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Letter of Credit Definition, Types, Questions For JAIIB

Letter of Credit: Letter of Credit is an important topic from the examination point of view. The concepts of the Letter of Credit must be crystal clear to the aspirant. In the JAIIB Exam, many questions are asked from the section of Letter of Credit. A number of Case Studies are also seen in the Exam on the topic of Letter of Credit. Letter of Credit topic is so beneficial because its questions can be seen in the papers of JAIIB as well as CAIIB. So all the JAIIB/CAIIB aspiring candidates must be thorough with this topic. In this article, we have discussed all those points of Letter of Credit from which questions can arise in the JAIIB Exam.

Letter of Credit: Definition

A letter from a bank confirming that the payment of a buyer to a seller will be received on time and for the correct amount is called the Letter of Credit. If after the purchase the buyer is not able to make payment then the bank will have to pay the complete or remaining amount of the deal.

Letter of Credit: Parties Involved

The parties that are involved in the issuing of the letter of credit are described below:

  • Applicant/Buyer/Opener/Importer- The person who applies for the letter of credit to the bank especially the buyer of the goods.
  • Issuing Bank- The bank that opens up the letter of credit.
  • Beneficiary Party- The party that will get the benefit under Letter of Credit. The amount issued will be received by the beneficiary party.
  • Advising Bank- The bank that has the responsibility to communicate with the other required parties under the letter of credit.
  • Confirming Bank- The bank that takes the responsibility of payment under the Letter of Credit is called the confirming bank.
  • Negotiating Bank- Negotiating Bank verifies and confirms the documents under the terms and conditions of Letter of Credit.
  • Reimbursing Bank- The issuing bank appoints the reimbursing bank to make the reimbursement to the confirming bank.

Letter of Credit: Types

  • Revocable Letter of Credit- Revocable LC can be amended or cancelled at any moment by the issuing bank even without the consent of any other party until the LC has not been drawn or documents are not taken up. Under the revocable LC if the negotiating bank has taken the documents prior to the receipt of cancellation notice then the issuing bank is responsible to compensate the amount to the negotiating bank.
  • Irrevocable Letter of Credit- Irrevocable LC cannot be amended or cancelled without the agreement of all parties concerned. This Letter of Credit is an unconditional undertaking by the issuing bank to make payment on the submission of documents withstanding the terms and conditions of the LC. Provided by the conditions of LC the issuing bank is committed to reimburse the negotiating bank. If the LC is not specified then they are considered as Irrevocable Letter of Credit.
  • Transferrable Letter of Credit- Transferrable LC can be transferred completely or partly in favor of any party other than beneficiary by the advising bank at the request of issuing bank.
  • Red Clause Letter of Credit- Red Clause LC allows the beneficiary to get the pre-shipment credit from the nominated/advising bank as per the permission given by the issuing bank. As the clause of the LC is printed in Red so it is called as Red Clause LC.
  • Green Clause Letter of Credit- Pre-Shipment and Post- Shipment Advances are included in the Green Clause LC.
  • Negotiation Letter of Credit- Negotiation LC can be freely negotiable or may be restricted to any bank that is chosen by the LC issuing bank.
  • Back to Back Letter of Credit- When a LC is issued for a local supplier by an exporter to acquire goods on the basis of export LC received in his favor is called as Back to Back LC.

Letter of Credit: Required Documents

The documents that are required under Letter of Credit are listed below:

  • Bill of Exchange
  • Bill of Lading
  • Bill of Airways
  • Invoice
  • Transport Documents
  • Origin Certificate
  • Weight/Quality/Analysis Certificate
  • Courier Receipt
  • Post Parcel Receipt
  • Insurance Document
  • Certificate from the health authorities

Uniform Customers and Practices for Documentary Credits- UCPDC 600

The new documentary credits of ICC Banking Commission, UCP 600 was sanctioned on 25 October 2006. UCP 600 commenced on July 1,2007. The Significant changes that were brought in UCP 600 are given below:

  •  The number of articles were decreased from 49 of UCP 500 to 39.
  • To make the rules more precise and clear new articles were added on Definitions and Interpretations.
  •  For accepting or refusing of documents by a definite time period of five banking days there was a substitution of the phrase Reasonable Time.
  • New provisions were incorporated that gave the permission for the discounting of deferred payment credits.
  •  Negotiation was given an ultimate description as “purchase” of drafts of documents.

Letter of Credit Questions asked in JAIIB June-July Exam

A significant number of questions are covered from the section of Letter of Credit. The questions that were asked in the JAIIB June-July Exam 2022 from Letter of Credit include: Definition of LC, types of LC specially from Back to Back LC & Red Clause LC, parties involved in the LC, Uniform Customers and Practices for Documentary Credits UCPDC 600. Case Studies based on the Letter of Credit were also asked in the JAIIB June-July Exam.

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FAQs: Letter of Credit

Q.1 What is a Letter of Credit?

Ans. A letter from a bank confirming that the payment of a buyer to a seller will be received on time and for the correct amount is called the Letter of Credit.

Q.2 What are the different types of Letter of Credit?

Ans. The different types of Letter of Credit are Revocable LC, Irrevocable LC, Red Clause LC, Transferrable LC, Commercial LC, Export/Import LC, Confirmed LC, etc.

Q.3 Which all parties are involved in the Letter of Credit(LC)?

Ans. The parties that are involved in the Letter of Credit are Applicant, Beneficiary, Advising Bank, Confirming Bank, Reimbursing Bank, etc.

Q.4 What are the documents required for the Letter of Credit?

Ans. The documents required for the Letter of Credit are Bills of Exchange, Bill of Lading, Transport Documents, Invoice, etc.

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