Lesson 14 – Aspects about  Letter of Credit

Shri Rajendra of M/S Rajendra Textiles (RT) a cotton bed sheets manufacture of Coimbatore. aproached BM Shri Swami showing a letter from Punjab Stores (PS), Ludhiana.The letter was for supplying 1000 pices of A grade fine cotton bedsheets pack at Rs2,000/- a piece in 2 lots first in 3 months and next within, 6 months.R wanted help as he was not knowing Ludhiana people.RT desired that as soon as he parts with the goods he should receive the money as PS was unknown to them. Simultaneously PS desired that they should receive quality goods within time and have credit period of 60 days after receipt of goods. 
A smart young officer Ashwin was with BM, Swami(S); listening the convention, said.Sir, thus the movement of goods is from Seller (Exporter) RT at Coimbatore to P S Buyer (Importer) at Ludhiana and naturally funds movement just opposite.The parties are not knowing each other. RT is not sure about the receipt of money and PS about quality of goods and its supply on time as well as he desired credit period. Sir how to solve all this tangle? 
Experienced BM Swami had a hearty laugh and explained that an Arrangement how so ever spelt which overcomes all these difficulties and safe guards the interest of two unknown parties is called as LETTER of CREDIT. S said, I repeat, it is an Arrangement.
So S told RT to request PS to open a LC for the proposed contract of supply of goods in their favour.

PS(Applicant/Credit opener/Buyer/Importer) approached their banker Punjab Sindh Bank ,Ludhina to open the LC in favour of RT(Seller/Exporter).Bank sought the details of supplies which were given as
1 Supply of "A class super fine bed sheets 500 pices @Rs2'000/- within 3 months and another 500 within next 6 months. 
2 The transport thru Gati Transport, MTR should not be later than 10th May and 10 th July for 1dt and 2nd Consignment. 
3 Invoice and a Bill of Exchange for the cost be drawn for Rs10 lacs each.
3 The quality of Bed Sheets be certified by Shrew Textile Coop. Corporation.
4 It should accompany Insurance for 110% of value of goods.
5 The documents be presented within 5 days of date of MTR.
All other expenses to be born by us. Based on all these inputs PSB prepares an LC (Inland LC) and communicates to PSB Coimbatore branch thru the System.
PSB take out the print adhere Rs 2 Revenue stamps cancels it by putting rubber stamp and date Signed by BM and despatches it to RT. Thus LC is opened by PSB Ludhiana,they are LC opening bank Credit Opener (They undertake liability on behalf of their client PS to honour ie Pay the amount if certain documents as stated in LC are presented to them within stipulated period).
The LC is advised by PSB Coimbatore hence they are called as Advising Banker. It is in favour of RT ,they are Beneficiary of credit.
Ashwin intervened thus LC opening is a contingent liability for PSB Ludhiana. Yes said Swami and hence they pass a Contra entry as in BG. Dr. LC Granted ( Asset ac) and Cr LC Issued (a liability ac).

Now RT books the goods and obtains MYR prepares all other documents as given in LC and hands over it to their banker ie Central Bank at Coimbatore and the LC copy.
(LC authenticity be verified by the branch.)
BM Swami shows Ashwin how each document be verified as per terms of LC and having satisfied they will Negotiate the Documents/Bill and Credit the ac of RT for Bill Amount. Of course the Negotiating commission and handling charges are claimed from the PSB as per LC terms (or from RT if LC terms are like that.).
Sir, said Ashwin thus Goods are handed over by RT in the form of MTR to branch and they immediately got the money.
Thus RTs are satisfied.
Coimbatore BM sends all documents to PSB Ludhiana and claims Reimbursement from PSB br Coimbatore as per LC terms.They get confirmation in a weeks time from their Ludhiana branch that documents conform to the LC and they reimburse the amount to CBI, hence they are Reimbursing bank.
PSB Ludhiana presents the documents to PS.They accept the (Usance ) Bill of Exchange due after 60 days and receive the certified goods in the form of MTR and credit period as desired.
Now they reverse the Contra passed earlier since the liability is crystalized.
On due date PSB Ludhiana recovers LC amount+Interest+ Negotiation charges+ commission+ handling charges etc.
Thus all parties to the transactions are satisfied.This is how a LC works.

Answer the Q's????
1 What are the parties to LC.
2 What type of liabilities it is for to PSB at opening time.
3 All parties in a LC transactions deal only in documents or both in documents and goods or goods only.

Add your questions if any in your mind.
Rest about LC in next lesson.
Good bye!

Waman Gokhale
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waman.gokhale@gmail.com