According to banking and financial encyclopedia L/C is defined as "A letter requesting one person to make advance to a third person on the credit of a writer is a letter of credit. Those letters are general or special, they are general if directed to writer's correspondent generally, and they are special if addressed to some particular person. "L/C is introducing by international commercial organization in 1933 A.D.
Commercial L/C defined a stand instrument by which a banker for account of buyer gives formal evidence to seller of its willingness to permit him a draw on certain terms and stipulates, in legal form that all search bills will be honored is what has come to be know as commercial L/C for commercial parties to serves an important economic purpose and the meaning and mechanism get broadened further. In another word it can be said as "banks conditional undertaking of payment." from this simple five word definition, we can derive five important characteristics of L/C.
-It is an undertaking of a bank.
-It is an undertaking to make payment.
-It is an undertaking given on behalf of a person.
-It is an undertaking given to a third person (a person other then the on whose behalf it is given)
-It is conditional undertaking, payment being subject to compliance with certain condition.
In typical international trade transaction good are being exchange between two commercial parties namely seller and buyer. This exchange of goods and services leads to a payment obligations are arising out of a seller contract (an obligation for supply of goods by seller to buyer on the other) and the parties to the contract are faced with complex problems attached to an international trade (like compliance with trade and regulation etc.), the terms and condition assumed lot importance. In order to overcome the situation of mutual but opposite interest, they look forward to the service of banks, to facilitated exchanges process. Since banks undertake basically financially transaction represented by the documents, they agree to as intermediary for exchange of goods and money through their medium provided the goods and services are represented by documents of title to goods.
We can expand the definition of documentary credit as " An agreement by means of which a bank (issuing bank) acting as request of costumer (applicant), undertaking to pay a third party (beneficiary) a per determined amount by given data according to agreed to agreed stipulation and against presentation of stipulated guarantees are issued on behalf of bank's client to cover a situation of their non performance (i.e. bank agrees to make payment incase of its clients doesn't perform the acts specified in a guarantee /contract) where as documentary credit are issued on behalf of beneficiary once he surrenders the requisite document and incompliance stipulated conditions irrespective of the fact whether the client pays for such documents or not.
No comments:
Post a Comment