Define HRM and Explain the Nature of Human Resource Management (HRM)/Subjective question with answer for Private Bank and Government Bank Exam
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Letter of Credit (LC)
A Letter of Credit (LC) is a financial instrument issued by a bank on
behalf of a buyer, guaranteeing that the seller will receive payment for goods
or services provided they comply with the specified terms and conditions. It is
a crucial tool in international trade, providing a secure and reliable method
for ensuring transactions is completed as agreed.
Key
Features of a Letter of Credit
1. Bank
Guarantee:
- The LC is a commitment from the issuing
bank that payment will be made to the seller upon presentation of required
documents.
2. Conditional
Payment:
- The LC specifies the documents that the
seller must present to receive payment. These documents typically include a
bill of lading, commercial invoice, and packing list, among others.
3. Types
of Letters of Credit:
- Revocable LC: Can be altered or canceled
by the issuing bank without the consent of the beneficiary (seller).
- Irrevocable LC: Cannot be changed or
canceled without the agreement of all parties involved. It offers more security
to the seller.
- Confirmed LC: An additional guarantee is
provided by a second bank, usually in the seller's country, ensuring payment
even if the issuing bank fails to pay.
- Unconfirmed LC: Only the issuing bank's
commitment is present, without any additional guarantee from another bank.
- Sight LC: Payment is made immediately upon
presentation and verification of documents.
- Deferred Payment LC: Payment is made at a
future date specified in the LC after the documents are presented and accepted.
- Standby LC: Acts as a secondary payment
method if the buyer fails to fulfill the payment terms agreed upon.
4.
Parties Involved:
- Applicant: The buyer who requests the LC.
- Beneficiary: The seller who receives the
payment upon fulfilling the LC terms.
- Issuing Bank: The buyer’s bank that issues
the LC.
- Advising Bank: The seller’s bank that
receives and verifies the LC.
- Confirming Bank: A second bank that
guarantees the LC (in the case of confirmed LCs).
5.
Process:
- Application: The buyer applies for an LC
at their bank.
- Issuance: The issuing bank creates the LC
and sends it to the advising bank.
- Verification: The advising bank verifies
the LC and informs the seller.
- Shipment: The seller ships the goods and
prepares the required documents.
- Presentation: The seller presents the
documents to the advising bank.
- Examination: The advising bank examines
the documents and forwards them to the issuing bank.
- Payment: If the documents comply with the
LC terms, the issuing bank makes the payment to the advising bank, which then
pays the seller.
6. Advantages:
- For Buyers: Ensures that payment is only
made upon receipt of conforming documents, reducing the risk of non-receipt of
goods.
- For Sellers: Guarantees payment if they
meet the LC terms, minimizing credit risk.
7.
Risks:
- Document Discrepancies: Even minor errors
in documentation can delay payment.
- Issuing Bank Risk: Risk associated with
the issuing bank's financial stability.
- Country Risk: Political or economic
instability in the buyer’s country can affect the transaction.
Conclusion
A Letter
of Credit is a vital instrument in international trade, offering security and
confidence to both buyers and sellers by ensuring that payments are made in
accordance with agreed terms and conditions. Its structured and legally binding
nature helps mitigate various risks associated with cross-border transactions.
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