Different types of Letter Of Credit. Payment, Acceptance and Negotiation

Brief description of different types of Letter Of Credit. Payment, Acceptance and Negotiation Credit


Ø Payment, Acceptance and Negotiation Credit: Article 10 (a) of UCP stipulates, “All Credits must clearly indicate whether they are available by sight payment, by deferred payment by Negotiation.” Thus a letter of Credit may be


a)    Payment Credit:  A Payment Credit provides that payment will be made to the beneficiary against the documents to be submitted by him. In a payment Credit the issuing Bank nominates a bank in the exporters country as the paying Bank. If the paying Bank accepts its nomination, it pays the beneficiary as soon as the documents under the Credit are presented to it. It gets reimbursement from the issuing Bank for the amount it Paid.



b) Negotiation Credit: In the Negotiation Credit the documents are accompanied by a sight draft (Bill of Exchange). The bill of exchange may be drawn on the Issuing Bank or any other bank stipulated in the Credit . the bank which negotiated documents under the credit Purchases the bill of exchange and pays the amount to the beneficiary by the Issuing Bank.



Article 10 (b) of UCP provides that unless the Credit stipulates that it available only with the issuing Bank, all Credit must nominate the bank which is authorized to negotiated Bank. Thus the Credit may be either restricted or open..



                         i) Restricted Letter of Credit: When negotiation of documents under the letter of Credits is restricted to a specified bank , it is called the Restricted Credit. The Letter of Credit  contains a provision : " Negotiation under this Credit restricted to ------------Bank" (Name of the Bank). Restriction of Credit may be resorted to by the Opening Bank under instructions from the applicant of the Credit, or it may be dome to confine business to a favoured bank.


                        ii) Open Credit: Negotiation of Documents is not so restricted to a particular bank and the beneficiary may present the documents for negotiation to any bank. The commitment of the issuing bank may read as follows: " We hear by engage with the drawers and or bonafide holders that drafts drawn and negotiated in conformity with the terms of this credit will be dully honoured of presentation.


C) Acceptance Credit:  An Acceptance Credit calls for a usance bill of exchange of a specified period to be drawn under the Credit. For instance, the Letter of Credit may require the exporter to draw '90 days' bill. The advantage under an Acceptance Credit is that the buyer need no pay immediately. He pays only on the due date of the bill. The seller gets the bill accepted by the bank, and in case he is in need of funds, documents it with his bank. Thus duty of the issuing Bank under this Credit is not only to see that the bill is accepted but also to ensure payment on maturity.



if the bill is drawn on the Accepting Bank in the exporters country the Accepting Bank will accept the bill and return it to the beneficiary. The Documents are forwarded to the issuing bank, If the beneficiary is in need of funds he may discount the bill with any other bank or finance house. Since it is a bankers acceptance, the bill will be discounted readily by other bank and at favourable rate.


On receipt of documents, the issuing Bank will deliver them against 'Trust Receipt' or 'Clean' basis. It may also hold them until the steamer arrives, arranges clearance and then stores the goods under its control. A loan against pledge of goods may be given for the importer to pay for the goods on maturity of the bill to be repaid by the sale proceeds of the goods.


D) Deferred Payment Credit: A Deferred payment Credit carries an undertaking of the Issuing Bank to pay or to arrange for payment on the dates determinable in accordance with the stipulations of the Credit. it is like an acceptance Credit with the exception that no drafts are drawn. it is thus considered inferior to Acceptance Credit from the beneficiary's point of view because he does not get a bankers acceptance which he could discount and raise finance. Deferres Payment Credit may be used where the beneficiary wishes to allow the importer time to pay for the documents. The documents will be delivered to the importer immediately. This type of Credit is also used to finance importer of plant and machinery and capital goods on deferred payments basis..

Types of Documentary Credit

It is Stated before that the letter of Credit is an undertaking by the importer's Bank that if the exporter exports the goods and produces documents as stipulated in the Credit, the bank would make payment to the exporter.

It is undeniable that a letter of credit offers advantages both to the exporter and the importer. the advantages accruing to either of the parties differ depending upon the nature of the Credit opened. However , those who deal in international trade and transactions should be well acquainted with the different types of Letter of Credit.

A Letter of Credit may be Clean Credit or Documentary Credit. A Documentary Credit requires the documents of little to goods and other documents to accompany the bill drawn under the Credit. But in case of Clean Letter of Credit no such documents are necessary.

Under a Clean Letter of Credit, the documents of little to goods, for instance, bill of lading, are sent by the exporter to the importer directly. Only the bill exchange drawn on the importer is offered to the bank for purchase. neither the exporter nor the bank retains control over the goods covered by the transaction. For the bank it remains an in secured advance. For this reason, Clean Letter of Credit is normally not found in commercial transaction.

