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LC PPT (1)

The document outlines various methods of payment in foreign trade, including cash in advance, documentary credit, documents against payment, and open account. It details the process of using a letter of credit, highlighting its security for exporters and benefits for importers. Additionally, it categorizes different types of letters of credit, such as revocable, irrevocable, confirmed, and transferable credits, each with specific features and advantages.

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Bhavi Agrawal
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6 views

LC PPT (1)

The document outlines various methods of payment in foreign trade, including cash in advance, documentary credit, documents against payment, and open account. It details the process of using a letter of credit, highlighting its security for exporters and benefits for importers. Additionally, it categorizes different types of letters of credit, such as revocable, irrevocable, confirmed, and transferable credits, each with specific features and advantages.

Uploaded by

Bhavi Agrawal
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Methods of payment in foreign

trade.
Cash in advance : The cash in advance method
is the safest for exporters because they are
securely paid before goods are shipped and
ownership is transferred

Documentary Credit or Letter of Credit : is


basically a promise by a bank to pay an exporter if
all terms of the contract are executed properly.
This is one of the most secure methods of
payment.
Documents Against Payment: The exporter gives
the ownership documents of an asset to their bank,
which then presents them to the importer after
payment is received.

Open Account : An open account is a sale in which


the goods are shipped and delivered before payment is
due usually in 30, 60, or 90 days.

This is one of the most advantageous options to the


importer, but it is a higher-risk option for an exporter.
Meaning
Mechanism / Process of L/c s(flow
chart)
Types
The letter of credit is conditional
undertaking by a bank, on behalf of its
importer customer, to pay the exporter
against specified export documents ( B/L,
Invoice, Bill of exchange ect.)

It is one of the important methods of


payment in international trade
1) The exporter and importer contract of
Sale.
2) The importer applies to his bank, the
issuing bank, to open a letter of credit.
3) On the strength of the application form of
importer, the bank issues a L/c
addressed to the exporter.
4) The issuing bank sends the advice of the
credit to the advising bank.
5) The exporter is advised of the credit.
6) Following shipment of the goods, the
exporter presents the documents to the
advising bank (the paying agent).
6) After checking the documents and confirming
that they agree with the letter of credit terms,
payment is made to the exporter. At the same
time, the advising bank sends the documents to
the issuing bank and requests reimbursement
for the letter of credit amount plus the advising
bank's fees and expenses.
7) The issuing bank sends the documents to the
importer and debits his account for the letter
of credit amount plus the fees and expenses
of the banks involved.
To exporter :
The letter of credit protects the exporter
against the failure of the importer to pay.

The bank will take care of exchange regulations of


the importer’s country on behalf of exporter.

It helps the seller to expand the business by


enabling him to conclude deals without fear.

Ease the financial position of the exporter as


exporter can easily discount the bills under
L/c, can raise loans from his bank.
To the importer :

Enables the importer to purchase


materials without making full advance
payment.

Quantity and quality of goods consigned


is assured.
Cost in terms of commissions to
bank.

Too much documentation required


“A documentary”letter of credit can be
classified under following types………………

- Payment, acceptance, negotiation credits


- Revocable and irrevocable credit
- Confirmed and unconfirmed credits
- Fixed and revolving credits
- Transferable credit
- Back to back credit
- Red clause and green clause credits
- Stand by credits.
A payment credit provides that payment
will be made to the exporter against the
documents to be submitted by him.
The documents are not accompanied by
bills of exchange.
To avoid stamp duties, parties may
agree for a payment of credit.
The documents are accompanied by bill
of exchange
The bank which negotiates the docs.
Under credit purchases the bill of
exchange.
A negotiation credit may be restricted
or open.
Restricted l/c can be negotiated in
the exporte’s country only with the
bank specified in credit.
An open credit provides for negotiation
by any bank in the exporter’s country.
Acceptance credit calls for bill of exchange
of a specified period to be drawn under the
credit.
The bills of exchange will be drawn on
the issuing bank.
The seller can always get
payment immediately.
Deferred payment credit carries an
undertaking by the issuing bank to pay on
dates determinable in accordance with the
stipulations of the credit.
A revocable credit is one which can be
cancelled or amended by issuing bank at
any time without prior notice to the
exporter.

An irrevocable letter of credit can neither be


amended or cancelled without the
agreement of all parties concerned.
A confirmed credit contains an
additional undertaking by a bank in the
exporter’s country to pay against
documents drawn.

Unconfirmed L/c which bears the


undertaking only that of the issuing bank.
A fixed L/c is available for negotiation
only up to limit mentioned under the
letter of credit.

A revolving credit is available again and


again for negotiation so long as
outstanding is within limit mentioned
A transferable L/c is one under which the
exporter has the right to make credit
available to third parties.

The exporter may be only an intermediary


who procures goods from the suppliers and
arranges them to be sent to the importer.
A red clause letter of credit authorizes the
bank in exporter’s country to make
advances to the exporter for the purpose
of purchase and processing of goods
for exports.

A green clause L/c, in addition, provides


for storage of goods.
Under this, issuing bank assures the
exporter that in event of non payment of
obligation, the exporter may get the
payment from the issuing bank.

It is a substitute for a bank guarantee.


Original Letter of Credit

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