How Many Parties are involved in Letter of Credit (L/C)

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How Many Parties are involved in Letter of Credit (L/C)

There are mainly 6(six) parties involved in a letter of credit which may be summed up as under:

a) Opener: The applicant of L/C or the Importer / Buyer / L/C applicant.
b) Opening Bank: The Bank opening the L/C i.e. the importer’s Bank / Buyer’s Bank.
c) Advising / Notifying Bank: The bank advising the credit to the beneficiary.
d) Beneficiary / Exporter/ Seller : The exporter / supplier in favor of which the credit is opened / issued.
e) Negotiating Bank : The Bank who negotiates / purchases documents of the exporter against the L/C opened and presents the documents to L/C opening Bank for payment.
f) Reimbursing Bank : The Bank who makes payment to the beneficiary’s Bank (BBK) on behalf of or at the request of opening Bank on receipt of confirmation regarding compliance of credit terms from negotiating bank.
g) Transferring Bank: In addition to the above, there may be another bank which may be termed as confirming Bank.
h) Confirming Bank: The Bank which under instruction in the letter of credit adds their irrevocable undertaking to that of the issuing bank.

a) Applicant :

The person / body (customer of the bank) who requests the bank (opening bank) to issue a letter of credit. As per instruction and on behalf of the applicant, bank open L/C in line with the terms and conditions of the sales contract between the buyer and seller.

b) Opening Bank / Issuing Bank :

The Bank which open / issue letter of credit on behalf of the applicant / importer. Issuing bank’s obligation is to make payment against presentation of documents drawn strictly complied as per terms of the L/C.

c) Advising Bank / Notifying Bank:

The bank through which the L/C is advised to the beneficiary (exporter). The responsibility of advising bank is to communicate the L/C to the beneficiary after checking the authenticity of the credit. The advising bank acts only as an agent of the issuing bank having no engagement on their part.

d) Beneficiary :

Beneficiary of the L/C is the party in whose favour the letter of credit is issued. Usually they are the seller or exporter.

e) Negotiating Bank:

The bank which negotiate documents and pays the amount to the beneficiary when presented complying credit terms. If the negotiations of documents are not restricted to a particular bank in the L/C, normally negotiating bank is the banker of the beneficiary.

f) Reimbursing / Paying Bank:

The bank nominated in the credit by the issuing bank to make payment against stipulated documents, complying with the credit terms. Normally issuing bank maintains account with the reimbursing bank.

g) Transferring Bank:

Original beneficiary may transfer L/C to second beneficiary / beneficiaries as per clause of the L/C. Transfer may be made once only. The bank of the original beneficiary authenticates the transfer and the bank is known as transferring bank. Normally transferring bank authenticate the transfer and keeps record of transfer without any engagement on their part.

h) Confirming Bank:
The Bank which under instruction in the letter of credit adds their irrevocable undertaking to that of the issuing bank. It is done at the request of the issuing bank having arrangement with them. This confirmation constitute a definite undertaking on the part of confirming bank in addition to that of issuing bank.

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