Letter of Credit & Overseas Payments Basics in 2026

It is important to understand the typical exports framework of a typical exports transaction to understand the challenges of international payments and shipment of goods internationally, both for the seller and the buyer. In the next video, Dr. Jain explains this framework to get started with this course.

Friends, in this, I will draw your attention to the typical export framework wherein the role of the banks is very aptly fitted. I will show you one typical export framework.

Friends, in this export framework, as you can see here, the exporter and the importer come into contact with each other. The exporter wants to sell the goods, and the importer requires those goods, and the matchmaking happens. The importer is interested in the goods. The exporter is interested in supplying these goods. Both parties reach an export contract. Based on this export contract, the exporter wants to be sure about the payment, which is due to be paid by the importer.

The importer is interested in ensuring that the goods which are sold and dispatched to him are in good condition, and that all due diligence has been done at the exporter’s end, and the system has ensured that the goods reach on time and in good order and condition. What happens to make this possible is that the importer approaches the bank in his own country, which we are calling the importer’s bank, where the importer requests that the bank make it possible for him to pay the exporter once the goods are shipped.

What does the bank do? The bank opens a letter of credit in favor of the exporter. What is a letter of credit? It is a conditional guarantee by the bank that once the goods are shipped from the exporter’s country and the exporter can satisfy the conditions regarding the shipment of the goods in time and in good order and condition, the importer’s bank will guarantee that the payment will be made to the exporter. What happens in this kind of situation is that the exporter is assured that once the goods are shipped in good order and condition and in the right manner, and he can satisfy the bank, he will get the payment.

Because the bank is a reputed international bank and the payment is being guaranteed by the bank, not by the importer, the interest of exporters is taken care of. Similarly, the bank gives this conditional guarantee by ensuring that the exporter makes the shipment on time and with the right quality and quantity. The conditions imposed by the bank are in the form of some original documents, which must be produced by the exporter to ensure that the interests of the importer have been taken care of. In this system, the interests of both the exporter and the importer are taken care of by the bank that has opened the LC.

Normally, this bank is called the issuing bank. Now, what happens is that the bank does not open this letter of credit directly to the exporter. Rather, it wants another bank to be involved in the exporter’s country so that the letter of credit, which is normally written in very technical banking language, is advised by a local bank to ensure the sanctity of the system. This letter of credit is advised to the exporter about its applicability and conditions through a local bank, which is generally located in the exporter’s country. The purpose of this system is that the exporter later on cannot say that he has not been able to understand the conditions of that letter of credit. Because of the involvement of a local bank, he can always go and ask for clarifications related to the conditions imposed by the importer’s bank.

What happens in this system now is that the role of two banks is created: one is the issuing bank, which is the importer’s bank, and the other is the advising bank, which is located in the exporter’s country. By involving these two banks, this whole system becomes possible, and the interests of both the exporter and the importer are taken care of.

This kind of international payment and dispatch of goods can now happen in this framework. Once the letter of credit has been opened by the importer’s bank and advised by the advising bank in the exporter’s country, the exporter is now confident that if he dispatches the goods and exports them on time, he will receive the payment. What he does is prepare the goods and, through the port of loading—either by sea, air, or any other means—exports the goods on time, which are then received by the importer through this system of letter of credit. This is how this typical export-import framework takes place, and the role of both the importer’s bank and the exporter’s bank, which means the issuing bank and the advising bank, comes into the picture. This is how the system works.

In order to carry out successful exports transactions and receive the timely and full payment for the goods exported, an international seller has limited choices. LC, while being a costly option, is certainly a safe bet for new exporters or when dealing with a new customer.

Typically, in a documentary letter of credit, an exporter who is the beneficiary of the LC must arrange the typical commercial documents. When presented on time and in the desired manner to the bank, exporters can definitely expect payment against the documentary L/C

In the next video, Dr. Jain explains the flow of money, documents, and goods in a typical traditional LC cycle. Also discussed are the several types of overseas and local banks, which play their role in a manner desirable to them.

Now, I will tell you in this very video itself how a letter of credit works. Let us look at how the LC works.

OK, friends, what happens in a typical LC, a traditional LC cycle, is that there is a contract between the seller and the buyer. Friends, this sales contract, which can also be in the form of a Proforma Invoice, initiates the international transaction. And what is an international transaction? The seller has to ship the goods in the right quantity and quality, and the buyer has to make the payment promptly and to the seller's entire satisfaction. Friends, to achieve this goal of the right goods and the right price, the seller, based on the sales contract, sends an LC opening instruction to the buyer.

The buyer examines the LC opening instructions given by the seller, and if he finds everything OK, he prepares an LC opening instruction cum application to his own bank, which works as the issuing bank. It is the bank in the importer’s country. Friends, this issuing bank opens the LC based on the LC opening instruction drafted and applied by the applicant, which means the buyer, who is the importer.

This particular letter of credit, which is issued by the issuing bank, is invariably a sight letter of credit, depending upon the case, and it is irrevocable. The LC is opened as per UCP version 500 or version 600, as agreed by both the seller and the buyer. Based on that, this LC is advised to the seller by the advising bank. This advising bank is located in the country of the seller. Once the seller receives the letter of credit, he looks at the LC and examines the different documents required as per the LC, because it is a conditional guarantee of the payment.

The condition is that all the required documents, commercial documents asked for in the LC, have to be procured and prepared by the seller after making the shipment. These documents have to be presented to the issuing bank through the nominated bank or the negotiating bank, as the case may be. If the seller finds that the conditions of the LC match the expected conditions and documents that he had agreed with the buyer and requested in the LC opening draft, he will accept the LC. Once the LC is accepted by the seller, he makes the shipment of the goods from the port of loading to the port of discharge.

The buyer is informed about this shipment. The buyer then approaches the issuing bank and asks for the original documents so that he can claim the goods, which are about to reach the port of discharge. In the meantime, the seller has presented all the documents required by the LC, including the transport documents, commercial invoice, packing list, certificate of origin, and any other principal commercial documents mentioned in the LC.

He presents these documents along with the bill of exchange, that is, the draft for payment, to the nominated bank or the negotiating bank, and then to the issuing bank. If the letter of credit is a sight letter of credit, the issuing bank either accepts the documents and makes the payment within five to seven working days or issues a rejection letter. In the case of a rejection letter, the documents are sent back to the seller, and they have to be rectified as per the instructions given by the issuing bank. If the payment is made by the issuing bank, the documents are sold to the buyer.

If any dues are outstanding with the bank, the same will be deducted by the bank. Based on the relationship between the issuing bank and the buyer, and the satisfaction of the bank regarding any pending dues, the documents will be handed over to the buyer. The buyer then uses these documents to claim the goods from the local customs in his own country and take delivery of the goods from the shipping company.

Friends, this is a very typical letter of credit cycle, which is commonly used in most cases around the world for any typical export transaction.

Welcome back, friends. Now, in this particular episode, I will talk about the LC parties—who are the LC parties, which are part of the LC cycle, the traditional LC cycle, LC issuance, and what exactly the steps involved. Step by step, I will explain this particular process.

