Letter of Credit Basics definition of Article 2 explained.

. Credit means any arrangement, however named or described, that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honour a complying presentation. Meaning of Credit The expressions Documentary Credit(s) and Standby Letter(s) of Credit are referred to as Credit(s). A Credit is "any arrangement, however named or described, whereby a bank (the 'issuing bank') acting at the request of and on the instructions of a customer (the 'applicant') or on its own behalf, (i) is to make payment to or to the order of a third party (the 'beneficiary'), or is to accept and pay bills of exchange (Drafts) drawn by the beneficiary, or (ii) authorises another bank to effect such payment, or to accept and pay such bills of exchange (Drafts), or (iii) authorises another bank to negotiate, against stipulated document(s), provided that the terms and conditions of the Credit are complied with.
(Bill of Exchange or Draft- Formal written order addressed by one person (drawer) to another (drawee), signed by the drawer, and directing the drawee to pay on demand or at a fixed or determinable future time, a certain sum in money to the order of a specified person (payee). The above draft are those drawn by the Applicant-drawer to issuing bank-drawee, directing the issuing bank to pay. Usance draft (usance bill) - There are drafts that may be made by the exporter as well. These are called usance draft a written demand for payment which comes due at a specified future date. When exporters make a drawing under a letter of credit, the presented documents (bill of lading, invoice, packing list, certificate of origin, etc.) should usually be accompanied by a draft, which is basically a check, representing demand for payment. The draft or Bill of Exchange is drawn and signed by the exporter (seller). Hence, the draft (especially the usance draft) is the instrument used to demand payment. )

Presentation means either the delivery of documents under a credit to the issuing bank or nominated bank or the documents so delivered. Complying presentation means a presentation that is in accordance with the terms and conditions of the credit, the applicable provisions of these rules and international standard banking practice. Presenter means a beneficiary, bank or other party that makes a presentation. Applicant means the party on whose request the credit is issued. Beneficiary means the party in whose favour a credit is issued. Issuing bank means the bank that issues a credit at the request of an applicant or on its own behalf. Advising bank means the bank that advises the credit at the request of the issuing bank. advising bank (also known as a notifying bank) advises a beneficiary (exporter) that a letter of credit (L/C) opened by an issuing bank for an applicant (importer) is available. Advising Bank's responsibility is to authenticate the letter of credit issued by the issuer to avoid fraud. The advising bank is not

necessarily responsible for the payment of the credit which it advises the beneficiary of. The advising bank is usually located in the beneficiary's country. It can be (1) a branch office of the issuing bank or a correspondent bank, or (2) a bank appointed by the beneficiary. Important point is the beneficiary has to be comfortable with the advising bank. In case (1), the issuing bank most often sends the L/C through its branch office or correspondent bank to avoid fraud. The branch office or the correspondent bank maintains specimen signature(s) on file where it may counter-check the signature(s) on the L/C, and it has a coding system (a secret test key) to distinguish a genuine L/C from a fraudulent one (authentication) . In case (2), the beneficiary can request the applicant to specify his/her bank (the beneficiary's bank) as the advising bank in an L/C application. In many countries, this is beneficial to the beneficiary, who may avail the reduced bank charges and fees because of special relationships with the bank. Under normal circumstances, advising charges is standard and minimal. In addition, it is more convenient to deal with the beneficiary's own bank over a bank with which the beneficiary does not maintain an account. Nominated Bank means the bank with which the credit is available or any bank in the case of a credit available with any bank. A bank designated by the issuing bank which is authorized to pay, to accept draft(s), to incur a deferred payment undertaking, or to negotiate the letter of credit (L/C) is known as the nominated bank. The nominated bank can be a party other than the advising bank. deferred payment - A debt which has been incurred and will be paid back at some point in the future. Negotiation means the purchase by the nominated bank of drafts (drawn on a bank other than the nominated bank) and/or documents under a complying presentation, by advancing or agreeing to advance funds to the beneficiary on or before the banking day on which reimbursement is due to the nominated bank. Meaning the nominated bank accepts draft and document from beneficiary when he makes a complying presentation and in return the nominated bank agrees to pay or pays the beneficiary. Then, the draft and document received by nominated bank are used by it to demand reimbursement from issuing bank. Honour means: a. to pay at sight if the credit is available by sight payment. b. to incur a deferred payment undertaking and pay at maturity if the credit is available by deferred payment. c. to accept a bill of exchange ("draft") drawn by the beneficiary and pay at maturity if the credit is available by acceptance. (pay at sight - A payment due on demand. An at sight payment will require the party receiving the good or service to pay a certain sum immediately upon being presented with the bill of exchange. Confirmation means a definite undertaking of the confirming bank, in addition to that of the issuing bank, to honour or negotiate a complying presentation. Confirming bank means the bank that adds its confirmation to a credit upon the issuing bank's authorization or request. Flow Chart for letter of Credit. - A Letter of Credit is a legal undertaking in writing. This undertaking is issued by a
bank (known as the issuing bank) given to the seller (beneficiary) at the request of the buyer (applicant), whereby the

issuing bank undertakes to pay a certain sum of money to the named beneficiary upon presentation of compliant documents as stipulated in the Letter of Credit. The credit may call for the payment to be effected immediately - know as sight LC. Alternatively, it may call for payment at a future date - known as a deferred payment LC or for payment on the maturity of a duly accepted tenor Bills of Exchange - known as acceptance LC.