Letter of Credit (LC) is also known as “Documentary Credit” in view of credit available to the seller immediately against submission of documents under LC for negotiation.
There are four principal parties in a letter of credit viz.
- Applicant/opener: LC is opened on behalf of the applicant, normally a buyer of goods.
- Issuing bank: The bank which opens (issues) an LC and undertakes to make payment to the beneficiary on submission of documents as per terms of L.C.
- Beneficiary: Beneficiary is one in whose favour LC is issued. Normally the seller who has to get payment from the buyer.
- Advising bank: The bank through whom LC is advised to the beneficiary. Advising bank will be situated normally in the place or country of the beneficiary.
Apart from above four principal parties to LC, the following four parties are also involved in a letter of credit.
- Confirming Bank (Optional): When LC issuing bank is unknown to the exporter (seller) another reputed bank of exporter’s country adds its confirmation to the LC. It means in addition to LC issuing bank, LC confirming bank undertakes the responsibility of payment under the credit.
- Negotiating Bank: Whichever bank negotiate the documents received under LC is called negotiating bank.
- Paying Bank or nominated bank: The issuing bank nominates/authorizes a bank to make payment under the credit. The bank which makes the payment under credit is called paying the bank.
- Reimbursing bank: LC issuing bank normally maintains accounts (NOSTRO A/Cs for different currencies) with the banks of other countries. LC issuing bank authorizes a bank where it maintains accounts to honour the LC reimbursement claim. The bank which makes reimbursement of claim is called the reimbursing bank.
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