Friends, first of all, there is a sales contract between the buyer and the seller. The buyer and seller reach a sales contract. Friends, based on this sales contract, the seller sends a draft LC opening instruction to the buyer. Based on this draft LC opening instruction, the buyer applies for opening the letter of credit with the issuing bank. He submits the final LC opening instructions, which are actually based on the LC opening draft sent by the seller. Now, friends, based on the LC opening instructions of the buyer, the issuing bank issues the LC and sends this LC, which has been opened, to the seller's bank, which is acting as the advising bank.

Now, friends, the advising bank reviews the letter of credit. It authenticates the letter of credit. It authenticates the reputation of the issuing bank. It also authenticates the terms and conditions of the letter of credit. Based on this analysis, if the advising bank finds the LC technically correct, this bank advises the letter of credit to the beneficiary, that is, the seller. The seller’s bank, after authenticating the LC, sends this asset to the seller for the seller’s acceptance.

Now it is up to the seller whether to accept the LC or not. If the seller accepts the letter of credit and agrees with the terms and conditions, which seem to be in line with his expectations, as well as the LC opening draft sent earlier to the buyer at the very first stage after the sales contract, then the seller accepts the letter of credit and prepares the goods for shipment. After the shipment has been made by the seller, the seller presents the documents. First, he procures all the documents—transport documents, commercial invoice, packing list, and any other principal commercial documents required by the LC. He gathers all these documents and presents them, as required by the LC, to the local bank, which now acts as the negotiating bank.

Why? Because this negotiating bank examines the presentation made by the seller, and if it finds the presentation satisfactory, it negotiates the documents against the letter of credit with the issuing bank. This is the role of the negotiating bank. What does the negotiating bank do? After scrutinizing the documents, the negotiating bank forwards them to the issuing bank. Now the issuing bank, as per UCP 500 or 600 (whichever is applicable), examines the documents and either approves them as compliant or sends a refusal letter.

If the documents are accepted by the issuing bank, it means it has to pay the LC amount to the seller within five or seven days, depending on the UCP version. In the meantime, the issuing bank debits the buyer’s account for the payment and releases the original documents to the buyer after it has already paid the money to the negotiating bank to be credited to the beneficiary, that is, the seller. What the issuing bank has done is that, upon checking compliance with the LC terms, it reimburses the negotiating bank by debiting the buyer’s account. It has already debited the buyer’s account and, with the help of that collection from the buyer, the issuing bank has already paid. If the LC is payable at sight, payment will be made within five or seven days, depending on the UCP version.

Thereafter, the negotiating bank, on receiving the payment, credits the amount to the seller. Friends, this is a very typical traditional letter of credit cycle and the different parties involved in this traditional letter of credit cycle: the seller, also called the beneficiary; the buyer, also called the applicant; the issuing bank, which is the importer’s bank; the advising bank, which is the exporter’s bank; and the negotiating bank, which also is the exporter’s bank in the exporter’s country. With the help of this letter of credit cycle and the assurances given by the reputed banks involved in this kind of transaction as intermediaries, the payment is assured to the seller for the shipment made.

ICC, through its publication, i.e., UCP, defines the expressions used for parties to the problem and specifically limits the number of participants to whom its rules apply. This, perhaps, is the best way to find the international solution to a diverse world.

Now, friends, it is important to understand that this letter of credit system, which has been prevalent for many decades, has its origin in the rules and regulations drafted by the International Chamber of Commerce, based in Paris, France. This particular private organization has been very successful in managing and monitoring the flow of international payments through documentary credit, through the system of UCP, which is the Uniform Customs and Practices for Documentary Credit.

The UCP rules and regulations were first published by the ICC, France, in 1933. Since then, six revisions have been made: Revision No. 100, 200, 300, 400, 500, and 600. The latest revision came in 2007 and is called UCP 600. This is the latest revision, but most of the LCs in the world are either based on UCP 500 or UCP 600.

Let us look at the latest version of UCP, that is, the Uniform Customs and Practices, which is called UCP 600 Revision, Uniform Customs and Practices for Documentary Credit. These are the revised rules which came into effect on 1st June 2007, and they are being used by banks and financial institutions around the world for documentary credit. It is not binding.

The letter of credit can also follow earlier versions. For example, the LC can be prepared as per UCP 500 or 400. Of course, 400 is very old and nobody uses 400 now, but UCP 500 is still very popular with many banks. The latest version remains UCP 600, and the majority of letters of credit in present times are based on the UCP 600 version.

Friends, let us try to understand what UCP is. UCP is the common reference for the Uniform Customs and Practices for Documentary Credit, which I just mentioned to you, and it was first published by the International Chamber of Commerce, Paris, France, in 1933.

As I mentioned, the objective of UCP was to create a set of contractual rules that would establish uniformity across conflicting national regulations, differences, dichotomies, and the conflicting nature of the laws of different countries. This uniformity is very important for being a banker. This uniformity is very important to be able to trade internationally. Without this uniformity, trade cannot happen, and the chances of conflict and disputes will increase manifold.

This UCP system is now recognized as standard practice by more than 38,000 banks in over 196 countries, or even more. These figures are only indicative. Banking practices, especially international trade financing practices by banks, in major terms are governed by UCP only.

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In the next video, some of the more popular types of L/C s and their features are discussed.

Friends, the most common type of letter of credit, which is normally used in international trade and transactions, is the merchandise L.C. It is also called the commercial L.C. or the trade L.C. The purpose of this L.C. is to deal with individual transactions of merchandise, commercial transactions, or international trade. The majority of L/Cs issued are for payment for goods in shipment or current services performed. Payment is normally made against documents for goods shipped. The reference for this type of letter of credit is given in Articles 1, 2, and 9 of UCP 500. These are the articles of UCP 500 that deal with this very common type of letter of credit, and a majority of international trade happens through this kind of L.C. When we talk about letters of credit, normally by default, we are talking about the merchandise letter of credit in which the importer requests the issuing bank to open the L.C. and give L.C. instructions, based on which a very typical type of merchandise L.C. is opened by the issuing bank, which gives the conditional undertaking. Those conditions are documented.

Against those documents, payment is made to the exporter after a compliant presentation. This is a very common and very popular type of letter of credit. Generally, when we are talking about the merchandise L.C., we are talking about individual shipments. It deals with individual shipments. There can be situations where the same type of transaction, for example, is made month to month for a very long period. Every month, there is a transaction happening. If you go for the merchandise L.C. of this type for each and every transaction every month, which is of a very similar nature, then you end up paying monthly L.C. charges to the bank, which becomes very costly.

