Letter of credit

1.Letter of credit is an instrument binding the banker to make payment to the destinated seller through arrangement of buyer.

2.There has to be a purchase order(p o) from buyer duly accepted by the seller for the terms of p.o.

3.Among other clauses the p o has to stipulate payment mode through L.C.

4.The buyer has to submit an application to his pre-arranged banker to open an L.C.to the benifit of the seller.

5.The terms of L.C. would mention the due date of payment as already agreed between the seller and buyer through p.o.and also the documents to submitted along with L.C.

6.The L.C.has to mention the seller's banker or the nominated banker of the seller as the payment banker.

7.The L.C.has to be confirmed by the seller's bank/nominated bank of seller  after L.C. isopened by the buyer to the effect that all the stipulations are correctly incorporatedin the L.C.

8.On the strength of the Confirmed L.C.the seller despatches goods and sends the documents as stipulated in L.C. for taking delivery of goods.

9.The payment on L.C.will be made by the banker as per payment terms and the necessary back-up payment has to bearranged by the buyer.

10.The banker would charge amounts like opening charges,usance charges,negotiation charges and conrfirmation charges etc,on qurterly basis.In addition banker would also keep Margin money as a percentage of L.C.valuein the form of F.D.till the L.C. is paid.

This is how broadly the L.C. is operated.

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