw attention to "advance payment"
term of the credit.

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