For example, in this situation, you need a certain type of documentary credit, a credit of a different nature. There can be many other similar situations where a typical merchandise letter of credit may not be the best option. Another type of letter of credit is called the revocable letter of credit. In UCP 600, by default, all letters of credit, especially merchandise letters of credit, are irrevocable, which means once it is opened by the issuing bank, either on the request of the importer or at the willingness of the issuing bank, the L/C cannot be revoked. But there can be a possibility of creating a letter of credit that is revocable in nature, which means it can be amended or cancelled by the issuing bank at any moment and without any prior notice to the beneficiary. Articles 6 and 8 of UCP 500 deal with this. In UCP 600, there is also a provision for the revocable letter of credit, although by default, all merchandise L.C.s, even if nothing has been mentioned, are irrevocable, which was not the case in UCP 500. This is a new development in UCP 600. If the L/C is based on UCP 600, by default, it is irrevocable.

Friends, there can also be letters of credit, and in fact, the majority of such letters of credit are unconfirmed, which means the guarantee associated with the letter of credit is only that of the issuing bank. In an unconfirmed L/C, there is no further confirmation by a local bank or any other intermediary financial institution. Such kinds of L.C.s are called unconfirmed L.C.s. At the same time, confirmation is possible by the local bank or an intermediary, which may be in a third country or an international intermediary, wherein the letter of credit issued by the issuing bank may not be of that stature. It may not be a reputed issuing bank, or it may be a bank not listed in the top 100 or top 1000 banks of the world, the so-called first-class banks, in which case there is a possibility of non-payment by the issuing bank.

In such cases, the concerns of the exporter, the credit risk of the exporter, are assumed by the intermediary, which can also be a confirming bank, a local bank able to confirm a letter of credit. This confirmed letter of credit is a credit in which a second guarantee is added to the letter of credit by another bank. Article 9 of UCP 500 deals with both the unconfirmed L/C and the confirmed L/C. These articles and corresponding articles in UCP 600, with very few modifications, deal with both types of letters of credit.

Friends, the most popular and most sought-after letter of credit is called the sight L/C or sight letter of credit, where payment is at sight. This means that drafts and documents are honored if there is no irregularity, if there is no discrepancy, and all the documents are in order, by the issuing bank making payment without delay. The period of payment for sight L/C in the case of UCP 500 is seven working days, but it has been reduced in UCP 600 to five working days. If the L/C is based on UCP 600 and it is a sight L/C, meaning payable at sight, the payment would be made within five working days.

Friends, different from the sight L.C., another type of L.C. is called the Usance L.C. or time L.C., where there is a usance period of the credit. In such types of letters of credit, the draft is honored by the issuing bank. It accepts the draft if there is no irregularity, if there is no discrepancy, and everything is in order, for payment at a future specified date, which can be 30 days later, 60 days, or 90 days.

Payment is delayed until the maturity of the draft. Depending on the specified number of days, generally, this usance time does not exceed 180 days. For example, in the case of Indian exports, the Central Bank of India, that is, the Reserve Bank of India, specifies that it is illegal to go in for a contract with a letter of credit that is a usance letter of credit beyond 180 days. In the Indian context, the guidelines and foreign policy of India say that the money should be realized by the exporters within 180 days of the dispatch of the goods.

Friends, there can be another type of L/C, which is called the revolving letter of credit. This actually comes into use in a situation I just explained about—similar types of transactions happening on a monthly basis or on a quarterly basis, on a regular frequency. If such transactions are happening, it is the best letter of credit, and it is a cheaper option, wherein the amount is renewed or reinstated without specific amendments to the letter of credit being needed. It can revolve in relation to time or value.

The transaction is very similar: the port of loading is the same, the port of discharge is the same, the exporter is the same, and the importer is the same. What may change is the date of shipment, which is every month or at some approximate frequency, and the value of the goods may also change. The dates may be different, or the value may be different, but otherwise the description of the goods in the commercial invoice is the same. The transport documents are similar in nature, which means the requirement of documents in the L.C. and the L.C. conditions also remain the same. There is no real amendment in the letter of credit except for the dates of dispatch, the last date of the letter of credit, or the value of the credit. That can change, in which case the banks offer this revolving L.C., which would revolve a specified number of times, maybe three times, six times, or ten times. The overall cost to the exporter and the importer of having this kind of L.C. becomes much more affordable. Banks can give better terms because there are no major changes in the letter of credit. It is just that the letter of credit is revolving. The value, the amount, is renewed in this L.C. and reinstated. Otherwise, the bank has no other work to do for this L.C., so they give better terms in such a case.

Friends, there is a type of letter of credit called the Red Clause Credit. A Red Clause Credit L.C. authorizes the advising bank or the confirming bank, which is generally a local bank, to make advances against the letter of credit to the beneficiary even before the presentation of documents. The purpose of this type of letter of credit is that the beneficiary, that is, the exporter, can take advances against the letter of credit to purchase raw material and manufacture the goods. It basically benefits the exporter.

At the same time, it also benefits the importer because it facilitates this particular transaction, which is also in the interest of the importer. Friends, then there is another type of letter of credit, which is called the transferable credit. This type of letter of credit, a transferable letter of credit, can be transferred by the original beneficiary, named in the letter of credit, to one or more other parties. In some cases, when the type of goods is very commoditized or in bulk and the procurement brings many challenges, and where the quantities are very large, generally, the per-unit value of such commodities is not very high. In the interest of the importer, it provides a transferable L/C so that the original beneficiary who received the L/C, if not in a position to procure the material within the specific time, can transfer the L/C to another party.

Also, sometimes what happens is that the person who receives the letter of credit is a merchant exporter, and he consolidates the supplies from several manufacturers. The manufacturers want the letter of credit to be transferred in their name. In many such cases, the letter of credit is also divisible, which means the L.C. amounts can be divided among several other beneficiaries to whom the original beneficiary transferred the L.C. A transferable, divisible letter of credit helps the importer procure the most challenging products, especially commodities of lower value. One example of that is soybean meal, which is exported from India from a district called Raipur in Chhattisgarh.

There are many manufacturers who extract soybean oil, and the byproduct of that extraction is soybean meal, which is animal feed. The cost of this commodity is very low and requires transportation by sea in chartered ships, where the quantity requirements for L.C. are very high, which is not possible for a single manufacturer to satisfy the importer. In such cases, the main beneficiary tries to get a transferable, divisible L.C. and transfers and divides the L.C. among several exporters. As a result, it becomes possible to procure the material in shipload quantities.

Friends, in many cases, what happens is that the main beneficiary of the L.C. requires the local bank to open another letter of credit for a third party, who can be another manufacturer of similar goods or the same goods mentioned in the letter of credit. In this case, the beneficiary offers the main L.C., that is, the overseas L.C., as security to the second L.C. of the bank, which can be an advising bank or a local bank, which opens a back-to-back L.C. to the secondary beneficiary. This is required in order to avoid advances or extra costs of getting advances from the banks. Instead of doing that, the main beneficiary can get a second credit against the main documentary credit as a back-to-back. The second credit becomes the back-to-back L.C.

Friends, there are several types of letters of credit, and the ones I just discussed are a few of the very popular documentary credits in international trading, international transactions, and international banking. Many such documentary credit instruments are offered by banks. Many times, they are very innovative in nature, and many times these letters of credit are not even mentioned in UCP 500 or 600. But banks try to match those innovative documentary credit instruments with the existing articles of UCP 500 and 600.

