How many Parties are involved in Letter of Credit (LC)

How many Parties are involved in Letter of Credit (LC)

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 the 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 the compliance of credit terms from negotiating bank.
g)    Transferring Bank:
In addition to the above, there may be another bank that 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.

Details: Parties are involved in Letter of Credit (LC)

a)    Applicant: The person/body (customer of the bank) who requests the bank (the opening bank) to issue a letter of credit.  As per instruction and on behalf of the applicant, the bank opens 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 opens / issues a letter of credit on behalf of the applicant/importer. The issuing bank’s obligation is to make payment against the 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 the 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:
The beneficiary of the L/C is the party in whose favor the letter of credit is issued. Usually, they are the seller or exporter.
e)    Negotiating Bank:
The bank negotiates documents and pays the amount to the beneficiary when presented with complying credit terms. If the negotiations of documents are not restricted to a particular bank in the L/C, normally the 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 an account with the reimbursing bank.
g)    Transferring Bank:
Original beneficiary may transfer L/C to the second beneficiary/beneficiaries as per clause of the L/C. The transfer may be made once only. The bank of the original beneficiary authenticates the transfer and the bank is known as the transferring bank. Normally transferring banks authenticate the transfer and keep records 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 to have arrangements with them. This confirmation constitutes a definite undertaking on the part of confirming the bank in addition to that of issuing a bank.

The documents required to open a LC:

  • Business Trade license 
  • Business Bank Account
  • Application for opening a Letter of Credit
  • Purchase Contract
  • Importer’s IRC certificate
  • Indent / Performa invoice 
  • Membership certificate from the local chamber of commerce
  • Income tax clearance
  • VAT registration certificate