All Most all commercial Letters of Credit are Documentary Credits. Documentary Credits may be classified under the following types depending upon the particular provisions contains:

1. Payment, Acceptance and Negotiation Credits.

2. Revocable and Irrevocavle Credits.

3. Confirmed and Unconfirmed Credits.

4. With Recourse and without recourse Credits.

5. Fixed and Revolving Credits.

6. Transferable Credits.

7. Back to Back Credits.

8. Red Clause and Green Clause Credits.

9. Standby Credits.

10. Anticipatory Credit.

Froms Of Credit

Documentary Credit may be either

1. Revocable

2. Irrevocable.

Revocable Credit: A revocable Credit is a credit which can be amended or cancelled by the issuing Bank at any time without prior notice to the seller. The cancellation or amendment, however, takes effect against the bank which has negotiated bills under the credit only on receipt of such notice of cancellation or amendment. The issuing Bank is liable for bills negotiated conforming to the terms and conditions of the Credit before the Negotiating Bank receives the notice of revocation.


Irrevocable Credit: An irrevocable Credit Constitutes a definite undertaking of the Issuing Bank, provided that the stipulated documents are presented and the seller fulfills the terms and condition. Obviously it can not be amended or cancelled without the agreement of all parties concerned. An irrevocable Credit may be either confirmed or unconfirmed depending on the desire of the seller..


Irrevocable Credit is always preferred to the Revocable Credit.. 

In accordance with Article 6 of UCPDC , 1993 Revision ICC publication no 500, the Credit should clearly indicate whether it is revocable or irrevocable. In the absence of such indication the Credit shall be deemed to be irrevocable.. 

Letter Of Credit : Meaning Of L/C

Letter of credit is a very populer means if international trade. It plays vital role in execution of trading goods from one country to another. It helps the importer and exporter to mitigate their risks and responsibilities. It also ensures the receive and payment of the concerned bill in international trade. It requires various procedures to be observed by the concerned parties especially for the bank..


Definition of Letter of Credit:

Letter of Credit (L/C) can be find as a "Credit Contract" whereby the buyers bank is committed (on behalf of the purchaser) to place certain amount of money at the sellers disposal under certain terms and conditions. The Letter of Credit is also called the Documentary Letter of Credit, Because the terms ans conditions include, amongst other things the presentation of some specified documents.

The Uniform Customer and practice for Documentary Credits, 1993 Revision, ICC Publication No 500 applies to all Documentary Credits (Including to the extent to which they may be applicable, stand by Letters of Credit) where they are incorporated into the text of the credit. They are binding on all parties thereto, unless otherwise expressly stipulated in the credit. The UCPDC 1993 Revision, Publication no 500 defines Documentary Credit any arrangement, however named or described, whereby a bank (the Issuing Bank) acting at the request and on the instructions of a customer ( the applicant) or on ots own behalf.

-- Is it to make a payment to or to the order of a third party ( the beneficiary) or is to accept and pay bills of exchange ("Draft") drawn by the beneficiary, or

- authorizes another bank to effect such payment or to accept and pay such bills of exchange (Draft)

-- authorizes another bank to negotiate, against stipulated documents provided that the terms and conditions are complied with..

While Lodgment of the Import Documents

Immediately Upon receipt of import documents the L/C Opening Bank examines all the documents thoroughly to ensure that the terms and conditions as laid down in the Credit have been complied with. On Security if it is found that the documents drawn are in conformity with the terms of the credit, the bank lodges the documents in PAD/Bill of exchange and the following vouchers are passed-

Debit- PAD/BE A/C ......................................................... tk
(Converted the bill amount at B.C Rate prevailing on the day of lodgement)

Credit - H.O. A/C ............................................................. tk
(Converted the bill amount at T.T rate prevailing on that date & Dr. TRV is sent along with a atatement of the transaction)

Credit: - Exchange A/C .................................................... tk



Reversal of contra Liability Voucher

Debit- Bankers Liability for Acceptance on L/C ................................. Tk

Credit- Customers Liability for Acceptances on L/C ........................... Tk




While Retirement of the Import Documentss:

Immediately after the lodgement of the import documents the bank request the importer for retirement of the documents against payment of bill amount and other charges payable. The Importer places fund in his account and the bank passes following vouchers in retiring documents:


Debit - Margins on L/C account ................................................... Tk

Debit - Importers authorized account ........................................... Tk

Credit - PAD/BE account .........................................................................Tk

Credit - Income account interest on PAD/BE........................................... Tk

Credit - Admissible commission account................................................. Tk

Credit - Miscellaneous earning (if any) ................................................... Tk




Note: The issuance commission of the bank is charges quarterly for Credits from date of issuance date until date payment, Credit expiry or maturity of a deferred payment undertaking..