After the contract is signed between the exporter and the importer, the exporter usually sends the LC opening instructions to the buyer based on the terms and conditions agreed in the contract or the written communication earlier. These LC opening instructions serve as the expected conditions and shape of the LC, which would be acceptable to the exporter. Importer, on receipt of this document from the exporter, creates its own LC opening instructions for the issuing bank and applies for opening the LC in favor of the exporter. Usually, the importer replicates the LC opening instructions sent by the exporter. In this example of the LC opening instructions sent by the exporter, the most common LC conditions can be understood.

The sample copy of a typical format of LC instructions usually sent by the exporter can be downloaded from the resource section of this lecture.

Let us look at this document. This document is called Letter of Credit Instructions, which is given by the exporter. The exporter frames this letter of credit instruction mostly based on the sales contract. I have given here a sample of one of the letters of credit instructions, which is typically the format that the exporter will be using. It would look like this: the date is there, the name of the buyer is there. Whatever the buyer's exact name is, he will write it, along with the address, so that the buyer knows what is in the record of the exporter. Because ultimately, these details have to appear in the commercial documents.

He writes: “Gentlemen, the following are the particular details we wish to have included in your documentary Letter of Credit issued in reply to our Proforma Invoice number…” Or it can be a sales contract number. Now, obviously, this Proforma Invoice or the sales contract is very much the same thing, except that the Proforma Invoice is minimal in nature. It does not have the kind of conditions that are given in the sales contract. It is not so detailed, but many times, for small transactions, instead of an extensive export contract, the trade is done using the so-called Proforma Invoice, which is very similar and serves as the basis for the commercial invoice.

He writes here that in reply to our Proforma Invoice No. ___ dated ___, please instruct your bank to open and issue this credit in accordance with the following terms and subject to the Uniform Customs and Practices for Documentary Credit by the International Chamber of Commerce, publication 500, or it can be 600 also. If you do not write anything, by default it will be 600. Generally, even today, many exporters will go for UCP 500 because they understand it better. Their staff is more conversant with UCP 500. They have probably not updated themselves according to UCP 600. Many exporters try to get the L/C under UCP 500, but it is always advisable to go for UCP 600.

The letter of credit instruction format further states that every effort has been made in these instructions to provide terms that can be easily accommodated. The language of the L.C. instruction should also take care of the interests of the buyer. Whatever has been understood in the sales contract or the Proforma Invoice, and whatever has been discussed orally or through email communication, is valid. Written communication in the form of emails can be a very good basis and support document with the Proforma Invoice, because it would contain the agreed terms and conditions in written form, which is as good as a detailed export contract.

It states that if you or your bank (the issuing bank), that is, the importer's bank (the issuing bank), is unable to comply with these terms and conditions, please consult with our office before issuance of the letter of credit to avoid any delay or non-shipment of the goods. Friends, international trading transactions are of mutual interest to both the buyer and the seller. While the seller expects everything to be in order and acceptable, the importer also wants the goods to be of good quality, delivered on time, and in the right quantity. It is in the interest of both parties to have this type of understanding of what should be involved in the L.C.—that is, what conditions and what documents must be incorporated in the letter of credit, and what the nature of the L.C. should be.

What are the payment terms of the letter of credit? Whether it is a sight L/C? Is it a revocable or irrevocable letter of credit? Is it a Red Clause letter of credit? Is it a revolving credit? The nature of the transaction, the value of the transaction, and the understanding and communication between the seller and the buyer will define all these conditions, and all these things should come into this document.

It states that the letter of credit shall be irrevocable, as you can see here, issued under the rules of UCP 500, or it can also be UCP 600, depending on the choice of both the seller and the buyer. If the seller says 500 and the buyer says 600, that should be acceptable. The credit shall be advised and confirmed by… Here, the seller specifies the bank nominated to act as the advising bank as well as the confirming bank, which would be the same as requested by the seller to the buyer. He writes the name of the bank, the local bank of the seller. Generally, it is the bank with which the seller has the main business account, because this makes things very easy for the seller. If it is possible for the issuing bank and the importer (the buyer) to accommodate this nominated bank, it would be good for both parties. He writes the name of the bank and the address of the bank.

Normally, the address is given for the foreign exchange branch of the bank, because it is possible that the actual account of the seller may not be in the foreign exchange branch. In such a case, he will invariably give the bank name along with the address and details of the foreign exchange branch and other details, such as the current account number or whatever the business account number is, depending on the country of export. All this information is given in this letter of credit instruction.

Further, the letter of credit instruction talks about the nature of the letter of credit. That is, the credit shall be freely negotiable, meaning that the seller would be in a position to use any local bank as the negotiating bank. Freely negotiable means the issuing bank is advised not to nominate a bank by itself to act as the negotiating bank. The credit being freely negotiable means that the seller wants the freedom to choose the bank of his choice to act as the negotiating bank for negotiating the documents and getting the remittance from the issuing bank. This request has been made here.

The fourth request made in this instruction is that the credit shall show, as the beneficiary, the exact name. The exporter will write here the exact name, generally the business name, which is also in the bank records and in which the current account has been created in the local bank, the nominated bank. The exact name has to be shown here so that there is no mistake in the letter of credit. The credit shall be payable in the currency, which is the U.S. dollar in this case. The total amount is also mentioned here in order to avoid any misunderstanding or miscommunication.

Further, it says that the credit shall be payable at sight, which means, as I mentioned earlier, that the request of the seller is to get a sight L/C, payable immediately on presentation of the documents, so there is no usance period. Or, if a usance period is agreed in the sales contract or the Proforma Invoice, it will state here the number of days after which the payment will be made after acceptance of the compliant documents. It may be 30 days, 60 days, or 90 days. Whatever the time period is, it will be mentioned here. The usance period will be mentioned.

The credit shall show that all banking charges except for the seller's bank charges are for the account of the applicant. Here, as I mentioned earlier, the applicant means the buyer, the importer. For banking purposes, the applicant is the buyer. Except for the charges of the seller's bank—the local bank charges—all other charges have to be in the applicant's account. This request has been made in the L/C instruction. All reimbursement charges are for the account of the applicant. All kinds of letter-of-credit-related charges, reimbursement charges—all these charges have to be on the account of the applicant. The applicant will not have any objection to this. The buyer will not object for the simple reason that even if the charges are in the account of the exporter, they will reflect in the price.

If the agreement was that certain charges have to be paid by the beneficiary, that is, the exporter, obviously, the export price will be increased by the exporter. Ultimately, all the costs and payments are borne by the buyer only. This kind of request is very logical and valid. Another condition and request made is that the confirmation charges, the local confirmation charges, are on the account of the applicant. Here, there can be differences of opinion, since it is in the interest of the seller to have local confirmation. The applicant can say that the charges should be borne by the beneficiary. But again, as I mentioned, the export price will go up, and the requirement of confirmation would arise if the issuing bank, as discussed in earlier communication, happens to be a bank not in the list of first-class banks. If it is not in the first-class list of banks, the contention of the buyer would be weaker.

