How is Letter of Credit Opened

Document Sample
How is Letter of Credit Opened Powered By Docstoc
					    How is Letter of Credit Opened?
Sales Contract: The importer contracts exporter for purchase of goods. He settles
with seller about prices, quantity and quality of goods and mode of making payments.
Then importer informs his banker to open a letter of credit.

Performa Invoice: Bankers ask applicant to provide Performa invoice or indent of
goods to be imported after taking these documents banker permits importer to file an
application on printed form.

Import license:-         The banker can ask for important license form the importer. The
license is issued by the government. The importer can submit copy of importer license.

Application form:- A printed application form usually known as application and
agreement for irrevocable letter of credit is filled up by banker and signed by applicants.
All terms and conditions of sale contract are recorded in it.

Completion of form:-Banker as per information of application fills in the letter
of credit form. All terms and c conditions are also stated in this form. The commercial
bank can open letter of credit because they are authorized dealers in foreign exchange.

Margin requirements:-The state bank of Pakistan decides percentage of amount
to be paid to issuing bank by importer. This amount is called margin. This amount is
deducted from total payment to be made by importer.

Information to advising bank:-The issuing bank informs advising bank                   that
credit has been issued . three copies are prepared one copy is kept by issuing bank for its
own record and other two copies are sent to advising bank, the advising bank keeps
second copy and third copy is given to beneficiary.

Information to seller:- The advising bank informs seller that credit has been
issued. The seller sends goods to buyer and provides shipping documents to advising
banker. The bank checks documents and then sends to issuing bank.

Payment to seller:- The advising bank negotiates bills drawn by seller and makes
payment to seller. Some times payment is made by bank other than advising banker. In
all issuing banker reimburses amount paid to seller.
Collection of documents:-The issuing bank collects shipping documents from
advising bank. These documents are bill of lading. Insurance policy, invoice, consular
invoice and certificate of origin. The issuing bank can examine these documents before
giving it to the importer.

Collection of money:-The issuing bank collects the money from the importer
before release of shipping documents. The margin requirements are already collected.
The remaining amount is collected at this stage.

Release of documents:-The issuing bank releases shipping documents to buyer
after receipt of amount due. The buyer sedns transport documents to carrier who makes
arrangements to deliver goods.

Receipt of goods:-The importer can collect documents from the bank. He can
submit these documents to shipping company for release of goods. Then he can collect
goods from the shipping company. In this way transaction of import is complete.

Description: Letter of credit is a type of guarantee. In foreign trade, seller asks the purchase to give him some guarantee of his payment. So purchase’s bank gives the guarantee to the seller about his payment.