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    Letter of Credit

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    yukta7733
    LETTER OF CREDIT (2)

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd

    Letter of Credit

    Uploaded by

    yukta7733
    2 views9 pages
    LETTER OF CREDIT (2)

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    LETTER OF CREDIT (2)

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    © © All Rights Reserved

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    LETTER OF CREDIT (2)

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    2 views9 pages

    Letter of Credit

    Uploaded by

    yukta7733
    LETTER OF CREDIT (2)

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 9

    ASSESMENT OF

    LETTER OF CREDIT
    Definition:
    A Letter of Credit (LC) also known as a Documentary Credit
    is a conditional payment mechanism used in International
    Trade to provide a financial guarantee from a credit worthy
    bank to an exporter of goods.

    It is used extensively as many of the times, the seller have


    very little or no information about the buyer’s financial
    standing.

    LC issuing bank assumes the credit risk of the buyer


    paying the seller for goods.
    Different types of LC
    Inland L/C
    An L/C where all the parties to an L/C are located within
    country

    Irrevocable LC
    Cannot be altered or canceled without consent from all
    involved parties.
    Provides greater security, commonly used in
    international trade.

    Foreign L/C
    An L/C where either the opener or the beneficiary is
    located outside the country if issue and arising out of
    export or import of goods/services out of/into the
    country of issue.
    Confirmed LC
    Another bank (usually in the seller’s country)
    guarantees payment if the issuing bank fails to pay.
    Suitable for high-risk transactions or when the issuing
    bank's credibility is uncertain.

    Unconfirmed LC
    Only the issuing bank is responsible for payment,
    without a secondary guarantee.
    Used when the seller trusts the issuing bank’s
    credibility.

    Transferable LC
    Allows the seller to transfer part or all of the credit to
    another party.
    Useful for intermediaries in multi-party transactions.

    Back-to-Back LC
    Two LCs are issued: one from the buyer to the
    intermediary and another from the intermediary to the
    supplier.
    Useful in complex trade deals with multiple parties.
    Red Clause LC
    Allows the seller to receive an advance before
    shipment, usually for material or production costs.
    Beneficial for sellers needing early financing.

    Green Clause LC
    Provides an advance payment for storage and
    insurance before shipment, with specific conditions.
    Helps sellers cover pre-shipment costs like storage.
    Building Confidence in Trade : “How Letters of Credit
    Support Manufacturers and Service Providers"

    1. For the Manufacturing Sector


    Assures Payment Security

    Mitigates Export Risks

    Enables Cash Flow Management

    Encourages Expansion into New Markets

    2. For the Services Sector

    Secures Payment in Service Contracts

    Supports Project-Based Payments

    Reduces Foreign Transaction Risks

    Builds Trust with New Clients


    Assessment of LC Limit:
    # Parameters

    Total Purchases of Raw Material (RM)


    A
    (Est / Proj)

    Procurement of RM under LC (%) P%

    Annual purchase of RM (under LC) A x P%

    Monthly purchase of RM (under LC) say


    (AxP%)/12
    Q

    Avg. Usance Period (a) months

    Avg. Lead Time (b) months

    Total Time (a+b) months

    LC Limit required Q xT

    LC Limit recommended for sanction (QxT)


    Example Calculation :
    Total Purchases of Raw Material (RM) (Est / Rs 100000
    Proj)

    Procurement of RM under LC (%) 50 %

    Annual purchase of RM (under LC) Rs 50000

    Monthly purchase of RM (under LC) 50000/12=


    4166/-

    Avg. Usance Period 2.5 Months

    Average lead Time 0.5 months

    Total Time 3 months

    LC Limit required 4166*3=


    12498

    LC Limit recommended for sanction Rs 12498


    CONTACT US US FORE MORE
    INFORMATION

    CONTACT - 9878201900
    VISIT - WWW.SMESOLUTIONS.ORG.IN

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