The seller would say that since the bank does not have the required due diligence for such a transaction, it is the right of the beneficiary to have local confirmation for the safety of the transaction. In that case, logically, it makes sense to have this request that the confirmation charges will be borne by the applicant, that is, the buyer.

The next request made in the letter of credit instruction is that the credit shall show that all the charges for amendments to the credit, including related communication expenses, are to be paid by the applicant. Again, very clear instructions are given to the applicant. If there are discrepancies or differences in the letter of credit and some amendments have to be made, obviously, the fault is not of the beneficiary. It is logical to ask that all these expenses be charged to the account of the applicant.

Another instruction given is that partial shipments are permitted. Depending on the nature of the goods and the agreed terms, it is possible that the goods may not be ready by the time the export has to be effected, and the shipment has to be made. If it was agreed by the buyer that he is flexible about the quantity, then in case the L/C is made for a certain quantity and that quantity is not available before the due date, partial shipment should be allowed. This would also be in the interest of the buyer, because if partial shipment is not allowed and the goods are not ready, depending on the nature of the goods, then the whole shipment will not reach the buyer, which would not be in his interest.

Now, another condition here is “Transshipment Not Allowed.” Transshipment means the goods are being shipped by whatever means. Obviously, the transshipment question arises in sea transport, because in air transport, it is very difficult to determine whether transshipment is involved or not, as shipment by air is more complicated and very fast. This question of transshipment mostly arises in transportation by sea, wherein transshipment means that the goods are unloaded from the ship to be further loaded during the transit at some middle point. This means the ship carrying the goods is not going directly to the port of discharge from the port of loading, which is actually not a very good idea. In sea shipments, loading and unloading are major transit perils. Normally, buyers will not agree to transshipment unless there are no regular sea routes and services from the port of loading to the port of discharge, as per the contract, in which case transshipment may be necessary.

Further, in the case of transshipment, marine insurance charges are also normally increased. Again, this is not in the interest of the buyer. If direct routes are available and the possibility of sending the goods directly in a single ship exists, then it will be in the interest of both the buyer and the seller to ship the goods without transshipment. Generally, this condition—“Transshipment Not Allowed”—would be included.

Now, “Shipment from any Indian port or airport.” Here, a lot of flexibility is being taken by the seller, both in terms of the port of loading, which can be any port in a large country like India, in this example, as well as the mode of transportation. The choice of mode of transportation, that freedom, has been taken by the seller. Again, this would not be of major concern to the buyer because it would not really create a major operational issue. Generally, this kind of request would be very much compatible and desirable for the seller, and it would not affect the buyer’s interest.

The letter of credit expiration date shall be mentioned here. Generally, it would be two to three weeks later than the desired shipment date, the last date of shipment. The expiration should allow sufficient time for the presentation to be made to the local bank for negotiation with the issuing bank. It is always good practice to have at least a two- to three-week gap between the last shipment date and the expiry date of the letter of credit. Here, the latest shipping date is also mentioned, which serves as the date beyond which the bill of lading would be termed as stale, and would not be a clean onboard bill of lading, which is the desired condition in the interest of the buyer. The latest shipment date will be mentioned here.

Now, in the L/C instruction, the seller requests that the documents be mentioned as conditions of the letter of credit. It would use the words: “Full Set Clean Onboard Ocean Bill of Lading or AWB consigned to the issuing bank.” The seller requests that the name of the consignee be the issuing bank. This is a very safe condition for the seller, because if it is consigned to the issuing bank, both the bank’s and the seller’s interests are protected. The buyer is not affected, because ultimately the buyer must pay the money to the issuing bank and obtain a no-objection certificate (NOC) from the issuing bank. Once the NOC is issued, even if the bank is the consignee and the bill of lading shows the bank as consignee (meaning it shows the ownership of the goods to the issuing bank), the importer can claim the goods from the bank.

This is a very smart and safe request by the seller, which would normally be acceptable to the buyer if his intentions are good and he is willing to pay the full amount to the issuing bank without other motives. The buyer would generally not object to this requirement of having the consignee named on the bill of lading consigned to the issuing bank. The name of the exporter would also appear in the documents, but the consignee's name would be the issuing bank.

Here, other documents agreed between the buyer and seller will also be written, as per the requirements of the customs of the port of discharge, that is, the customs of the buyer’s country. Normally, these include the certificate of origin, quality certificate, or insurance certificate, depending on whether it is a CIF, C&F, or FOB contract. Depending on the delivery terms (INCOTERMS) used, certain documents may be requested by the buyer and agreed upon in prior communication. Only documents that the seller can procure should be included. It should not contain any document that is outside the scope of the exporter to procure locally or otherwise. Any document that is possible and doable will be mentioned here.

It ends with: “Your cooperation is very much appreciated. Please contact us for any questions that you may have.” This is a very professional type of communication made by the seller to the buyer while giving the letter of credit instructions. Friends, this is a very good starting point for the international export transaction, wherein the seller gives point-wise requests to the buyer to be incorporated in the L/C opening instructions. The other document, which will now be created by the buyer and submitted to the issuing bank, will be based on these instructions, and the issuing bank will open a letter of credit accordingly.

See the sample of a typical international letter of credit. Download the sample from the resources section of this lecture.

What are the common L/C flaws to look for when a seller receives the L/C and before accepting it for the seller? Watch the next video.

Hello friends, welcome back to the course. Friends, now your knowledge of L/C is getting strengthened, and you are now able to understand the fine print of the letter of credit. You can understand how the letter of credit works, what the different types of letters of credit are, what role the credit opening instructions play, and what role the document that the exporter provides to the importer in relation to the instructions plays. This is a very important document.

Friends, here everything is very logical. The system works very logically. It has proven itself over the last 80 or 90 years. The system works very smoothly, and not many changes have occurred. Certain changes have been reflected in the various new versions of the UCP, Uniform Customs and Practices, the latest version of which is UCP 600. Let's now look at when the LC is opened by the issuing bank and advised by the advising bank to the beneficiary, who is the exporter.

It is now the exporter's turn to review the letter of credit and decide whether it is acceptable or not, and to check whether the advised letter of credit corresponds to the LC instructions given by the beneficiary to the applicant, that is, the importer, through the L/C instructions. If there are differences, changes, or deviations from the given LC instruction from the exporter to the importer, whether these changes are acceptable, whether the given conditions are feasible in the letter of credit, and whether the documents required by the LC can be obtained by the exporter, these must be considered. There are certain fine details that the exporter, i.e., the beneficiary, should check before accepting the letter of credit advised by the advising bank.

I am now sharing a checklist of the things that should be checked step by step before accepting a letter of credit recently advised by the bank. Let's take a look at this checklist.

The first thing to check in the letter of credit is whether the names and addresses mentioned for both parties—the beneficiary and the applicant—are correct. The addresses should be correct, and the names should be correct. Since these addresses will appear on several documents, they must match exactly, with the correct spelling and format. Everything should be sufficiently the same. This first step, verification of name and address, is very important.

