12 (Letter Of Credit ) What Is A Usance Letter Of Credit ?
Case – Explain Complete concept of Letter of Credit with Real Example !

Story – By Amlan —-Contribution’s by Runold Fernandes .

I am wanting to buy coke bottles from Coa Cola USA …..so evidently , i am the buyer

Alway’s remember that the receive of the payment (seller ) is termed the beneficiary …..so here Coca Cola USA is the benefeciary ….

Let’s also understand what is a letter of credit ….it is credit ( payment offered ) against documents and so also called documentary credit …. amechanism wherein the seller of the goods is assured of his payment because the buyer’s bank take’s guarantee to make the payment …the seller is not concerned whether the buyer goes bankrupt or not

So , in this case my bank is SBI , Cuffe parade ….this is called the issuing bank ….say , i want to buy 100 crates Coke bottles worth 10 million dollars …..i go and ask the bank to open a letter of credit (the process is called issuing letter of credit ) favoring the bebenficiary and the beneficiary bank as follows

Beneficiary – Coca Cola Ltd

Beneciary Bank – Citi Bank -Los Angeles

Coca Cola Lts had already intimated me that he bank he desires for his payment to be credited shall be Citi Bank (Los Angeles )…..

Case 1 –

In present arrangement , SBI Cuffe parade is the issuing bank , Citi Bank Los anageles is the Bneficiary bank

Once the LC is opened , SBI sends across the letter of credit to the advising bank which then advises Coca Cola that the LC has come and asks for the documents

Say , Coca Cola ships the Material on 16Th May ….he gets the bill of lading and collects all the other documents like the invoice , ciountry of origin , Test certificate , inspection certicate ads mentioned in the LC and makes a presentation of the documents to the advising bank ( not neccesary that documents are to be submitted to the advising bank )

The bank ( in this case —-Citi Bank checkls the documents …if it finds any discrepancy , it lets know to the seller( Coca Cola ) of the discrepancy …say test certificate was missing , it lets Coca cola know of the same …Coca cola then furnishes the remaining document…once the advising bank is satisfied that all documents are in order , it sends the documents to the issuing bank (SBI , cuffe parade )

If SBI , cuffe parade also finds that the docs are in order , then since it has taken guarantee for payment , it will have to make payment for the issued LC i.e pay the advising bank 2000 $ against the docs collected

It then contacts me (buyer ) that all the docs are with it and asks me to make payment and collect the documents

( Sometimes while issuing the letter of credit , the bank blocks that much fund from my account and when the docs arrive debits my account and sends across the documents )

Using the Bill of lading document) document, i go to the Mumbai port to get my shipment released upon subsequent payment of Import duty for the coke trenches

That’s it

The basics are clear ,

Hope You enjoyed ,

Cheers ,

Amlan