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How To Open An LC' by Buyer-"Procedures To Open An Letter of Credit"

The document discusses the procedures for opening a letter of credit (LC). It explains that an LC is a guarantee by the buyer's bank to the seller that payment will be made according to the terms in the LC. To open an LC, the buyer must provide their bank with a copy of the purchase order/contract and pay a margin amount, which is determined based on the buyer's creditworthiness and relationship with the bank. The margin amount serves as collateral for the bank to guarantee payment under the LC. The bank then helps the buyer fill out an application to open the LC. This summary outlines the key steps and concepts involved in opening an LC according to the document.

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amity mba
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331 views

How To Open An LC' by Buyer-"Procedures To Open An Letter of Credit"

The document discusses the procedures for opening a letter of credit (LC). It explains that an LC is a guarantee by the buyer's bank to the seller that payment will be made according to the terms in the LC. To open an LC, the buyer must provide their bank with a copy of the purchase order/contract and pay a margin amount, which is determined based on the buyer's creditworthiness and relationship with the bank. The margin amount serves as collateral for the bank to guarantee payment under the LC. The bank then helps the buyer fill out an application to open the LC. This summary outlines the key steps and concepts involved in opening an LC according to the document.

Uploaded by

amity mba
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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How to open an LC?

  
Letter of Credit – A common term known to almost all business world. What is Letter of Credit? How
does LC work? How to open a Letter of Credit? What are the advantages of Letter of Credit to Exporter?
How LC is benefited to Importer? Are there any disadvantages to importer for a consignment under Letter
of Credit? What are the disadvantages of LC to an exporter? Who are the parties involved in Letter
of Credit? How to check authenticity of LC? What is Prime Banker?
 
In this article I am going to explain basic information to open Letter of Credit. Letter of Credit is an
assurance given by buyer’s bank as opening bank to seller as beneficiary against sale of goods as per the
terms and conditions mentioned in Letter of Credit.
 
‘How to open an LC’ by buyer- “procedures to open an Letter of Credit”
 
You (buyer) entered in to a contract with your overseas supplier to import machinery for production at
your factory. As per your contract each other, you (buyer) need to open a Letter of credit (LC). In this
case, Letter of credit is opened by your bank (or other opening bank)  and beneficiary of letter of credit is
your overseas seller of machinery. Letter of credit is a guarantee given by your bank (not you) to your
buyer’s bank on account of your buyer. The amount under LC is transferred as per the terms and
conditions mentioned in Letter of credit.  Please also read other articles about Letter of Credit  in same
website to know more about Letter of Credit.
  
Procedures to open a Letter of Credit.
 
You can approach your bank to open a Letter of credit. The concerned officer at bank helps you in filling
up necessary application to open an LC. Since the LC is opened on the basis of your purchase contract, a
copy purchase order / export contract has to be produced with along with other required documents. Your
bank may ask you to keep certain percentage of ‘margin amount’ with bank.
 
What is ‘margin amount’ while opening Letter of Credit.
 
As I have explained to you, bank is guaranteeing the payment.   In turn, what guarantee are you providing
to bank against the amount of LC? So a margin amount is blocked in your bank account to make the
payment under the said letter of credit. Certainly you may ask, what would be the ‘margin’, bank blocks.
This amount is determined, purely based on your financial relationship with your bank.
 
Let us discuss about your creditworthiness with your bank while keeping ‘margin amount to open LC’. If
you are a new account holder for your bank and bank does not know your other financial status, you
cannot expect any financial support from your Bank. You need to keep 100% margin amount with your
bank. If the LC amount is for USD 10000, your amount of USD 10000 is blocked from your account to
pay LC amount to your overseas seller on maturity date. You may have a good relationship with your
banker for the past many years, and your banker knows your fixed assets, your fixed investments with
bank, other financial transactions and are happy with the credit worthiness, bank decides the amount of
margin to be collected from you to open the Letter of Credit. It  ccan be from  1% to 100%, as explained.
I hope, you came to know the basic procedures to open Letter of credit.
 
In this article, I have tried to explain a brief idea about Letter of Credit, Mechanism of Letter of Credit,
the procedures and formalities to open a Letter of Credit, Margin amount in Letter of Credit etc. You can
also read more information by clicking 
INTERNATIONAL TRADE PROCEDURES AND DOCUMENTATION

Course Code: MBA 365 Credit Units: 03

Course Objective:

Learning the importance and procedural & documentation aspects of export-import of goods and services ; impart
knowledge of governments, departments, international institutions involved ; teach an Export Manager to develop a
systematic methodology to handle exports ; understand the relevance and importance of various government policy
measures for export as well as import.

Course Contents:

Module I: Introduction
Export documentation Framework – the need, entities & documents as per requirement of (a) the contract (b) Govt.
of India (c) Importing country d) for claiming export assistance.

Module II: Documents for processing export order and legal implications
Processing of Product enquiry/quotation, Purchase/Export Order, Letter of intent, Payment Terms, International
Transport Modes, INCOTERMS, advising & scrutiny of a Letter of Credit (L/C), seeking L/C amendments,
International Chamber of Commerce’s UCPDC articles.

Module III: Export/Import Documents


How to make Commercial, Financial, Transport, Title, Official, Insurance, Export assistance Documents &
Certificates for Exports. Ensuring error-free export documentation as per L/C. How to open L/C, apply for license
and make Customs/ Sales Tax documents for imports.

Module IV: Central Excise, Sales Tax & Customs Clearances


Clearance of Export & Import Cargo, Role of Clearing and Forwarding Agents, Shipment of Export Cargo, Excise,
Sales Tax & Customs Department regulation compliance.

Module V: EXIM Policy Framework


EPCG Scheme, Duty Exemption Pass Book Scheme, Export Oriented Units, Export houses, Trading houses, Export
Processing Zones, Special Economic Zone, Negotiation of Export Bills, Bank realization, late payment follow-up.
Bank, RBI, DGFT, Customs & FEMA regulatory compliances.

Examination Scheme:

Components CPA TP Q/S A ME EE

Weightage (%) 5 5 5 5 10 70

Text & References:

 Nabhi (2011-12)1999, How to Export, Nabhi Publications


 RBI Mumbai, Export Procedures and Documentation
 Handbook of Exim Procedures and Documentation – Govt. of India Publication Division

 Handbook of DGFT Publications – Ministry of Commerce, Govt. of India.

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