Second, in the case of the letter of credit, the beneficiary must check whether the credit amount, that is, the LC amount, corresponds to reality, the calculation, and what the exporter had indicated in the letter of credit instruction. Whether this is sufficient needs to be checked.

The third thing to check is the list of required documents. Commercial documents or L/C documents, also called principal documents, are listed in the letter of credit and may vary depending on the terms and conditions. It must therefore be checked that these documents required by the LC are obtainable, according to the conditions of sale and as per the sales contract or any written communication between the exporter and the importer, such as email. These written documents should be checked to see if there is a discrepancy in the letter of credit.

The fourth thing to check is the shipping and destination locations. These must be checked to ensure that they are correct. The port of loading, if the L/C is flexible as to the port of loading, is good for the beneficiary. When the beneficiary requested flexibility in the LC instruction regarding the loading port, or if the name of the port is given, this is convenient for the beneficiary. If it is acceptable to the beneficiary, it will work. The point of shipment—that is, the port of loading—and the destination—that is, the port of discharge—must be checked.

The fifth point to check is the insurance coverage and the terms and scope of the insurance. What is the insurance coverage requirement stated in the letter of credit? Whether these requirements can be met, are obtainable, and are consistent with the agreements in the sales contract or written communication between exporter and importer must be confirmed.

Friends, the sixth thing to check in the letter of credit is the date of shipment. This is the permissible date for the dispatch of the goods. It must be checked whether manufacturing, packaging, preparation of documents, and all formalities can be completed to ensure space can be booked on a ship sailing from the port of loading to the port of discharge before this date. These things must be clarified by the beneficiary with the shipping company, the C&F agent, and whoever is responsible for shipping, to ensure the dates are convenient and achievable.

The seventh point to check is the expiry date of the L/C, according to this checklist. It must allow enough time for submission of the draft and the documents. Usually, banks allow 17–18 days after shipping for presentation. According to the latest UCP, this should be stated in the L/C. The expiry date of the letter of credit must be consistent with this schedule.

The last thing to check in the letter of credit is the description of the goods. It should be logical and technically correct, and it should conform to the agreements and all documents, such as the certificate of origin and other documents to be obtained from third parties. The mentioned description should be feasible and practical. It should match the ITC-HS code on which the entire deal and prices are based. If the ITC-HS code changes, the entire calculation can change. The description of the goods must be correct from the point of view of both the importer and the exporter. These descriptions should be given very clearly and correctly in simple terms. They should not be too complex or difficult to understand. This must be checked carefully.

The worst thing that can happen to the seller is that the documents presented to the issuing bank are rejected. It is better to learn about common documentary discrepancies observed by several international banks worldwide. And it is better to avoid such discrepancies. Watch about it in the next video.

Friends, I will now share with you the common discrepancies that occur in the letter of credit when the exporter prepares the goods, ships the goods, procures the documents, and then presents the documents to the negotiating bank. The bank negotiates with the issuing bank, sends the documents, and the common discrepancies are observed by issuing banks around the world. I will share all these discrepancies, and exporters should be very aware and knowledgeable about them so that sufficient care is taken while dispatching the goods, procuring the documents, and making sure that the process does not result in any of these types of discrepancies.

Let us look at the common discrepancies among the letter of credit documents. These are the discrepancies normally observed in export documents, and exporters are advised to keep them in view while tendering the documents for negotiation by the negotiating bank.

The most common type of discrepancy observed in general is when the presentation is made after the credit has already expired. This normally happens when the expiration date of the letter of credit is very close to the last date of shipment. Sufficient time is not allowed by the letter of credit for the presentation of the documents. If due diligence has been done and care has been taken, the chances of this discrepancy occurring are very low.

The second very common discrepancy observed in many letters of credit is that the shipment date in the transport document is later than the latest date by which the shipment must have been made. The last date of shipment has been crossed, and the transport documents have become stale. This is very common, and sufficient care should be taken by the beneficiary to ensure this situation does not arise.

The third common discrepancy in the presented documents is that the bill of lading is not a clean onboard B/L. It is a claused B/L, which means either the quantity does not match the commercial invoice, the gap between the quantity mentioned and the actual shipment is significant, or the goods loaded on the ship are damaged or dirty, or some other problem has occurred during shipment, as inspected by the captain. In such a case, the B/L will be claused and not a clean bill of lading. Most letters of credit require a clean onboard B/L. Sufficient care must be taken by the beneficiary to ensure the goods are loaded properly so that a claused B/L does not result.

Another very common discrepancy observed by issuing banks worldwide is that the documents are presented to the bank after the allowed time for submission. Generally, the time allowed is 16–18 days after shipment. If the documents reach the issuing bank after this period, the presentation will not be compliant.

Another very common discrepancy is that the shipment is not as per the quantity required by the letter of credit. This generally happens when a partial shipment is not allowed. In such cases, if the shipped quantity does not match the required quantity and is short, then the documents will be non-compliant.

Another observed discrepancy is that the credit amount mentioned in the commercial invoice and demanded by the exporter is more than what is allowable in the L/C. This is again a very common discrepancy.

Another very common discrepancy is that the insurance requirements have not been met by the beneficiary. For example, if the type of insurance, the coverage, or the value of the insurance is less than what was required in the L/C or as per trade practices, then the documents will be underinsured. This means the insurance part has not been fully taken care of.

Another discrepancy commonly observed is that the description of the goods on the invoice does not match the description in the letter of credit. This is very important. The goods shipped and the documents created must have descriptions that reasonably match what is demanded in the L/C. If there are differences or variations in the description or details, the issuing bank will raise a discrepancy and may not accept the documents.

Sometimes the documents indicate marks and numbers different from what is mentioned in the L/C. For example, in the packing list, the marks, numbers, or part numbers shown may not match the conditions of the L/C. In such cases, the documents may not be accepted.

Another common discrepancy is that the documents indicate that the goods have been shipped on deck, whereas the L/C requires that the goods should not be decked but placed below deck. If this condition is not met, the documents may be rejected.

Many times, the transport documents, B/L, insurance documents, or bill of exchange are not properly endorsed or signed by the authorized person as per UCP guidelines. In such cases, the documents may be rejected.

If any document required in the L/C is missing, the documents may not be accepted by the bank. Often, instead of an insurance policy, exporters supply an insurance certificate. Exporters must understand the difference clearly: if the L/C requires a policy, a policy must be supplied. If it allows a certificate, then a certificate is acceptable.

Another very common discrepancy relates to measurement and weight. The measurements or weights mentioned in one document may differ from those in another. Since all documents refer to the same shipment, the measurements must match.

The type of transport document is also important. It may be a house bill of lading, a combined transport document, or a charter party bill of lading. The exporter must ensure that the transport document required by the L/C is obtained; otherwise, the documents may be rejected.

