A letter of credit (LoC) is a common documentary credit instrument in settling trade between nations. The documentary credit transaction process involves the applicant for the credit (buyer) and the beneficiary (seller) entering into a contract recording their commercial terms. The buyer then applies to the bank issuing the credit (issuing bank) to issue an LoC promising to pay the amount to the seller on the fulfillment of the terms and conditions mentioned in the contract.
The issuing bank provides the LoC to the bank which makes the payment (intermediary bank), which forwards it to the seller. The seller then confirms that the terms of the LoC match the commercial understanding between the buyer and the seller and the seller ships the goods to the buyer.
The seller then produces the documents before the intermediary bank, which will forward the LoC along with any other document from the seller to the issuing bank. The issuing bank again would review the compliance to the terms of the LoC then send the money to the intermediary bank. The intermediary bank would then pay the amount to the seller.
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SNG & Partners has offices in New Delhi, Mumbai and Singapore. Amit Ronald Charan is a principal associate and Sounak Chakraborty is an associate.