Letter of Credit(LC) का सब कुछ आसान भाषा में समझिये - YouTube

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Hello, my name is Mukul

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In this video, we are going to discuss the Letter of Credit

Many subscribers have requested to make a detailed video about the letter of credit

In this video, we will understand the concept

And we'll see how this works

I had discussed bank guarantees in my previous video

If you haven't watched it yet, then make sure to watch it

Letter of credit, like a bank guarantee, is a non-fund based credit facility

But this is different than that, many people get confused

They consider bank guarantee and letter of credit the same

But these are two different financial instruments and their purpose is also different

For example, you are a buyer

And you want to purchase something from the seller

And he may not be in the city

He lives far away from you or he may not be in your country

Let's say you live in India

And you want to import computer equipment from China

So in this case, it will be very difficult for you to trust the seller

And it is difficult for the seller to trust you

You may not have funds to transfer immediately

The seller will not send goods without money

And you will also not give money without taking goods

Then, in this case, the third party is used, banks are used

2 or 3 banks are involved in this concept

So in what ways is this credit facility is used or arranged

So we will discuss this only in detail

So please watch this video from start till the end

So that you'll understand this concept nicely

Let's go to the blackboard straight

So let's understand what is a letter of credit?

How does this process work?

We will take the same example which we took in the starting

Assume you are a buyer in India

And you want to import computer equipment from China

Then you cannot trust one another, the buyer and seller cannot trust each other

The buyer will think that, if I send the money first

Then maybe I'll not get the goods on time

Seller may think that his payment will not be on time

So in these cases, the letter of credit is very useful

which is a financial instrument, a bank issues it

There is a guarantee in a way through this financial instrument

That a buyer will pay the seller

The banks pay the amount as soon as the criteria meet

So the seller has to meet the criteria,to ship his the goods

And present the document

So how this process is operated?

How are the banks are involved? Let's understand!

Firstly the buyer becomes the applicant in a way

Because he will issue the letter of credit

So the applicant will go to his bank

And the bank to which he will request the letter of credit

We call it opening bank or issuing bank

So he will request a letter of credit there

This is the first part of this

In the next step, there is an advising bank which is a bank of the beneficiary

Beneficiary means the seller

The opening bank will send the letter of credit to the advising bank

In our second step, the letter of credit will reach the advising bank

Then the advising bank will check the authenticity here

In authenticity, he will check all the things whether the name is correct or not

Product name and all these things will be checked in the letter of credit

Then advising bank will send that letter of credit to the seller

Now the seller has full trust, there is a build-up trust

Because the buyer has sent the letter of credit

That means he is very serious about it

After that, he will ship the goods from here

Letter of credit in a way built trust

That his money is not going anywhere, I'll get the money for sure

Because the banks are involved here

So here he will ship his goods

In the third part, we have seen that the seller got the letter of credit

In the fourth step, these goods will be shipped

These are in route, let's say these are only shipped, they haven't reached the buyer yet

Because it will take time to reach from China to India

But this process of documents will go on

After that, the seller will get a bill of lading here

Bill of lading is the main document when goods are exported from any country

He will take the bill of lading to the nominated or negotiating bank

A nominated or negotiating bank can be a separate bank or advising bank

Both can be the same

And negotiating bank can be a separate bank

The purpose of negotiating bank is to check the shopping documents

The bill of lading present in here, they will check its accuracy

Of the goods are shipped properly or not, according to LC

After this, the negotiating bank or the nominated bank

Will make the payment to the beneficiary

So the payment to the beneficiary is done here

So this was our 5th step

So in the 5th step, the negotiating bank checked the documents

And made the payment to the beneficiary

After that, negotiating bank sends the documents to the opening bank

And demand the payment

The demand for payment is done here

The opening bank will send these documents to the applicant

And will take his approval if all the documents are right or not

The products that they have ordered are shipped according to them or not

Once the applicant's approval comes, the opening bank demands the payment

From applicant and applicant make payment to the opening bank

So here are 5th step was done

In the 6th step, documents were sent and the payment was demanded

In the 7th step, approval was taken from the applicant

In the 8th step, payment was done

The applicant has done the payment to the opening bank

After that, the opening bank again makes the payment to the negotiating bank on the 9th step