Post Import Financing Method

Importer very often requires financial support for releasing imported goods. Post import financing is an important part of a banks activities. At the end of import operation the bank finances the importer directly in two forms:-

1. Loan against Imported Merchandise (LIM): 

Such credit facility is allowed against pledge of imported goods. In this case bank clears the goods through its approved 'Clearing Agent' and store the same under its effective control. All relative expenses in connection with clearing of goods are debited to LIM account. In this case the banker has to obtain approval from the competent authority. Necessary charge documents are to be held with the bank for such credit.

2. Loan against Trust Receipt (LTR):

This sort of credit is extended to the importer against trust receipt. In this case unlike LIM, the imported goods remain in the custody of the importer. He is required to execute a stamped trust receipt in favour of the bank. Moreover, the bank retains collateral security for its safeguard. Necessary charge documents are also held with the bank against this type of credit.

3. Forced LMI:

  Upon receipt the shipping/import documents from the Negotiating Bank, the Opening Bank notified the importer about the documents and ask the importer to take delivery of import documents for releasing the goods. If the importer fails to respond within a reasonable time  time,the opening bank retires the bill by creation of forced LIM with approval of its competent authority. In such case the Banks create the goods through its approved 'Clearing Agent' and store the same under its effective control. All relevant expenses in connection with clearing of goods are debited to forced LIM account.

BOOK-KEEPING IN Import Operation:

Importer operation goes on through different stages and the importers bank has to accomplish different jobs in each stage. Therefore the banker makes different forms of book keeping and of course these include income and expenditure of the bank and the importer respectively. Here are some formations of book keeping usually the bankers in our country follow for importer operation:

While Opening L/C

Description	Debit	Credit
Importer's authorized Account Margi on L/C account Commision account Other imcome account (Postage/TT etc. Where applicable)	XXXXXX	XXXXX XXXXX XXXXX

Contra Liability Voucher:

Description	Debit	Credit
Customers Liability for Acceptance on L/C Bankers Liability for Acceptance on L/C	XXXXXX	XXXXX

It is important to mote that accounting procedure may differ from bank to bank. As such we have to follow the guidelines issued by our respective bank. Further we have to take in to account that the amount of margin is to be realized according to agreement made between the bank and the importer.

The margin agrees by the bank will depend upon various factors such as Bangladesh Bank stipulations, the creditworthiness of importer, nature of the commodity to be imported, etc.

IMPORT Payment Procedures

Import means purchase of foreign goods and or services. Hence it needs exchange of money and goods or services. The importer makes payment for the goods and or services he imports. import procedure differs with different means of payment. Different payment procedures are:


1. Cash in Advance:

Importer pays full, partial or progressive payment by a foreign DD, MT or TT. After receiving payment , exporter sends the goods and the transport receipt to the importer. Importer takes delivery of the goods from the transport company.


2. Open Account:

Exporter ships the goods and sends transport receipt to the importer. Importer takes delivery of the goods and makes payment by foreign DD, MT or TT. at some specified date.

3. Collection Methods:

Collection Methods are either clean or documentary. Again documentary collection is of two kinds:

                              a) Documents against payment.
                              b) Documents against Acceptance

In this method the exporter ships the goods and draws a draft/bill on the buyer. The exporter then submits the draft/bill (only or with documents) to the Remitting Bank for collection and the bank acknowledge it. The Remitting Bank sends the draft/bill (with or without documents) and a collection instruction letter to the Collecting Bank notifies the importer upon receipt of the draft. The title of the goods is released to the importer upon full payment or acceptance of the draft/bill.

4. Letter of Credit:

Letter of credit is well accepted and the most commonly used means of payment. It is an undertaking for payment. It is an undertaking for payment by the issuing Bank to the beneficiary, upon submission of some stipulated documents and fulfilling the terms and conditions mentioned in the letter of credit.

Import Financing Source

Import involves outward remittance of foreign currency. It is commonly known that there are different sources of import financing and they are:-

1. CASH:

     a) Cash Foreign Exchange (balance in foreign exchange account of Bangladesh Bank)

     b) Foreign Exchange Account of Non-resident Bangladeshi.

2. Foreign Aid (Commodity aid, loan, grants) :

Developing Countries like Bangladesh sometimes borrow from friendly countries to meet import requirements. Such funds are repaid to the lending countries with agrees interest. Sometimes our government signs agreement on commodity loan with the government of donor countries or with our multilateral credit agencies. Exporters under such commodity loans are reimbursed in cash by the creditor (i.e. government or the loan giving agency) as soon as the goods are exported. The obligation for the payment of the term loan and interest are directly assumed by the importers government.

