Letter of credit is a payment method in international trade. It is usually shortened as L/C or DLC. DLC means Documentary Letter of Credit or Documentary Credit.
As of yesterday, I have started to write down a new series of articles regarding letters of credit. The 1st article was about the definition and types of letters of credit.
Today, on this article, I will try to introduce you the parties to a simple letter of credit transaction. Each L/C party will be presented briefly and its role will be explained with the help of the graphic images.
In a typical letter of credit transaction, one should expect to see following parties: applicant, beneficiary, issuing bank, confirming bank, nominated bank and reimbursing bank.
Let us start understanding these parties along with their roles and responsibilities one by one below.
Under a commercial letter of credit, applicant is the technical name of the buyer of the goods or services.
Although, banks issue letters of credit according to applicants' instructions, applicants do not belong one of the parties to a letter of credit transaction.
This is because of the fact that letters of credit are separate transactions from the commercial contracts on which they may be based.
Beneficiary
Under a commercial letter of credit, beneficiary is the technical name of the seller of the goods or services.
Letters of credit are issued in favor of the beneficiaries.
Beneficiaries will be eligible to receive payment under both commercial and standby letters of credit, as long as they make complying presentations.
Issuing Bank
Issuing Bank is the bank that issues a letter of credit at the request of an applicant or its own behalf. (It is strange but letters of credit rules allow issuing banks to open letters of credit to their own behalf)
Issuing banks undertake to honor a complying presentation without recourse basis.
Which means that issuing banks must pay the letter of credit amount to the beneficiaries, if complying presentation has been made.
Confirming Bank
Confirming bank is the bank that adds its confirmation to a credit upon the issuing bank's authorization and request.
Confirmation is a commercial decision, as a result a bank is free to add its confirmation to any letter of credit.
But, once it adds its confirmation to the letter of credit, confirming bank is irrevocably bound to honor the L/C.
Even if the issuing bank fails to honor, confirming bank must pay to the beneficiary.
Nominated Bank
Nominated bank is the bank with which the credit is available or any bank in the case of a credit available with any bank.
Nominated banks play a key role determining whether or not the documents are presented within the allowed period or not.
Advising Bank
Advising bank is the bank that advises the credit at the request of the issuing bank.
An advising bank that is not a confirming bank advises the credit and any amendment without any obligation to honor.
By advising the credit or amendment, the advising bank signifies that it has satisfied itself as to the apparent authenticity of the credit or amendment and that the advice accurately reflects the terms and conditions of the credit.
Reimbursing Bank
Reimbursing Bank shall mean the bank instructed and/or authorized to provide reimbursement pursuant to a reimbursement authorization issued by the issuing bank.
Reimbursing Bank is the settlement bank between the issuing bank and the nominated bank or the confirming bank.
If letter of credit currency is USD, reimbursing bank is usually located in US. If letter of credit currency is EUR, reimbursing bank is generally located in Germany.
