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Dear friends we have discussed regarding types of Letters of Credits and international rules and regulations applicable in my previous article. The UCP 600 Rules have been adopted by many countries, though these rules are not enforceable in any state or country. The UCP 600 Rules and its provisions have been adopted by majority of countries as Code of Conduct of International Transactions.

In this article we are going to discuss utilisation of Letters of Credit and its advantages/disadvantages;

UTILISATION OF LETTERS OF CREDIT; there are various stages from shipment of goods and / or provisions of services till the payment received by the seller / beneficiary;

SHIPMENT OF GOODS; The beneficiary / seller shipped the specified goods before the last date as mentioned in the contract, subject to LC.

DOCUMENTS TO NOMINATED BANK; the beneficiary presents complying documents to the nominated bank for negotiation or for acceptance or for payment as per terms of LC, within the last date for presentation.

EXAMINATION OF DOCUMENTS; [Article 14 of UCP 600] before acceptance or payments, the documents submitted by the beneficiary shall be examined by the negotiating bank, to ensure that the presenting documents are accordance with the terms of contract.

DISCREPANCIES IN THE DOCUMENTS; [Article 16 of UCP 600]; if any defect or discrepancy found in the complying documents, the nominated bank may refuse to negotiate or accept the presentation. The communication should be sent as per Rule 16(c) of UCP 600. If rectification made it must be within credit period.

NEGOTIATION, ACCEPTANCE, PAYMENT [ Article 15 UCP 600]; the Nominated Bank accepts, negotiate or honours documents as per credit terms, if documents comply or discrepancies (if any) are approved by the issuing bank.

FORWARDING DOCUMENTS AND CLAIMING REIMBURSEMENT [Articles 15,13]; the negotiated documents are forwarded to the issuing bank or the confirming bank (as applicable). The Nominated Bank claims reimbursement as per terms of the credit.

EXAMINATION BY ISSUING BANK; on receipt of the documents, issuing bank examines documents for compliance with terms of credit. If documents contain discrepancies, the issuing bank may, in its sole judgment, approach the applicant with full details of discrepancies for waiver.

NEGOTIATING BANK CLAIM; if the documents presented to the issuing bank comply or in accordance with the terms of credit or contract, then claim of negotiating bank should be honoured.

APPLICANT REIMBURSE TO THE BANK; the applicant account is debited by the issuing bank with the negotiated amount as well as all types of charges leviable for issue of LC.

DELIVERY OF DOCUMENTS TO BUYER; the documents released to the applicant against immediate payment or against acceptance of time draft (in case of bill, payable at maturity).

On payment by applicant to the bank, his liability towards the bank fulfilled to the extent the amount utilised in the Letters of Credit issued by the bank.

ADVANTAGES OT LETTERS OF CREDIT TO APPLICANT; the applicant/ buyer through Letters of Credit effectively control over various critical areas of International trade operations as;

The applicant/ buyer stipulates the exact nature of documents to be presented by the beneficiary/ seller to the bank for claim of payment. The applicant/ buyer stipulates the nature of instruments to be presented and the terms and conditions of the contract with the beneficiary/ seller;

The applicant/ buyer stipulates the nature and data to be mentioned in the documents. The applicant controls the data input in the document after negotiation with the beneficiary;

The LC mechanism protects the buyer/ applicant from not being called upon to pay the seller unless the documents presented by the beneficiary comply strictly with the terms of Letters of Credit. The applicant interest is protected. If there is no compliance, then no payments by the issuing bank;

Letters of Credit improves the credit worthiness of the buyer/applicant. The seller/ beneficiary shall also ensure regarding payment against supply of goods/ or provisions of services.

The applicant/ buyer is on better position of negotiation, by issue of LC. The can better negotiate with the seller/ beneficiary.

ADVANTAGES TO BENEFICIARY; though the Letters of Credit is issued by the applicant and the issuing bank but there are various advantages to beneficiary/ seller as follows;

Certainty of Payment; The operation of Letter of Credit is based on the sole premises that the issuing bank or nominated bank will pay under accredit provided the beneficiary presents the documents with the terms of the credit. Thus, LC secure the payment to the beneficiary/ seller;

Reduces Risk; The integrity and creditworthiness of the buyer are replaced by those of an independent third party, the LC issuing bank. Thus, the country risk, industry risk and other types of various risks associated with international trade and finance will reduce;

Transparent Terms; The LC offers transparency and safety to the seller/ beneficiary. The credit has been received well before the shipment of the goods/ or provision of services and beneficiary/ seller will get ample time to examine the terms and conditions of contract and issue of credit terms;

Options to accept or reject LC terms; The seller/ beneficiary can accept or reject the terms of issue of LC or request for amendment there off.

Under UCP 600 all credits are irrevocable in nature unless specified otherwise (Articles 2 and 3). Article 10(a) states that ‘a credit can neither be amended nor cancelled without the agreement of the issuing bank, the confirming bank and the beneficiary’. This means that the terms of the credit can be changed arbitrarily without consent of the parties to the LC.

Irrevocable Nature of LC; an issuing bank is irrevocably bound to honour a complying presentation under LC as of the time its issues credit. A confirming bank is irrevocably bound to honour or negotiate without recourse as of time its adds its confirmation to a credit;

Therefore, once a credit has been advised to the beneficiary (and the terms found acceptable by him), he can go ahead with the production and supply secure in the knowledge that;

  1. No terms of a LC can be modified without his consent;
  2. Payment is issued if the credit terms are complied with.

These facts are given big relief to the beneficiary/ seller, that his payment will be secure.

The banks/ financial institutions are keen to finance the beneficiary by knowing that the beneficiary/ seller is secured thorough issue of LC by the buyer. The banks / financial institutions become sure that the payment will received against of shipment of goods by the seller / beneficiary.


  • LC reduces the work of the seller, to investigate the integrity, credit worthiness, reputation and track record of the buyer. Since the creditworthiness of the buyer is replaced by third party called the issuing bank;
  • LC reduces transit risk, since the seller is entitled to get payment after complying with the terms of issue of credit.
  • Reduces Country Risk; apart from counterparty risk, there are also country risk and same is mitigated through LC. Some of these risks can be reduced or eliminated b making LC available for negotiation in the country of the beneficiary. A reimbursing bank situated in the country of beneficiary or a country other than in which buyer resides can also reduce the risk;


If credit is confirmed by a bank in the country or city of beneficiary, the performance under credit is said to be ‘localised’. Once a confirming bank approves a presentation and pays, it does so, without recourse.

CONCLUSION; In this article, we have gone through various aspects and basics of Letters of Credit. The Letters of Credits are well accepted and secure negotiable instrument in international trade and finance. It provides security to both the buyer and the seller. The rules and regulation promulgated by ICC and the code of conduct adopted by various countries for dealing in international trade and finance will ensure fair trade practices.


Published by

FCS Deepak Pratap Singh
(Manager Compliance -SBI General Insurance Co. Ltd.)
Category Corporate Law   Report

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