Letters of Credit
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What is a Letter of Credit (LC) in banking terminology?
A Letter of Credit is a written undertaking by an issuing bank, on behalf of the buyer (applicant), to pay the seller (beneficiary) a specified amount provided the seller presents documents that comply strictly with the terms and conditions of the LC.
What is an irrevocable Letter of Credit?
An LC that cannot be amended or cancelled without all parties' consent.
Which international rules primarily govern Letters of Credit?
Letters of Credit are primarily governed by the Uniform Customs and Practice for Documentary Credits (UCP 600), published by the International Chamber of Commerce (ICC), which came into effect on 1 July 2007.
What is the role of the issuing bank in an LC transaction?
It opens the LC on behalf of the applicant and guarantees payment to the beneficiary.
Who are the primary parties involved in a Letter of Credit transaction?
The primary parties are the applicant (buyer/importer), the issuing bank, the beneficiary (seller/exporter), and the advising bank; additional parties may include the confirming bank and the negotiating bank.
Who is the beneficiary in a Letter of Credit transaction?
The exporter/seller who receives payment under the LC.
What is the role of the advising bank in an LC transaction?
The advising bank authenticates and forwards the LC to the beneficiary on behalf of the issuing bank, without taking any payment obligation unless it also confirms the LC.
Who is the applicant in a Letter of Credit?
The importer/buyer who requests the bank to open the LC.
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