Letter of Credit and bill of exchange

Question 1

DOCUMENTARY CREDIT UNDER LETTER

OF CREDIT

Answer 1

-highly popular
-advantage from the viewpoint of the exporter, he can obtain the payment from a bank, at his own centre.
-documentary bills finance a large part of overseas
trade.

Question 2

PARTIES TO LETTER OF CREDIT

Answer 2

1. Applicant
   - The importer (applicant) approaches the bank and initiates the progress of opening documentary credit in favour of the exporter.
2. Banker
   - The banker who issues the letter of credit at the request of the applicant is referred to as the opening or issuing banker
3. Advising Bank
   - bank to whom the letter of credit is sent for authentication and delivery is known as ‘advising bank’.
4. Confirming Bank
   - which adds the confirmation
   - Normally, advising bank and confirming bank are one and the same.
5. Paying Bank
   - when a draft is drawn on the importers bank, that bank becomes the paying bank.
6. Negotiating Bank
   - When the paying bank is not located in the exporter’s place, credit permits any bank to make the negotiation of document and disburse payment to the exporter, known as ‘negotiating bank’.
7. Beneficiary
   - exporter for whose benefit the documentary credit is opened

Question 3

TYPES OF LETTER OF CREDIT

Answer 3

1. Documentary Letter of Credit
   -specifies the various documents that are required to be submitted by the exporter to the importer.
2. Revocable and Irrevocable Credit
   -Under revocable letter of credit, the opening bank reserves the right to cancel or modify the credit, at any time, without the consent of beneficiary.
   -In case of irrevocable letter of credit, the opening bank has no
   right to change the terms of credit, without the consent of the beneficiary.
3. With Recourse or Without Recourse Letter of Credit
   -Under ‘with recourse’ letter of credit, the negotiating bank can make the exporter liable, in case of default in payment by the opening bank or importer.
   -Under ‘without recourse’ letter of credit, the negotiating bank has no recourse to the exporter.
4. Confirmed and Unconfirmed Letter of Credit
5. Transferable and Non-transferable Letter of Credit
   -Under transferable letter of credit, exporter can transfer the credit fully or partly to one or more parties.
   -When the credit is not transferable, it is non-transferable credit.
6. Fixed and Revolving Letter of Credit
   -A fixed letter of credit is for a fixed period and amount.
   -In case of revolving letter of credit, the letter of credit would be revived automatically for the same amount and period, once it is exhausted.
7. Freely Negotiable and Restricted Letter of Credit
   - When the letter of credit does not put any condition for the negotiation of documents, it is freely negotiable letter of credit.
   -the credit names a specific bank for negotiation, then the letter of credit is a restricted credit.
8. Red Clause and Green Clause Letter of Credit
   -A Red Clause letter of credit is one that authorises the exporter to avail pre-shipment finance on the strength of credit.
   -In a Green Clause letter of credit, in addition to pre-shipment finance, storage facilities are allowed at the port of shipment to the exporter by opening bank.
9. Back-to-back Letter of Credit
   -This letter of credit provides pre-shipment finance to the beneficiary.
10. Assignable and Non-Assignable Letter of Credit
    -An assignable letter of credit can be assigned to a third party by the beneficiary of the credit.
    -Non-assignable letter of credit is one that cannot
    be further assigned and so opened only in favour of the real exporter of goods after the exporter confirms the order.
11. Deferred Period of Credit
    -the supplier provides credit to the buyer after supply of goods.
12. Stand by Credit
    -The credit assures the beneficiary that in the event of
    non-performance or non-payment of any obligation, the beneficiary may request the issuing bank to make the payment.

Question 4

TYPES OF BILL OF EXCHANGE

Answer 4

1. Sight bill of exchange
   -In this bill of exchange, also known as demand bill of exchange, the
   drawee has to make the payment, on presentation.
2. Usance bill of exchange
   -payment is to be made on the maturity date, after a certain period, known as Tenor.
   -When the calculation of period is made with reference to the sight of bill, the bill is known as ‘After sight usance bill’.
   -Sometimes, the maturity date is calculated with reference to
   the date of bill of exchange, it is known as ‘After date usance bill’.
3. Clean bill of exchange
   -A clean bill of exchange is one when the relative shipping documents do not accompany with it.
4. Documentary bill of exchange
   -A documentary bill of exchange is one where the relative shipping
   document such as bill of lading, marine insurance policy, invoice and other documents are sent along with the bill of exchange. This is the common form of export trade.