Another very common discrepancy is that the insurance cover, or sometimes other documents, is expressed in a currency other than that required by the L/C. All documents must adhere to the currency mentioned in the L/C. For example, if it is the U.S. dollar, the amounts shown in all documents, including the insurance cover, must be expressed in U.S. dollars.

Another reason for rejection is missing or improper signatures. If the signatures are not there or not authorized as per UCP guidelines, the documents can be rejected.

Sometimes the transport documents may have the exporter’s or consignee’s name different from what is given in the L/C or other documents, such as the commercial invoice. Since the commercial invoice is the most important negotiable document, if the wrong parties are shown, it can lead to rejection.

Discrepancies may also arise in the bill of exchange if it is not drawn as per the tenor stated in the documentary credit. The bill of exchange should match the tenor in the L/C.

The nature and extent of insurance cover may also be an issue. If the risks required by the L/C are not covered, the documents may be rejected.

Another common issue is that the effective dates in the insurance policy may not match the shipment dates. The insurance coverage must be valid and effective from start to end, matching the shipment needs and L/C requirements.

In cases where the delivery terms are CNF or CIF, the freight must be paid by the exporter. The transport document must clearly indicate “freight prepaid,” even if it is not explicitly mentioned in the L/C. If it does not, the documents may be rejected.

Most L/Cs require a clean onboard bill of lading. The transport document must indicate “shipped on board.” It should not be clausal. The “shipped on board” stamp must be present for the document to be accepted.

Another common discrepancy is that the amounts shown on the invoice and the bill of exchange do not match. Such mistakes must be avoided.

Shipments made between ports other than those stated in the L/C also result in discrepancies. The port of loading and port of discharge in the transport document must match those in the L/C.

Finally, discrepancies may occur regarding transshipment and partial shipment. If transshipment is not allowed but the documents indicate it occurred, or if partial shipment is not allowed but the actual shipment is partial, the documents will be non-compliant.

Friends, these were some very common discrepancies I wanted to share with you. This checklist is very important and should be handy for exporters. They should note it down. In the course resource section, you can download the checklist for both checking the L/C before acceptance and the common discrepancies observed worldwide by issuing banks. You can keep it handy for the smooth conduct of export shipments. Due diligence and care must be taken by the exporter while obtaining documents for presentation to the bank, to make sure none of these discrepancies—or others that may arise depending on the goods and contract—occur.

In the next few videos, Dr. Jain explains the different types of L/C related costs. And who pays what?

Friends, welcome back to the course. Now, let us try to understand. What are the different fees that are involved in the traditional LC Cycle? It is very, very important to know this cost and who bears this cost. So, Friends, let us first try to understand how the L/C fees, different types of fees are split between the importer and the exporter, which means the buyer and seller, that is, the applicant and the beneficiary. So, Friends, it all depends on the arrangement between the buyer and seller. So it's more of a mutual understanding between the seller and buyer.

The costs in the beneficiary's country are usually the responsibility of the beneficiary, and the costs that are in the applicant's country are the responsibility of the applicant. However, buyer and seller can arrange to split letter of credit fees in a variety of ways. So which means it is possible that all the costs, whether it is in the applicant's country, buyer's country or seller's country may be borne by the buyer or it may be borne by the seller, whether it is the opening charges or the advising charges or negotiating charges or the documents examination charges or the reimbursement charges or amendment charges, whatever the cost.

The beneficiary may bear all the costs. But ultimately, these costs would be reflected in the price, and the price has to be paid by the buyer only. So at the end of the day, for the goods as well as for any related cost, ultimately the payment has to be made by the buyer only.

But in usual terms, let us look at the different costs and who pays for them. Suppose we want to see what costs are typically paid by the beneficiary.

The first important cost is the L/C advising cost, which compensates the advising bank for authenticating the L/C, sending the L/C to the beneficiary, and logging the L/C into the bank's liability system.

The second cost, which is generally paid by the beneficiary, refers to the negotiating bank, and it is for document examination. The negotiating bank examines the documents, and this is normally a percentage of the drawing amount, but subject to a minimum charge, which may range from $150 to $250, or may be based on a percentage of the total drawing amount.

Another cost, usually paid by the beneficiary, is the discrepancy cost. If the documents are discrepant, the negotiating bank charges a discrepancy fee for the additional work involved, including rectifying the discrepancy (if possible) or arranging for payment with the discrepant documents. The bank may take responsibility for some minor discrepancies and ensure that payment will be arranged, but it will charge for this. These are two types of discrepancy charges. Normally, these costs are unpredictable. The buyer will never pay for this cost. This cost must definitely be borne by the beneficiary. This is the only cost that is outside the expected costs, and it must be paid by the beneficiary. Generally, it is not reflected in the price.

Friends, in addition to those costs, there are costs that must be paid by the beneficiary related to communication costs, such as telex and commercial communication costs, when there are discrepancies or when following up for payment. For that kind of communication, additional costs must be paid by the exporter. Otherwise, in the normal course of communication, negotiating banks do not usually charge anything. Exporters should try to fax queries directly to the buyer to resolve any payment issues, since this is definitely cheaper for the exporter.

Then there are costs related to courier and postage for sending the documents and drafts to the issuing bank or the reimbursement bank. Generally, the issuing bank also selects a reimbursement bank, which reimburses the payment. The cost of sending the original documents to either the issuing bank or the reimbursement bank must be paid by the beneficiary. Similarly, if the issuing bank selects a reimbursement bank, its charges are typically paid by the beneficiary and usually range from $150 to $250.

These are the very common costs that are paid by the beneficiary.

Now, friends, let us look at what the costs are that are associated with the applicant that is the buyer, especially the cost of a letter of credit and its fees. So the cost of opening an L/C varies from country to country. But as a thumb rule, in most developed nations, Western nations, it ranges from three to four percent of the LC amount. If it is in excess of one hundred thousand dollars. But if it is less 100,000 dollars, that is the L/C amount is less than 100,000 dollars, there may be minimum charges which would vary from bank to bank.

And in the underdeveloped countries, the L/C issuing charges, as well as the negotiating charges, can be more than 1.5 percent of the total L/C amount. So it should be noted that the cost of issuing a letter of credit as well as the cost of negotiating the L/C are very much comparable.

In addition, Friends, for the importers who do not have a credit line with the bank with whom they are getting the L/C issued, there may also be the cost of using the credit facility because the amount has to be paid by the bank. And for that period, the bank will definitely charge for extending the credit line. Unless the bank has asked for the hundred percent margin money, in which case this cost would not be charged

Compared to the paper-intensive and time-consuming processes involved in the traditional methods of trade finance, by digitizing the end-to-end exchange of information and streamlining the process of LC issuance and confirmation, all trade participants achieved a significant reduction in processing time and costs using the new, emerging Blockchain-based letter of credit. In the next several videos, Dr. Jain has discussed several aspects of the blockchain-based letter of credit system.

So, friends, this is a very, very basic cycle, which I just told you about, the LC, the traditional LC. Now, friends, there is a new document. In the operation of LC, for many decades, no major change had come in the payment systems through documentary credit. But recently, blockchain technology has provided new ways of operating. LC, wherein the role of banks is useful but not necessary.

