Letter of credit

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

17 July 2015 I read the following regarding the process involved in issuing an LC

> Sales contract entered into by buyer(importer) and seller (exporter)
> Importer applies to open LC in favour of the exporter
> Issuing bank issues LC which reaches the beneficiary's bank
> Beneficiary's bank advises the letter of credit to the beneficiary
> If letter of credit conditions seem reasonable to the beneficiary then beneficiary starts producing the goods in order to make the shipment
> The beneficiary ships the order according to the terms and conditions stated in the credit.
> When the goods are loaded, the exporter collects the documents, which are requested by the credit and forwards them to his bank.
> Beneficiary's bank sends these documents to the issuing bank. The issuing bank checks the documents according to the terms and conditions of the credit.
> If the documents are found complying after the examination the issuing bank honors the payment claim.
> The documents transmit to the applicant. The applicant uses these documents to clear the goods from the customs.

Now my question is whether the beneficiary's bank can take the shipping documents from the beneficiary without making his payment?
will the exporter wait for receiving his payment for the time involved in remitting the documents from his bank to the issuing bank, the time taken by issuing bank in verifying the documents, collecting payment from importer, remitting the payment to beneficiary's bank and finally to the beneficiary? or beneficiary's bank will make payment to the beneficiary on receipt of shipping documents and later recover the same from the issuing bank?
Also how will the above process in case of usance LC of say 90 days?

Please reply at the earliest.

Thanking You.

CA R SEETHARAMAN

CA R SEETHARAMAN (Expert)
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17 July 2015 Yes the beneficiary bank can take the shipping documents from the beneficiary without making payment.
The exporter has to wait for payment from importer.
In case of usance LC payment is made by beneficiary bank on presentation of documents but interest payable.

Querist : Anonymous

Querist : Anonymous (Querist)

17 July 2015 so suppose the exporter exports the goods and the other formalities like remitting documents and receiving payment from importer takes 15 days then the exporter will receive the payment after 15 days?

If the case of ussance LC, the bank accepts the bill and then pays after the ussance period say 90 days. I want to understand 90 days are calculated from which day? The day the beneficiary presents the bill to his bank or when issuing bank accepts the same from the beneficiary bank?

I also didnt get the interest is payable that you wrote kindly clarify the same.

Thanking You.

CA R SEETHARAMAN

CA R SEETHARAMAN (Expert)
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17 July 2015 Yes the exporter will receive payment after 15 days.
In case of usance after confirmation from the buyer the buyer's bank release the payment to beneficiary bank within 2 or 3 days. The buyer gets credit of 90 days from his bakers from the date of payment to beneficiary bank, for which the buyer's bank will charge interest.

Querist : Anonymous

Querist : Anonymous (Querist)

22 July 2015 Dear Mr. Seetharaman,

I read many articles on Letter of Credit process just to know the flow of cash after the goods are sold and at many places i saw that beneficiary's bank paid the beneficiary and collected the documents from him and remitted the same to issuing bank to claim the amount of LC.

This implies that the exporter received cash as soon as he shipped the goods which is contrary to the view i expressed earlier.

Kindly clarify as to when the funds are received by the beneficiary.

Please reply as i am not able to get clarity on the above issue.

Thanking You.

Querist : Anonymous

Querist : Anonymous (Querist)

22 July 2015 Also, i dont follow the roles/ responsibilities/ liabilities of advising bank, negotiating bank and confirming bank. Could you be kind enough to site an example wherein all these banks are involved in an LC transaction and who pays to whom when the documents are submitted for payment?

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