Here you can see I have done color coding here with different colours

Here you can see the movement of LC in blue color

LC was requested and then LC was issued

It is called the opening of LC

So the opening bank is opening the LC

Then the LC has reached the advising bank and then it is reached to the seller

After that, the movement of the documents is marked by the orange color

First, it reaches the negotiating bank, after that to opening bank

After that, it reached the applicant

Payment is being made from the applicant to the opening bank

After that, to the negotiating bank,

And negotiating bank has already made the payment to the beneficiary

As I have already told you that the negotiating bank and advising bank can be the same

So in this way, this whole process works

And the goods that have been shipped here will be delivered

So the buyer will get his goods and the seller will get his payment

The whole transaction would end and the trust issue will be resolved

Many times one more step get involved

Many times the advising bank thinks that the credit rating of

The opening bank isn't that great

Maybe this is a small bank

Then it says that bring the guarantee from a bank

That has good credit ratings

If a big bank guarantees you that you shouldn't have a problem

In issuing Letter of credit for opening bank

if opening bank, in any case, defaults the letter of credit

Then it will be our guarantee

And it will be liability of the confirming bank for the payment

So in this way, another bank, confirming bank can be involved

So this was the working of letter of credit

Now let's see the important features of the letter of credit

We will talk about the collateral and charges

When a bank issues LC, then it issues it against the collateral

Whatever the opening or issuing bank is

Collateral means keeping the bank deposits or FD as a security

The bank always charges a fee to issue a letter of credit

The fees are dependent on the type of letter of credit

I will cover the types of letters of credit in the next video

So make sure to watch my next video

So this is a fundamental concept of international trade

Because buyers and sellers do not know each other in international trade

As I have told you earlier

So there are trust issues and that's why international guidelines are issued

International Chambers of Commerce issues guidelines for a letter of credit also

So ICC is its main body

After that, the correctness of LC is very important

I will highlight it

See because in LC there's only the exchange of documents

Goods and services are not exchanging there

The contents given in the LC is very important

What is the name of the seller, exact issuing date

What is the exact amount of the letter of credit?

What is the product name and quantity

What are other details, they should be precise and clear

There should not be spelling mistakes

If there is any kind of minor mistake, if there are some misspellings

The name of the seller has missed "A"

Or there is "E" in place of "A"

If the product name has not been written properly

If the name is written half or there is a spelling mistake

Or shipping has not been done on time

Or the shipping date is written on the document

The shipping was not done on that date

So for these minor things too, the bank will not pay according to LC

Or we have to make a new LC

All parties in LC deal in the document and not goods and services

As you have seen that we saw the whole process

And there is only a process of document

Banks do not care about goods and services

So basically if the documents are right then the payment will be done

Payment will not depend on whether there is a defect in goods or services

So I have told this earlier that if the documents are right

Then the bank will do the payment

There is no guarantee for if the goods are defective or

The whole goods are not delivered

So this is not the liability of the bank

This problem will be solved by the buyers and sellers

In whatever ways they want to resolve it

So you must check all the spellings in the letter of credit

And check all the details in advance

When the opening bank is issuing the letter of credit

Or if it is opening them

So as a buyer, you should check all the details

And as a seller also you would check all the details

In the letter of credit

Before that, you should not ship the goods

Now we will see what are the advantages of a letter of credit

For a buyer or the seller

First, we will talk about the seller

As we have discussed, that we get protection

If the buyer does payment default then it is the liability of the bank

Bank will surely pay you

After that your production risk decreases

Assume if it is suddenly canceled

But if the letter of credit has been issued already

Then the buyer cannot do anything, he'll have to buy goods from you

Assume you have a manufacturing unit,

Then you'll not have any production risk

If you have any manufacturing unit

We will talk about the buyer

What advantages do buyers have?

The goods will be received by you timely

So there's a certainty that you will surely receive goods

After that, LC shows your solvency that you are in business

And in a way, it is showing standing in your business

Because the bank is ready to take credit risk on you

After that, you get a small credit you don't have to do an initial payment

So it reduces the burden

Assume if you don't have immediate payment

So you get time

I think I have covered all the major points related to LC

We have seen how the whole mechanics works

What are the important features of the letter of credit

And what are the advantages of a letter of credit to the buyers and sellers

In my next video, I will talk about the types of letter of credit

Make sure to watch that video

In that video, we will see how many types of letters of credit are there?

And when to use and where?

That's all in this video

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