New blockchain-based platforms and consortia are emerging in the market, making the operation of international payment through LC, which is based on blockchain, cost-effective. And it takes very little time, and it is really very convenient. It is in real time. And the single document that is the LC opening instruction itself becomes the letter of credit on the blockchain, which is advised to the exporter and governed by the multi-signatory access mechanism, wherein all the major parties to the transactions have access to the blockchain-based single document system of the network. It makes the operation of the new type of credit very cheap and time-consuming.

It has been observed that in recent times, the blockchain-based LC took just five to six hours as opposed to five to seven days, which traditional LC takes, and there has been a significant reduction in the cost of operating LC

Let us now try to understand the concept of the Blockchain-based L/C. Basically, it has been proposed that there are mainly seven steps to a Blockchain-based L/C transaction cycle.

What are these steps?

The importer creates an L/C application for the importer’s bank to review and store on the blockchain platform or network. The importer’s bank receives a notification to review the letter of credit and can approve or reject it, based on the application type, the data provided, and the conditions mentioned.

Once checked and approved by the importer’s bank, access is then automatically provided to the exporter’s bank (the advising bank) for verification, endorsement, and acceptance by the exporter. In this step, the exporter’s bank approves or rejects the L/C. If approved, the exporter is able to view the L/C requirements on the same platform. Permissions are granted step by step to the parties involved. If the issued letter of credit is approved by the advising bank (the exporter’s bank), the exporter can view the L/C requirements and conditions included, and is prompted to review the complete application. The exporter then completes the shipment, adds the invoice and export application data, and uploads the photo images of any other required document in the prescribed manner. Once validated, these documents are stored on the blockchain.

In step five, the documents are reviewed by the exporter’s bank, which approves or rejects the application. The documents submitted by the exporter are viewed by the exporter’s bank, that is, the advising bank, which now acts as the negotiating bank. It approves or rejects the application. The importer’s bank then reviews the data and images against the L/C requirements, provided they have been approved by the negotiating bank. It may also mark any discrepancies for review by the importer.

This review by the importer is the subject of debate: how and whether it should be done, because ultimately, the payment has to be made by the bank, not the importer in this case. However, depending on the platform, the smart contract, and the immutability of the system, it is very much possible that the importer can do it.

When approved, the L/C goes straight to the completed status or is sent to the importer for settlement if required. Due to discrepancies, the importer can review the export documents and approve or reject them. Depending on the nature of the discrepancy, if it is acceptable to the importer, the importer can still accept it, and payment would be made to the exporter.

These are the seven very basic steps of the Blockchain-based L/C.

What happens is that the traditional L/C cycle has not really seen the kind of overhaul required over so many decades. Now this letter of credit, which is based on the blockchain, looks something like this. The seven steps I have just discussed with you about the blockchain-based L/C cycle can be easily understood: there is only one platform, the blockchain network, also called the blockchain platform. On this blockchain platform, the activities take place over a single document, starting with the L/C opening instructions. This blue box you can see here: the importer submits the L/C opening instructions and conditions on the bank's blockchain platform.

Here itself, the L/C opening instruction becomes the letter of credit. This green box you can see here, but it is still the same platform and the same document. There is no manual system here. This platform is a multi-signatory access platform, wherein the parties can be the importer, the importer’s bank, the exporter, and the exporter’s bank. At the right time, access is available to all these parties on the single platform, on the single document itself. There are no two documents—it is only one document, immutable and sacrosanct, containing all the information, conditions, and requirements of the importer as well as those approved by the importer’s bank.

Once it becomes a full-fledged L/C, you can see this red box here. In this red box, the advising bank verifies and endorses, and the exporter either accepts or rejects the letter of credit. If it is rejected, it is visible in real time to the importer and the importer’s bank, whether it has been accepted or not. There is a time-bound acceptance or rejection, depending on this letter of credit, on the blockchain platform, which is now in the form of a smart contract. This smart contract, with its many automated features and robustness of blockchain technology, along with the single network, single platform, and single document, provides convenience, speed, and very high potential for cost reduction, since there is hardly any manual work involved. Once it is visible to all the multi-signatories with permissioned access to the data on this document, it happens automatically by rule, without manual work. The cost reduction is therefore very high.

If any amendment is required, it is visible in real time. If the amendment is made by the importer or the importer’s bank, it is easily available and viewable by the exporter’s bank as well as the exporter. Any unwanted amendment or change in the L/C must be approved by all the parties. If it is not, then it will be automatically red-flagged in real time.

This system makes the entire transaction of the letter of credit so simple and fast, something similar to what we know about the credit card. Because of the high volume and the exclusion of manual work, all the parties are happy. The possibility of cost reduction is very high.

With this cost reduction and convenience available on the blockchain-based L/C platform, the volume is definitely going to increase. For example, from 10 to 15 percent of total international trade financing, this figure can increase manyfold. Banks are also happy because of the higher volumes they handle without putting in too much effort—whether it is for the main L/C, amendments, negotiation, or release of payment.

The situation becomes a win-win for the importer, the exporter, the importer’s bank, and the exporter’s bank. This is how it works. This kind of technology change is truly incredible, something not seen for many decades. Friends, this technology is definitely going to revolutionize the way L/C operations are handled.

Congratulations on completing this short course. You must now be well conversant with the international letter of credit and its role in receiving international trade-related payments. If you wish to study an in-depth understanding of the concept, you can enroll in a more advanced certification course titled - International Letter of Credit and UCP - Advanced Certification available on this platform

Do rate the course if not yet done, and if you liked what was taught in this course. And refer this course to your friends and contacts.

In the next video, Dr. Jain shares the final thoughts on the topic and the course.

So, friends, I'm sure that you found this class very informative and you could easily understand how an international letter of credit works. What is the role of UCP? What is the role of the other regulatory mechanism that controls this international flow of payments through a documentary letter of credit?

If you like this class, please refer this class to your contacts and friends

Thank you very much

Hello to you. Today, I have some appreciative comments for you.

I want to take a moment to congratulate you on fully completing this course.

Your dedication and perseverance throughout this journey have been truly commendable.

Completing a course is no small feat, and I'm incredibly proud of the progress you have made and the knowledge you have gained along the way.

I also want to remind you that this course is just one piece of the puzzle.

It is part of our larger VJ Export Mastery Courses series, consisting of 25 courses that I mentioned to you earlier. These courses are designed to provide you with a comprehensive understanding of the export industry.

On my part, as I had told you earlier, I am committed to helping you expand your learning even further by giving you access to more similar courses in the series. On your part, I again have a small request.

Your feedback and rating are incredibly valuable in refining this course and ensuring it remains world-class.

I kindly ask you to leave a rating for the course along with your honest feedback, in case you have not done so yet.

Once again, congratulations on completing the course.

Keep up the fantastic work that you have done in this course, and remember, I am here to support you every step of the way, personally. Even after you have completed this course, you can reach out to me any time for any mentoring or support that you may need.

Thank you very much.