![]() ![]() Therefore, if the issuing bank does not pay the beneficiary, the advising bank is not obligated to pay. The advising bank has no other obligation under the letter of credit. In addition, the advising bank is responsible for sending the documents to the issuing bank. Generally, the beneficiary wants to use a local bank to insure that the letter of credit is valid. Advising bank: An advising bank is usually a foreign correspondent bank of the issuing bank which advises the seller-beneficiary.If the seller-beneficiary conforms to the letter of credit, the seller must be paid by the bank. To get the payment it is for the beneficiary to provide all the required documents. The issuing bank’s obligation to the buyer-applicant is to examine all documents to insure that they are in compliance with the terms and conditions of the credit. The issuing bank is not liable for performance of the underlying contract between the buyer and seller. All parties deal in documents and not in goods. The letter of credit is a distinct and separate transaction from the underlying contract (contract between seller and buyer). Beneficiary: Beneficiary is normally the provider of the goods or services and is entitled to payment as long as he can provide the conforming documents required by the letter of credit.Letters of credit only concerns with the documents, not with the goods. Typically the documents requested include a commercial invoice, bill of lading or airway bill and an insurance document but there are many others. The issuing bank’s duty is to provide a guarantee to the seller that if complying documents are presented by the seller, then the bank will make the payment to the seller, and will only pay if these documents comply with the terms and conditions set out in the letter of credit. ![]() Under the law provisions the bank is entitled to have a reasonable time after receipt of the documents to honor the draft. Issuing bank: The issuing bank’s duty to pay and to be reimbursed from its customer becomes absolute upon the completion of the terms and conditions of the letter of credit.Applicant: The buyer or importer of goods.Thus, the issuing bank replaces the bank’s customer as the payee. The issuing bank, on the application of its customer (buyer), opens the letter of credit, and makes a commitment with the buyer to honor the credit on the presentation of the documents, conforming to the terms and conditions of the credit, by the beneficiary. Definition of Letter of CreditĪ Letter of Credit can be defined as “an undertaking by importer’s bank stating that payment will be made to the exporter if the required documents are presented to the bank within the validity of the L/C”.Ī commercial letter of credit is a contractual agreement between a bank (issuing bank), on behalf of one of its customers (buyer), authorizing another bank (advising or confirming bank), to make payment to the beneficiary (seller). Typical documents, which are required includes commercial invoice, transport document such as Bill of lading or Airway bill, an insurance documents etc. Banks are not in the business of examining the goods on behalf of the customers. A Letter of Credit refers to the documents representing the goods and not the goods themselves. Letter of Credit is one of the most popular and more secured of method of payment in recent times as compared to other methods of payment. ![]()
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