This shows short details about Letter of Credit, its types and procedures so that one can get necessary information regarding this spending just few minutes.

1. 1
Letter of Credit
Types
Parties Thereof &
Procedure
1st Choice FnF
Cell: 8801748100667 Mail: 1stchoicefnf@gmail.com
FB: https://facebook.com/1stchoicefnf
Group: https://facebook.com/groups/1stchoicefnf
Web: https://1stchoicefnf.com
Blog: https://1stchoicefnf.blogspot.com

2. WHAT IS INTERNATIONAL TRADE?
International Trade refers to trade between the residents of two different
countries. It includes both exports and imports. Import means
procurement of goods or services into Bangladesh from abroad. On the
other hand, export means sale of goods or services to other countries.
WHY ?
- Every country lacks some vital resources.
- A country is relatively efficient producer in some goods and inefficient
producer in some other goods.
- Trade leads to specialization.
WHETHER TO EXPORT OR IMPORT
- If WMP> DMP  country will export
- If WMP< DMP  country will import.

3. Domestic trade has the following characteristics that apply to both parties:
 a common language and culture;
 the same laws;
 absence of custom formalities;
 usually relatively simple documentation;
 a single currency;
 relatively simple formalities for transportation of goods.
On the other hand, for International Trade –
- Different countries have different Language and Culture, Currency, Monetary
Policy, Legal Practices.
- Restrictions imposed by countries on Import and Export of goods and also on
Payment from and into their countries
- Customs formalities must be completed before (export) and after (import) of
shipment
- Cost of Transport and Marketing Efforts, Duty and Taxes increase the cost of
goods
Exporters and importers are required to know global market environment,
International and Bangladesh Rules, Shipping Procedure, Custom Formalities etc.
DOMESTIC VS. INTERNATIONAL TRADE

4. Whenever an international sales contract is entered into, sellers and buyers in
different countries face a number of risks that they do not face in domestic
sales. Some of the risks are:
Country Risk :
Country risk comprises political, social and economic components and
includes: Exchange control regulations in buyer’s and sometimes lack of
foreign currency. Country risk also includes unfavourable change in
government policies, laws or introduction of trade embargoes
Buyer Risk of payment :
Buyer’s ability to pay the seller for reasons that are not country risk.
Example buyer goes bankrupt or unwilling to pay.
Seller Risk of supply :
Seller’s ability to supply the right quality and/or quantity of goods at the
right time and place for reasons other than country risk. Example a major
machine failure will affect seller’s production or even supply a poor quality
product.
Risk of Honouring – Bankers :
Bankers ability to honour their own undertakings for reasons other than
country risk. For example if a bank issued a bank guarantee or endorsed a
bill of exchange, but could not honour it on demand.
Performance risk of third parties : inspection companies, shipping
companies, forwarding and clearing agents or customs departments
Incomplete Documents , Inadequate Insurance, Distance and Delay,
Exchange Rate Fluctuations, Different Legal Systems
Risks in International Trade

5. ROLE OF BANKS IN INTERNATIOANL TRADE
• Cross Country Transactions
• Cross Currency Transaction
• Foreign Exchange
• Trade Payment
Methods:•Cash in Advance, •Open Account
• Documentary Collection, •Documentary Credit
• Trade Finance
Import Financing
Export Financing
• Flows of Funds
• Recording of Fund Flows

6. Foreign Exchange
According to FER Act, 1947 (Act No. VII of 1947) –
2. Interpretation:
(c) “foreign currency” means any currency other than Bangladesh
currency;
(d) “foreign exchange” means foreign currency and includes any
instrument drawn, accepted, made or issued under [clause (13) of
Article 16 of the Bangladesh Bank Order, 1972] all deposits, credits
and balances payable in any foreign currency, and any drafts,
traveller's cheques, letters of credit and bills of exchange, expressed
or drawn in Bangladesh currency but payable in any foreign
currency;
6