3. Barter(Exchange of Goods):

When a specific import is paid by a specific export without involvement of monetary transaction is called "Barter Trade". But the price is expressed in terms of a particular currency. Agreement of a Barter Trade is signed between two countries for a fixed period. In case of any imbalance after the expiry of the Barter Trade protocol, the imbalance is squared up by remittance from their own resources.


4. Special Trading Arrangement (STA)

Special Trading Agreements (STA) are signed in order to boost up export and import of two countries. Unlike Barter Trade Agreement. Special Trading Agreements are signed between the enterprises of the countries with the consent of respective governments.

5. Wage Earners Scheme:

Financing From wage earners fund.

Way of Importers registration

According to imports and Exports (Control) Act, 1950, no person without registration granted by the Chief Controller of Imports and Exports shall indent, Import or Export anything into or out of Bangladesh except in cash of exemption issued by the Registration Certificate (IRC) issued by the Chief Controller of Import an Export. To obtain Import Registration Certificate in the intending importer is required to apply to the Controller/joint Controller/ Deputy Controller/Asst. Controller of Import and Exports.

Criteria of Registration:

1. Valid Trade License.

2. Nationality and Asset Certificate.

3. TIN and VAT Registration Certificate.

4. Memorandum & Article of Association and Certificate of incorporation (In case of Limited Company)

5. Bank Solvency Certificate etc..

Fex Regulation act and Policy order by Import

The present import practice has been evolved out of the older ones. However, it is important to mote that under the Imports and Exports (control) Act, 1950 the Government of Bangladesh formulates the Import policy through Ministry of Commerce and all concerned are compelled to meticulously follow the Import policy existing in the country. The existing Import policy (1997-2002) has come in to effect for June 14, 1998 to June 20 2002. Import activities are also regulated by the Foreign Exchange Regulation Act, 1947, consisting of 27 section and number of sub section. Notwithstanding the above, a few provision have been added under the Foreign Exchange regulation (Amendment) Ordinance, 1976 to control over certain payments, dealing in foreign exchange and the import and export of currency and bullion which are very important to know for us.

Above all, internal circulars and guidelines of our respective institutions are absolutely necessary to proceed on the activities..

Definition About Import..

Import means the flow of goods and services purchased by consumers, firms and government of one country from economic agents located in another country. Import is essential for the prosperity of the trading  nations. Because every country lacks some vital resources that it can get only by importing from others. In Bangladesh plenty of different goods are imported every year. To cope with the volume of works related to import procedure a good number of officials of the banks are engaged in various level.

It is needless to mention that people of different government and private sector are also closely concerned with the import activities in the country. For smooth functioning of import activities there must be cordial co-operation and c0-ordination among the concerned agencies.

Functions Of a Banks Foreign Exchange Department

Here is a delineation of the important functions performed by the foreign exchange departments of the commercial banks.

Export	1. Pre-shipment advances 2. Purchase of foreign bills 3. Negotiation of foreign bills 4. Export guarantees 5. Advising/confirming Letters of Cresit 6. Advance for deferred payment exports. 7. Advance againts bills for collection
Import	1. Opening of Letter of Credit 2. Advance bills 3. Bills for collection 4. Import loans and guarantees
Remittances	1. Issuance of DD, MT, TT, etc. 2. Payment of DD, MT, TT, etc. 3. Issuance and encashment of travellers. 4. Sale and encashment of foreign currancy notes. 5. Non-resident accounts
Dealings	1. Rate Computation. 2. Maintenance of foreign currancy accounts. 3. Forward contracts. 4. Exchange possition and cover operations
Statisticso	1. Submission of returns. 2. Collection of credit information.

Role Of Banks In Foreign Trade

Banks Extended credit facilities to the exporter to procure raw materials process them and prepare them for shipment to the importer. They also extend post shipment financing facility to the exporters. Besides financing, the banks render service to the exporters by advising, confirming Letter of Credit issued in favour of the exporters by their correspondent abroad. Banks may also execute guarantees on behalf of their export customers.


Banks issue Letter of Credit on behalf of their importer-customers. Thus they undertake financial guarantee of stipulated documents. They also extend post import financing facility to the importer.

Besides extending services to the importers and exporters banks perform activities of inward and outward remittances and also open and maintain non-resident accounts. Banks also buy and sell foreign exchange from and to the public.

Foreign exchange business is concentrated in selected branches of commercial bank. It is obviously a highly specialized business. The Concerned officers of the foreign exchange department should possess an in depth knowledge of the rules and regulations of foreign exchange business in particular and banking in general.Besides, the foreign exchange dealing branches of the commercial banks should meticulously follow the guidelines prescribed by their head office, From time to time.