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    How To Open Letter of Credit

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    ✬ SHANZA MALIK ✬
    PEL wants to purchase Rs. 500,000 worth of goods from Jing Ji. To facilitate the transaction, PEL requests a letter of credit from its bank, HBL, naming Jing Ji as the beneficiary. HBL issues the letter of credit, which it sends to Jing Ji's bank, Bank of China. This notifies Jing Ji that payment is available upon shipping the goods. Upon receiving the required documents from Jing Ji, HBL will transfer the funds to Bank of China, which deposits it in Jing Ji's account. The letter of credit provides assurance of payment for Jing Ji to ship the goods to PEL.

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    How To Open Letter of Credit

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    ✬ SHANZA MALIK ✬
    186 views2 pages
    PEL wants to purchase Rs. 500,000 worth of goods from Jing Ji. To facilitate the transaction, PEL requests a letter of credit from its bank, HBL, naming Jing Ji as the beneficiary. HBL issues the letter of credit, which it sends to Jing Ji's bank, Bank of China. This notifies Jing Ji that payment is available upon shipping the goods. Upon receiving the required documents from Jing Ji, HBL will transfer the funds to Bank of China, which deposits it in Jing Ji's account. The letter of credit provides assurance of payment for Jing Ji to ship the goods to PEL.

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    How to Open Letter of Credit

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    PEL wants to purchase Rs. 500,000 worth of goods from Jing Ji. To facilitate the transaction, PEL requests a letter of credit from its bank, HBL, naming Jing Ji as the beneficiary. HBL issues the letter of credit, which it sends to Jing Ji's bank, Bank of China. This notifies Jing Ji that payment is available upon shipping the goods. Upon receiving the required documents from Jing Ji, HBL will transfer the funds to Bank of China, which deposits it in Jing Ji's account. The letter of credit provides assurance of payment for Jing Ji to ship the goods to PEL.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    186 views2 pages

    How To Open Letter of Credit

    Uploaded by

    ✬ SHANZA MALIK ✬
    PEL wants to purchase Rs. 500,000 worth of goods from Jing Ji. To facilitate the transaction, PEL requests a letter of credit from its bank, HBL, naming Jing Ji as the beneficiary. HBL issues the letter of credit, which it sends to Jing Ji's bank, Bank of China. This notifies Jing Ji that payment is available upon shipping the goods. Upon receiving the required documents from Jing Ji, HBL will transfer the funds to Bank of China, which deposits it in Jing Ji's account. The letter of credit provides assurance of payment for Jing Ji to ship the goods to PEL.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
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    How To Open a letter of credit

    A business called the PEL from time to time imports goods from a business called Jing Ji,
    which banks with the Bank of China. PEL holds an account at the HBL. PEL wants to buy
    Rs.500,000 worth of merchandise from Jing Ji, who agrees to sell the goods and give PEL 60
    days to pay for them, on the condition that they are provided with a 90-day letter of credit for the
    full amount. The steps to get the letter of credit would be as follows:

     PEL goes to The HBL and requests a Rs. 500,000 letter of credit, with Jing Ji as the
    beneficiary.
     The HBL can issue an LC either on approval of a standard loan underwriting process or
    by PEL funding it directly with a deposit of Rs. 500,000 plus fees which are typically
    between 1% and 8% of the face value of the LC.
     The HBL sends a copy of the LC to the Bank of China, which notifies Jing Ji that
    payment, is available and they can ship the merchandise PEL has ordered with the full
    assurance of payment to them.
     On presentation of the stipulated documents in the letter of credit and compliance with
    the terms and conditions of the letter of credit, the HBL transfers the Rs. 500,000 to the
    Bank of China which then credits the account of Jing Ji for that amount.
     Note that banks deal only with documents required in the letter of credit and not the
    underlying transaction.
     Many exporters have mistakenly assumed that the payment is guaranteed after receiving
    the LC. The issuing bank is obligated to pay under the letter of credit only when the
    stipulated documents are presented and the terms and conditions of the letter of credit
    have been met.

    Some of the Documents Called for under a LC


     Financial Documents
    Bill of exchange
     Commercial Documents
    Invoice
     Shipping Documents
    Transport Document, Insurance Certificate
     Official Documents
    License
     Transport Documents
    Bill of Lading, Delivery challan etc
    Parties to a Letter of Credit
    The parties to a letter of credit transaction are as follows:
    a. Issuing bank, The bank that issues the letter of credit.
    b. Applicant i.e., the customer on whose behalf the letter of credit is issued. In relation to
    export – import transaction, the customer is the importer.
    c. Beneficiary i.e., the third party to whom the payment shall be made. In relation to
    export- import transaction, the beneficiary is the exporter.
    d. Negotiating bank i.e., the bank authorized to negotiate the documents stipulated in the
    letter of credit.

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