Documentary Letter of Credit – Parties | Trade Samaritan

Documentary Letter of Credit – Parties

Documentary Letter of credit (LC) is a financial contract between the issuing bank, applicant and the beneficiary. Let us understand the role of various parties involved in an LC transaction.

Commercial or documentary letter of credit (LC) instrument gives an assurance given to the beneficiary by the issuing bank or financial institution that the said amount will be paid if the stipulated documents and conditions are met by the beneficiary.

In an LC transaction the exporter may be referred to as the ‘beneficiary’ and the importer may be referred to as the ‘applicant’, also there are multiple banks/financial institutions or Authorized dealers involved who have unique roles and responsibilities hence it is important to understand the naming convention and the basic role of various parties of an LC transaction.

A commercial/documentary Letter of credit transaction has following parties:

  1. Applicant: means the party on whose request the credit is issued. Applicant usually is the importer/buyer of the underlying goods or services.
  2. Issuing bank: means the bank that issues a credit at the request of an applicant or on its own behalf.
  3. Advising bank: means the bank who advises the credit at the request of an issuing bank. Advising bank if different from the confirming bank does not undertake any obligation to honor the credit or the amendment advised. Advising bank is in charge of verifying the authenticity of the letter of credit.
  4. Beneficiary: means the party in whose favor a credit is issued. Beneficiary receives the proceeds under the credit and usually is the exporter/seller or an agent.
  5. Confirming bank: means the bank that adds its confirmation to a credit upon the issuing bank’s authorization or request. Confirming bank can refuse to confirm in spite of receiving the request however once it adds its confirmation to the credit, the confirming bank is irrevocably bound to honor or negotiate as of the time it adds its confirmation to the credit. Even if the issuing bank fails to honor, confirming bank must pay to the beneficiary
  6. Nominated bank: means the bank with which the credit is available or any bank in the case of credit available with any bank.
  7. Presenter: means a bank or other party that makes a presentation.
  8. Reimbursing bank: means the bank that at the request of the issuing bank is authorized to pay or accept and pay time drafts under the credit.