Answer to Question #258246 in Finance for Vibha

Question

Identify which party is playing what role in the following Letter of Credit transaction. ABC Limited wants to import raw material from Z123 Limited, a supplier in Germany who banks with T.R.V. Bank. The supplier insists that ABC Limited issue a Letter of Credit for the full value of the transaction. A tenure of 90 days is agreed upon. ABC Limited approaches N.O.P. Bank to issue a Letter of Credit. You are required to identify the steps involved in a Letter of Credit transaction. Also Identify which party is playing the role of

 Issuing Bank

 Beneficiary

 Applicant

 Beneficiary Bank

Answer 1

Solution:

A letter of credit (LC) is a written document issued on the importer's behalf by the importer's bank (opening bank). The exporter is assured by its issuance that the issuing bank will pay the exporter for international trade conducted between both parties.

 

The importer is the LC's applicant, while the exporter is the LC's beneficiary. The issuing bank promises to pay the specified amount within the agreed-upon time frame and against specified documents in an LC.

The steps involved in a Letter of Credit transaction are as follows:

Step 1 - Issuance of an LC.

Step 2 – Shipping of goods.

Step 3 – Providing documents to the confirming bank.

Step 4 – Settlement of payment from the importer and possession of the goods.

 

Issuing Bank – N.O.P Bank

Beneficiary – Z123 Limited (Exporter)

Applicant – ABC Limited (Importer)

Beneficiary Bank – T.R.V. Bank