7. Regulations Governing Foreign Exchange Transactions
ICC Publications:
UCPDC-600 : Uniform Customs and Practice for Documentary Credits
URC-522 : Uniform Rules for Collections
URR-725: Uniform Rules for Bank-to-Bank Reimbursements
ISBP-745: International Standard Banking Practice
Incoterms – 2020 : International Commercial Terms
URDG-758: Uniform Rules for Demand Guarantees
ISP-98 : International Standby Practices
7

8. Exporter Importer
(2) Shipment
(3) Documents
(1)
Payment
Guiding
Framework :
Sales/Purchas
e Contract
Who is at
Risk?
Cash In Advance

9. Open Account
Exporter Importer
(3)
Payment
(1) Shipment
(2)
Documents
Guiding
Framewo
rk:
Sales/
Purchase
Contract
Who
is at
Risk?

10. Documentary Collection
Importer
Collecting
Bank
Presentin
g Bank
Remitting
Bank
Exporter
Guiding
Framework:
Sales/Purchase
Contract & URC
Who
is at
Risk?

11. Flow Chart of Documentary Credit

12. IMPORTER EXPORTER
SALES/ PURCHASE CONTRCACT
SHIPMENT MADE (4)
ISSUING
BANK
ADVISING/
CONFIRMING/
NEGOTIATING
BANK
MAKES
PAYMENT
AGAINST
DOCUMENTS
(10)
PRESENTS
DOCUMENTS
(9)
APPLIES
TO
ISSUE
LC
(1)
ADVISES
AND/OR
CONFIRMS
L/C
(3)
SUBMITS
DOCUMENTS
(5)
MAKES
PAYMENTS
BY
NEGOTIATING
DOCUMENTS
(6)
ISSUES L/C (2)
FORWARDS
DOCUMENTS (7)
MAKE PAYMENT (8)
PAYING/ REIMBURSING
BANK
Instructs
Pays or
Reimburses
TO Pay or
Reimburse
OR
Flow Chart of Documentary Credit

13. 13
Major Steps of Documentary Credit
 Issuing of L/C
 Advising of L/C
 Amendments
 Presentation of Documents
 Settlement of Payment

14. 14
PARTIES RELATED TO DOCUMENTARY CREDIT
 Applicant/Importer/Buyer: The person on whose request Letter
 of credit is opened.
 Beneficiary/Seller/Shipper: The party in whose favor the letter of
credit is issued.
 Issuing Bank: The bank that agrees to issue or open Letter of
Credit on the request of applicant & in terms of the instructions of
applicant.
 Advising Bank: The Bank that advises the credit at the request of
the issuing Bank.

15. 15
PARTIES RELATED TO DOCUMENTARY CREDIT
 Confirming Bank: The Bank that adds it’s confirmation upon the
issuing bank’s authorization or request.
 Nominated Bank: A Bank that nominated to pay, issue deferred
payment undertaking or accept drafts.
 Reimbursing Bank: This is the Bank, which would reimburse the
negotiating/nominated bank. It is to be nominated by the issuing
bank.
 Transferring Bank: The Bank that transfers the credit at the
request of the issuing Bank.
 Insurance companies, Shipping Company, Other Authorities (if
any)

16. Types of Letter of Credit
Article 3 of UCP-600 says that a credit is Irrevocable even if there is not
indication to that effect. It therefore, indicates that (under UCP-600)
there is only one type of Credit, named Irrevocable Letter of Credit.
Irrevocable credit
The issuing bank commits itself irrevocably to honour its obligation
under the credit, provided that the beneficiary complies with all credit
conditions.
Revocable Credit
The revocable credit can be modified or cancelled by the issuing bank
at any time without prior notice to the beneficiary.
16

17. 17

18. Other types of Letter of Credit
 Stand-by Letter of Credit
 The Revolving Credit
 The Transferable Credit
 The back-to back credit
 Red clause letter of credit
 Green clause letter of credit
 At Sight/ Deferred/ Usance/ UPAS/ Restricted/ Confirmed L/C
Standby Letter of Credit : The Standby Letter of Credit is a documentary credit or
similar arrangement, however named or described, which represents an obligation to
the beneficiary on the part of the Issuing Bank to :
(a) repay money borrowed by the applicant, or advanced to or for the account of the
applicant;
(b) make payment on account of any indebtedness undertaken by the applicant; or
(c) make payment on account of any default by the applicant in the performance of an
obligation.
18

