EXIM A Letter of Credit, simply defined, is a written instrument issued by a bank at the request of its customer, the Importer

(Buyer), whereby the bank promises to pay the Exporter (Beneficiary) for goods or services, provided that the Exporter presents all documents called for, exactly as stipulated in the Letter of Credit, and meet all other terms and conditions set out in the Letter of Credit. A Letter of Credit is also commonly referred to as a Documentary Credit. There are two types of Letters of Credit: revocable and irrevocable. A revocable Letter of Credit can be revoked without the consent of the Exporter, meaning that it may be cancelled or changed up to the time the documents are presented. A revocable Letter of Credit affords the Exporter little protection; therefore, it is rarely used. An irrevocable Letter of Credit cannot be cancelled or changed without the consent of all parties, including the Exporter. Unless otherwise stipulated, all Letters of Credit are irrevocable. A further differentiation is made between Letters of Credit, depending on the payment terms. If payment is to be made at the time documents are presented, this is referred to as a sight Letter of Credit. Alternatively, if payment is to be made at a future fixed time from presentation of documents (e.g. 60 days after sight), this is referred to as a term, usance or deferred payment Letter of Credit. The International Chamber of Commerce (ICC) publishes internationally agreed-upon rules, definitions and practices governing Letters of Credit, called Uniform Customs and Practice for Documentary Credits (UCP). The UCP facilitates standardization of Letters of Credit among all banks in the world that subscribe to it. These rules are updated from time to time; the last revision became effective January 1, 1994, and is referred to as UCP 500. Copies of the UCP 500 are available from your TD branch or Global Trade Finance office. Please refer to the back cover of this guide for a listing of these offices.
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Any exporter will perhaps tell you that the most important aspect in the exportimport business is finding a payment mode which is secure and safe, and all the more, acceptable to both parties. I strongly believe that it is of utmost importance for each and every exporter to have extensive knowledge of export payment mechanisms and extend credit cautiously. I believe is a relatively cheap and uncomplicated method of payment for both importers and exporters, I invariably go with Letter of Credit. Although I always advocate Letter of Credit, with the world turning into a digitally connected global village, both the buyer and seller have, however, found various means of transacting commensurate with their needs and comfort. For newbies to the export-import business, I would like to introduce Letter of Credit (also known as L/C, LC, or LOC) as a letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. L/Cs are ideally used in international transactions to ensure that payment will be received by the seller.

The reasons why I feel a L/C is a very important tool for export-import transactions is primarily due to the factors involved in international dealings such as distance, different laws in respective countries and absence of face to face interactions between the buyer and seller sitting in two far-flung areas on the globe. It is a fact that the exporter or importer, who are located in different countries, may not know each other. As such many a time the problem of buyer's creditworthiness hampers trade between the two. At various platforms in the past, I have discussed with several exporters on whether L/Cs are indeed the safest and secure payment mode. They opined that being an exporter, L/Cs amount to guaranteed payment upon presentation of certain documents, thus reducing production risk, for situations when the buyer cancels or changes his/ her order. Moreover, they felt that it gives them the ability not only to structure the delivery schedule according to their interests, but also in obtaining pre-export finance to finance the production or the purchase of the goods. Perhaps the single-most advantage as a seller or exporter in using L/C as a payment mode is that the buyer cannot refuse to pay due to any complaints about the goods and the buyer has to raise his/ her complaint or claim separately from the Letter of Credit. This, I think, gives the exporter a significant advantage in resolving such issues related to delayed payments. However, many importers whom I have met were unanimous on the benefits of L/Cs because the bank acts on behalf of the buyer who is the holder of Letter of Credit by ensuring that the seller or the exporter will not be paid until the bank receives a confirmation that the goods have been shipped. Having said that, several exporters and importers have been successful too without Letter of Credits. Cash in advance, documentary collection or draft, open account, and other payment mechanisms are also popular amongst the exim community. Since I always argue for L/Cs as the safest and more secure payment mode, I would definitely like readers to share their views on: 'Do you really think L/C is the safest and secure means of transaction?' or 'Which payment method do you mostly use?' or 'What according to you is the safest means of export-import payment method?'

Under most of the LOCs of Exim Bank, the overseas importer of Indian goods needs to open, through his Bank, a Letter of Credit in favour of the Indian exporter, which states that the eligible value of contract would be reimbursed by Exim Bank, directly, or where specifically designated, through the negotiating bank in India, as per the terms of the contract approval and

in accordance with the LOC Agreement between Exim Bank and the recipient of the LOC. Since the L/C opening bank, in such cases, does not undertake payment obligation, the L/C opening bank would only levy nominal handling charges to the importer at whose instance the L/C is opened. Exim Bank itself can undertake negotiation of documents under the L/Cs opened under the LOCs