Part 3 Letter of Credit

Main Topics Definition The Features of L/C The Parties Involved The Chief Contents of L/C The Procedures Involved in the Use of L/C The Varieties of L/C UCP

Definition Of L/C Letter of credit is the chief means which is now most often used in the settlement of payment in international trade. A letter of credit, according to the draft of UCP500 (Uniform Customs and Practice for Commercial Documentary Credit), can be simply defined as a document by which a bank, upon the request of an importer, promises to effect the payment of the goods to the exporter.

The Features of L/C Letters of credit uses bank credit. Letters of credit deal in documents, not goods.documents Letters of credit are purely documentary transactions.purely documentary transactions

Significance The letter of credit solves the possible problems arising from the distrust between the seller and buyer. Under L/C, the seller can feel assured that so long as he has made the delivery of the goods and got the required documents he can get the payment of the goods in time and the buyer can also feel at ease that he can get the shipping documents at the same time when he effects the payment of the goods.

The Parties Involved in a L/C The Applicant( 开证申请人 ), who is usually the importer who applies to the bank for the letter of credit. Opening Bank ， or Issuing Bank( 开证银行 ), which opens the letter of credit upon the request of the importer. It holds itself responsible for the payment of the goods. It is in the importer’s country. Advising Bank ， or Notifying Bank( 通知银行 ), which is authorized by the issuing bank to transfer the letter of credit to the exporter’s bank. It is in the exporter’s country and usually the correspondent bank of the issuing bank. It is only responsible for the authenticity of the L/C.

Beneficiary( 受益人 ), who is usually the exporter and is entitled to use the letter of credit for the payment of the goods. Negotiating Bank( 议付银行 ), which is willing to buy on discount the documentary draft drawn by the beneficiary. It can either or not be designated in the letter of credit. In the transfer of the bill of exchange, the negotiating bank can be taken as the bona fide bearer of the bill of exchange. The negotiating bank and the advising bank can be the same bank, as is to be decided by the letter of credit.

Paying Bank ， or Drawee Bank( 付款银行 ), which is designated by the letter of credit to pay the draft. In most cases, it is the issuing bank. It might also be some other bank, as when the currency used in the letter of credit is that of a third country, the paying bank can be a bank of that country. Once the paying bank has effected the payment, it can not claim it back by recourse. Confirming Bank( 保兑银行）, which is asked by the opening bank to confirm the L/C. If a bank has confirmed a L/C, it holds itself responsible for the negotiation or payment of the L/C. Mostly, the confirming bank is advising bank, but it can also be some other bank in the country of the exporter.

The Chief Contents of L/C The chief contents of a L/C can be seen as a combination of the chief contents of a sales contract, the required documents and the bank assurance. Generally a L/C contains the following provisions: The parties involved, including the applicant, the issuing bank, negotiating bank, the paying bank, and the like; Remarks about the L/C: such as the No. of the L/C, its type, the issuing date; The amount of the L/C; The clauses of the bill of exchange, such as the amount of the bill, the drawer and drawee, the paying date, etc;

The clauses about the documents, what documents are required, such as the invoice, the bill of lading, the insurance policy, the packing list, the certificate of origin and inspection certificate, etc. Also, the required number of copies of the documents; Description of the goods or services, including specifications, quantity, packing, unit price, total amount, mode of transport, place of unloading, etc; Additional conditions, such as the special provisions about the deal in accordance with the particular business or political situations of the importing country; Guarantee clauses of the opening bank, which testifies that the opening bank will hold itself responsible for the payment to the beneficiary or the holder of the draft.

The Procedures Involved in the Use of L/C Step 1: Application Step 2: Opening Step 3: AdvisingAdvising Step 4: Examination Step 5: Amendment Step 6: Delivery of the Goods and Negotiation Step 7: Reimbursement Step 8: Delivery of the Shipping Documents and Taking Delivery of the Goods Step 9: Claim

Varieties of L/C 1. Documentary L/C and Clean L/C( 跟单 信用证和光票信用证 ): If the L/C requires the beneficiary to draw a documentary draft upon the buyer. Then it is a Documentary L/C. If the L/C requires the beneficiary to draw a clean draft, then it is a Clean L/C

2. Irrevocable L/C and Revocable L/C( 不可撤销信用证 和可撤销信用证 ): Irrevocable L/C is the one that can not be withdrawn or amended by the opening bank without the agreement of the beneficiary. This kind of L/C is more secure and hence is most often used. It claims our attention that, according to UCP 500, whether a L/C is not marked as being irrevocable or not, it should be taken as irrevocable.

Revocable L/C is the one that can be withdrawn or amended by the opening bank any time before the negotiation, or acceptance, or payment is effected. In doing so, the issuing bank does not need to have the consent or even notify the beneficiary. This is rarely used in the settlement of payment in international trade. And in our export practice, we, as a general principle, do not accept revocable L/C.

3. Confirmed L/C and Unconfirmed L/C( 保兑信用证和 不保兑信用证 ): Sometimes, to ensure the payment of the goods, the exporter would ask the importer to request the opening bank to authorize another bank to confirm the L/C. The confirming bank is usually the advising bank and is usually in the country of the exporter. The confirming bank then holds itself responsible for the payment of the goods.

Once the confirming bank has effected the payment, it can not claim the payment back with recourse. So under a confirmed L/C, two banks hold themselves for the payment of the goods, which is more secure than otherwise. The L/C that is not confirmed is called an unconfirmed L/C.