19. Red Clause Letter of Credit :
In this credit, the issuing bank authorizes nominated bank, which is in beneficiary's
country, to give pre-shipment credit to the beneficiary. This advance is given to the
beneficiary for purchase of raw material / processing / packing of the goods to be
exported. It is given at the risk and responsibility of the issuing bank and is unsecured.
The pre-shipment advance given in this way would be adjusted against the documents
tendered by the exporter for negotiation. This type of L/C is known as 'Red Clause
Letter of Credit'.
Green Clause Letter of Credit:
This credit is an extended version of red clause credit. In addition to whatever has been
given in red clause credit, it covers charges for warehousing of the goods at the port of
shipment, when waiting for ship or space and insurance therefore. Generally, the
advance under this credit is given to the exporter after the goods are lodged in bonded
warehouse and would be adjusted once they are shipped on board, Under this credit,
warehouse warrants are given as a security for the advance.
19

20. Back to Back Letter of Credit
A back-to-back letter of credit is different from the original credit based on which
the bank undertakes the risk under the back-to-back credit. In this case the bank’s
main surety/security is the original credit. The original credit (selling credit) and the
back-to-back credit (buying credit) are separate instruments independent of each
other and in no way legally connected, although they both form part of the same
business operation. The supplier (beneficiary of the back to back credit) ships goods
to the importer or supplies goods to the exporters and presents the documents to the
bank as is specified in the credit. It is intended that the exporter would substitute his
own documents and ships the goods to the importer, if necessary, and present
documents for negotiation under the original credit, his liability under the back to
back credit would be adjusted out of these proceeds.
20

21. Documents Required For Issuance of
Documentary Letter of Credit
 TIN, BIN/ VAT Certificate, IRC or any other applicable permission.
 Proforma Invoice (PI)/ Contract/ Purchase Order/ Indent
 Prescribed Application & Agreement Form
 LCAF Form (Industrial/ Commercial)
 Insurance Cover Note
 Permission of Competent Authority where Applicable
 Application to Bank Manager / Approval/ Sanction

22. L/C Procedure
1. The buyer and seller conclude a sales contract
providing for payment by a Documentary
Credit.
2. The buyer instructs his bank - the “Issuing
Bank" - to issue a Documentary Credit in favour
of the seller (Beneficiary)
3. The Issuing Bank issues the Documentary
Credit and asks another bank (the Advising
Bank), usually in the country of the seller, to
advise or confirm the Documentary Credit.

23. 4. The Advising Bank informs the seller that the
Documentary Credit has been issued.
5. As soon as the seller receives the Documentary
Credit and is satisfied that it meets the terms of the
sales contract and that he can meet the Documentary
Credit terms and conditions, he is in a position to effect
shipment.
6. Seller then sends the required documents to the bank
where the Documentary Credit is made available (the
Nominated Bank).
Procedure (contd.)

24. 7. The bank examines the documents against the
Documentary Credit. If they meet the requirements of
the Documentary Credit, the bank will negotiate;
according to the terms of the Documentary Credit.
8. The bank, which takes up the documents, sends the
documents to the Issuing Bank.
9. The Issuing Bank examines the documents and, if the
documents meet the Documentary credit requirements,
reimburses in the pre-agreed manner the Confirming
Bank or any other Nominated Bank that has negotiated
under the Documentary Credit.
Procedure (contd.)

25. 10. When the documents have been examined by the
Issuing Bank and are found to meet the Documentary
Credit requirements, they are released to the buyer.
11. The Issuing Bank obtains reimbursement from the
Buyer in the pre-agreed manner.
12. The buyer forwards the transport document to the
local office or agent of the carrier who will then affect
delivery of the goods to him.
Procedure (contd.)