Import Letters of Credit provide importers the most widely used and accepted international trade payment mechanism and finance instrument. By structuring Letter of Credit terms to allow Deferred Payment or Trade Acceptance a Letter of Credit can be utilized to provide financing to the importer. It guarantees payment, provided the seller complies with the terms and conditions within the Letter of Credit. An irrevocable letter of credit cannot be canceled or varied without the consent of all parties. A bank issue an import letter of credit on the behalf of an importer or buyer under the following Circumstances a) When a importer is importing goods within its own country, b) Any act of merchandise where goods from the country is sold to another commercially, c) When an Indian exporter who is executing a contract outside his own country requires importing goods from a third country to the country where he is executing the contract. The first out of these three is the most common reason to get a letter of credit in modern day trading.
There are certain fees and reimbursements associated with this kind of trading though. The issuing bank charges the applicant fees for opening the letter of credit. The fee charged depends on the credit of the applicant, and primarily consists of: A) Opening Charges, which comprises of commitment and usage charges for the period of the letter of credit, B) Retirement Charges: This is to be paid when the period of letter of credit terminates. The bank providing the letter scrutinizes the bill according to UCPDC (Uniform Customs and Practice for Documentary Credits), and levies charges based on value of goods. There are certain risks also that are associated while opening this kind of account. Basic risks include: Financial Standing of the Importer, the goods involved, the exporter and country risk and foreign exchange risk. Price risk is another crucial factor associated with all modes of international trade. All banks need to evaluate their strategies on the mentioned criteria’s prior to issuing the letter of credit.
Import Letters of Credit provide importers the most widely used and accepted international trade payment mechanism and finance instrument. By structuring Letter of Credit terms to allow Deferred Payment or Trade Acceptance an L/C can be utilized to provide financing to the importer. With the amount of influx creeping in the Indian Market, people primarily into forex business or into international trading will value this document. Most importantly international trading has a whole lot of money involved and if done properly could accumulate a turnover capable of running a state’s budget; hence it is important that it is handled with care.
