Operations of Letter of Credit

Operations of Letter of Credit (LC)

I. Introduction to the Operations of Letter of Credit:

  • The operations of a Letter of Credit (LC) involve various steps to ensure the smooth execution of international trade transactions.
  • LC operations provide assurance to both the buyer and the seller regarding payment and delivery.

II. LC Process and Operations:

  1. Opening of LC:
    • Buyer (applicant) requests their bank (issuing bank) to issue an LC.
    • Issuing bank opens the LC based on the buyer’s instructions.
  2. Advising of LC:
    • Issuing bank sends the LC to the beneficiary’s bank (advising bank).
    • Advising bank informs the beneficiary (seller) about the LC’s terms and conditions.
  3. Applicant’s Obligations:
    • Applicant provides necessary funds or credit to the issuing bank.
    • Complies with the terms and conditions of the LC.
  4. Shipment and Document Preparation:
    • Seller ships the goods as per the terms agreed.
    • Seller prepares and collects the required shipping and commercial documents.
  5. Document Submission:
    • Seller submits the required documents to the advising bank.
    • Documents include the invoice, bill of lading, packing list, insurance certificate, etc.
  6. Document Examination:
    • Advising bank examines the documents for compliance with LC terms.
    • If documents are compliant, the advising bank forwards them to the issuing bank.
  7. Issuing Bank’s Examination:
    • The issuing bank examines the documents to ensure they meet the LC’s requirements.
  8. Payment or Acceptance:
    • If the documents are compliant, the issuing bank makes payment or accepts a draft.
    • Payment is made to the advising bank or confirming bank.
  9. Payment to Beneficiary:
    • The advising bank pays the beneficiary or releases documents upon receipt of payment from the issuing bank.

III. Multiple Choice Questions (MCQs) with Answers:

  1. What is the first step in the operations of a Letter of Credit? a) Advising of LC b) Shipment and Document Preparation c) Opening of LC (Correct) d) Document Examination
  2. Which bank informs the beneficiary about the terms of the LC? a) Confirming bank b) Issuing bank c) Advising bank (Correct) d) Applicant’s bank
  3. What is the purpose of document examination by the advising bank? a) To confirm the beneficiary’s creditworthiness b) To check the quality of the shipped goods c) To verify compliance with LC terms (Correct) d) To determine the shipping route
  4. When does the issuing bank make payment to the beneficiary? a) Before shipment of goods b) Upon receiving the LC c) After examining the documents and finding them compliant (Correct) d) Only after the goods are sold

Note: This information is based on knowledge available up to September 2021. Always consult current sources or professionals for the latest information on the operations of Letters of Credit.