Letter Of Credit:

Definition, Types & Parties

Compiled By:
Janata Bank Staff College
Dhaka
 Bankers role in Foreign Trade

Bankers Play Two important role in Foreign Trade-

1. To Facilitate Payment

2. To Make Finance
 Methods of Payment-
There are 4 Methods of
Payment-

1. 3. 4.
2
Cash in Documentary Documentary
Open Account Collection Credit
Advance
 Origin of the term Letter Of Credit

Latin word
English-“letter French word
“accreditivus”,
of credit” “accreditation”
meaning trust.
 Define Letter Of Credit

• The letter of credit is a commitment by the

buyer’s bank on behalf of the buyer (importer)
to effect payment to the seller (exporter) /
beneficiary subject to fulfillment of certain
conditions by the seller.
 Define Letter Of Credit…Continued

1. A letter addressed to 2. written and signed by

the seller, a bank,

…
Letter Of Credit
3. who acts on the
buyer’s behalf.
• -Bank promises to pay drafts,
• provided seller performs
• exactly.
 Define Letter Of redit…Continued…
As per Article-2 of UCPDC – 600 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 .

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 bill of Exchange (draft) drawn by the beneficiary

and pay at maturity if the credit is available by acceptance.
 Flow Chart of Doc. Credit
Flow Chart of Doc. Credit

Reimbursing Bank

Advising Bank
Confirming Bank
Shipra Biswas, Faculty Member ,JBSC
 Parties To A Letter Of Credit
• Applicant
• Beneficiary
• Issuing Bank
• Advising Bank
• Confirming bank
• Nominated Bank
• Confirming Bank
• Reimbursing Bank
 Types of Letter of Credit :
• Irrevocable letter of credit :

(Article of 3 of UCP-600 says that a credit is

irrevocable even if there is not indication to
that effect. It therefore, indicates that (under
UCP-600) there is only one type of credit,
named Irrevocable Letter of Credit)
 Types of Letter of Credit :

• Revocable letter of credit

• Sight letter of credit
• Deferred letter of credit
• Confirmed letter of credit :
• Transferred Letter of Credit
• Revolving letter of credit
• Red Clause letter of credit
• Green Clause letter of credit
• Back to Back Letter of Credit
• Standby letter of credit
 Letter Of Credit
• Applicant : means the party on whose request the credit
is issued.
=The buyer, or customer, is the Applicant.

• Beneficiary: means the party in whose favour a credit is

issued
= The seller of the goods or the provider of the services.
 Parties To A Letter Of Credit

• Issuing Bank is the bank that issues a letter of credit

at the request of an applicant or its own behalf.
Issuing bank undertakes to honor a complying
presentation of the beneficiary without recourse.
– The Issuing Bank’s credit replaces the buyer's credit.

Risks to the Issuing Bank-

– Insolvency of the Applicant
– Fraud Risk, Sovereign and Regulatory Risk and Legal Risks
 Parties To A Letter Of Credit
• 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 amendmend without any
obligation to honor.
• -----The Advising Bank is an agent of the Opening
Bank.
– Verifies the authenticity of the Opening Bank.
 Parties To A Letter Of Credit

• 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.
Risks to the Nominated Bank -has made a payment
to the Beneficiary against documents that comply
with the terms and conditions of the Credit and is
unable to obtain reimbursement from the Issuing
Bank
 Parties To A Letter Of Credit

• Confirming Bank: Confirming

bank is the bank that
adds its confirmation to a credit upon the issuing
bank's authorization or request.
• This decision is up to confirming bank only.
• 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.
--The Confirming Bank is usually the Advising
Bank, but it confirms that the credit exists.
--It can negotiate the documents, and can
accept the letter of credit the Opening Bank will
not pay.
 Parties To A Letter Of Credit

• 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.
Thank You