1. Letter Of Credit: Definition, Types & Parties
Compiled By:
Janata Bank Staff College
Dhaka

2. Bankers role in Foreign Trade
Bankers Play Two important role in Foreign Trade-
1. To Facilitate Payment
2. To Make Finance

3. Methods of Payment- There are 4 Methods of Payment- 1.
Cash in Advance 2
Open Account
3. Documentary Collection
4. Documentary Credit

4. Origin of the term Letter Of Credit
English-“letter of credit”
French word “accreditation”
Latin word “accreditivus”, meaning trust.

5. Define Letter Of Credit
The letter of credit is a commitment by the buyer’s bank on behalf of the buyer (importer) to effect payment to the seller (exporter) / beneficiary subject to fulfillment of certain conditions by the seller.

6. Define Letter Of Credit…Continued … Letter Of Credit
1. A letter addressed to the seller,
2. written and signed by a bank,
3. who acts on the buyer’s behalf.
-Bank promises to pay drafts,
provided seller performs
exactly.

7. Define Letter Of redit…Continued…
As per Article-2 of UCPDC – 600 Credit means –
any arrangement, however named or described, that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honour a complying presentation .
A) to pay at sight if the credit is available by sight payment.
B) to incur a deferred payment undertaking and pay at maturity if the credit is available by deferred payment
C) to accept bill of Exchange (draft) drawn by the beneficiary and pay at maturity if the credit is available by acceptance.

8. Flow Chart of Doc. Credit
Reimbursing Bank 
Advising Bank
Confirming Bank
Shipra Biswas, Faculty Member ,JBSC

9. Parties To A Letter Of Credit
Applicant
Beneficiary
Issuing Bank
Advising Bank
Confirming bank
Nominated Bank
Confirming Bank
Reimbursing Bank

10. Types of Letter of Credit :
Irrevocable letter of credit :
(Article of 3 of UCP-600 says that a credit is irrevocable even if there is not indication to that effect. It therefore, indicates that (under UCP-600) there is only one type of credit, named Irrevocable Letter of Credit)

11. Types of Letter of Credit :
Revocable letter of credit
Sight letter of credit
Deferred letter of credit
Confirmed letter of credit :
Transferred Letter of Credit
Revolving letter of credit
Red Clause letter of credit
Green Clause letter of credit
Back to Back Letter of Credit
Standby letter of credit

12. Letter Of Credit
Applicant : means the party on whose request the credit is issued.
=The buyer, or customer, is the Applicant.
Beneficiary: means the party in whose favour a credit is issued
= The seller of the goods or the provider of the services.

13. Parties To A Letter Of Credit
Issuing Bank is the bank that issues a letter of credit at the request of an applicant or its own behalf. Issuing bank undertakes to honor a complying presentation of the beneficiary without recourse. 
The Issuing Bank’s credit replaces the buyer's credit.
Risks to the Issuing Bank-
Insolvency of the Applicant
Fraud Risk, Sovereign and Regulatory Risk and Legal Risks

14. Parties To A Letter Of Credit
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 amendmend without any obligation to honor.
-----The Advising Bank is an agent of the Opening Bank.
Verifies the authenticity of the Opening Bank.

15. Parties To A Letter Of Credit
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.
Risks to the Nominated Bank -has made a payment to the Beneficiary against documents that comply with the terms and conditions of the Credit and is unable to obtain reimbursement from the Issuing Bank

16. Parties To A Letter Of Credit
Confirming Bank: Confirming bank is the bank that adds its confirmation to a credit upon the issuing bank's authorization or request.
This decision is up to confirming bank only.
once it adds its confirmation to the credit confirming is irrevocably bound to honor or negotiate as of the time it adds its confirmation to the credit. Even if the issuing bank fails to honor, confirming bank must pay to the beneficiary.
--The Confirming Bank is usually the Advising Bank, but it confirms that the credit exists.
--It can negotiate the documents, and can accept the letter of credit the Opening Bank will not pay.

17. Parties To A Letter Of 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.

18. Thank You