There are different types of letters of credit and various scenarios in which letters of credit (L/C) are used. The basic letter of credit procedure:
1. The buyer and the seller draw up a purchase and sales agreement. The purchase and sales agreement between the buyer and the seller stipulates that payment is made through a letter of credit.
2. The buyer submits the LOI along with required DLC Type (Use Updated Security List), Face Value, Issuing Bank Name, Receiving Bank Details to issue a letter of credit. The letter of credit must be in accordance with the purchase and sales agreement.
3. Issuing Platform will check the Availability of the requested Security and reply to the Applicant with Security details (or suggest an alternative Security). The reply will be attached with an Application/CIS Form.
4. Applicant will fill and submit the Application/CIS with Supporting documents like Pro-forma Invoice & Purchase Contract.
5. Legal Desk will verify the documents and access Applicant’s capabilities. Accepted applicants will receive the Legal Agreement of Securities Issuance Program.
6. Applicant will submit the Executed Agreement to issuing authority.
7. Issuing authority will counter-sign the agreement and submit a copy to the Applicant.
8. Issuing authority will issue the Payment Invoice for the Lease fee of the required DLC.
9. Applicant, within five (5) banking days, instructs his Bank to transfer the Lease Fee on Letter of Credit transaction.
10. Within three (3) banking days from the receipt of the Lease Charges, the issuing bank sends the letter of credit to the advising bank through SWIFT MT700.
11. The advising bank verifies the authenticity of the letter of credit and forwards the letter of credit to the seller.
12. After ensuring that the terms of the letter of credit can be met, the seller produces the goods and prepares shipment.
13. The seller prepares the documents that prove that the goods are ready for shipment and presents these documents to the advising bank. The advising bank sends the documents to the issuing bank.
14. The issuing bank checks the documents and if approved, the issuing bank transfers the payment to the seller through the advising bank.
15. The issuing bank hands over the documents to the buyer. The documents allow the buyer to clear the goods from the customs and take possession of the goods. The buyer pays the issuing bank.
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