Following parties are involved in the LC
1). Applicant / Buyer / Importer:
It is the buyer of the goods or services supplied by the seller. On the request of the buyer, LC is open by the buyer’s bank.
2) Beneficiary / Seller / Exporter:
It is the seller of the goods or services. The LC is issued in the favor of the Beneficiary.
3) Issuing Bank:
It is the bank who issues a letter of credit at the request of the buyer or applicant.
4) Advising Bank:
It is also known as a notifying bank. It advises the beneficiary that a letter of credit has been opened in your favor by the issuing bank. Its responsibility is to authenticate the letter of credit issued by the applicant to avoid fraud.
5) Negotiating Bank:
It negotiates the documents which are submitted by the exporter after shipment is done. It verifies the documents & confirms the terms & conditions under LC on behalf of the beneficiary to avoid discrepancies.
6) Confirming Bank:
“Confirmation means a definite undertaking of the confirming bank, in addition to that of the issuing bank, to honor or negotiate a complying presentation.” In this way, beneficiaries receive a second payment guarantee from another bank. Insolvency risk of the issuing bank is eliminated by addition of this second payment guarantee to the letter of credit.
Mostly confirming banks and the beneficiaries are located in the same country and when this is the case the country risk of the issuing bank is eliminated
7) Nominated Bank / Restricted Bank:
Nominated Bank means the bank with which the letter of credit is available or any bank in the case of a credit available with any bank.
In maximum LC cases, nominated and confirming bank remain the same.
a) In the case of restricted LC, negotiating & nominated banks are same. Generally, under LC negotiation bank is exporter’s bank.
b) In the case of confirmed LC, the payment risk for exporter gets localized. Whereas in the case of unconfirmed LC, it is a foreign risk. In confirmed LC case, LC confirmation bank on the instruction of the LC opening bank is supposed to make payment to the exporter’s bank.
c) When the exporter submits the documents to exporter’s bank for payment then this process is called Negotiation.
- Buyer Opens the Confirmed LC and advises it through the Advising bank
- The Advising bank informs the Exporter Bank that the LC has been received in your favor.
- Exporter Bank informs the same to the Exporter
- Exporter submits the documents to the Exporter’s bank
- Exporter bank after verifying it, submit the same to the confirming bank.
- Confirmation bank makes the payment to the Exporter’s Bank.
- Confirming bank forwards the documents to the LC opening bank.
- LC opening bank will make the payment to the Confirming bank
- The buyer’s bank send the documentation to the buyer
- The buyer presents the documents at the port and releases the goods.