NON-FUND BASED FACILITIES

NON-FUND BASED FACILITIES

Letter of Credit (Non-Fund)

A Letter of Credit (LC) is a bank's written undertaking to pay the seller (beneficiary) on behalf of the buyer (applicant), provided the seller submits the required documents in accordance with the terms and conditions specified in the LC.

It is a widely used payment instrument in domestic and international trade that provides assurance to both buyers and sellers.

KEY PARTIES INVOLVED

  • Applicant: Buyer / Importer requesting the Letter of Credit.
  • Issuing Bank: Bank issuing the Letter of Credit.
  • Beneficiary: Seller / Exporter receiving payment.
  • Advising Bank: Bank advising the Letter of Credit to the beneficiary.
  • Confirming Bank (if applicable): Adds its own payment guarantee.
  • Negotiating / Nominated Bank: Examines documents and processes payment.

FEATURES OF A LETTER OF CREDIT

Bank Payment Guarantee

The issuing bank undertakes to make payment subject to compliant documents.

Document-Based Transaction

Banks deal with documents and not with goods or services.

Conditional Payment

Payment is released only after submission of documents exactly as specified in the LC.

Risk Mitigation

Reduces payment risk for sellers and performance risk for buyers.

Internationally Accepted

Extensively used in domestic and international trade.

Governed by International Rules

Most Letters of Credit are governed by ICC UCP 600 rules.

Confirmation Facility

Another bank may add its guarantee, reducing country and bank risk.

Multiple Payment Options

Sight Payment, Usance (Deferred Payment), Acceptance and Negotiation.

Transferable LC

Allows the beneficiary to transfer rights to another supplier.

Expiry Date

Every LC has a validity period and document presentation deadline.

BENEFITS OF LETTER OF CREDIT

For the Seller (Exporter)

  • ✅ Assured payment from the bank.
  • ✅ Reduced credit risk.
  • ✅ Improved cash flow.
  • ✅ Easier access to export finance.
  • ✅ Greater confidence while dealing with new buyers.

For the Buyer (Importer)

  • ✅ Payment only against compliant documents.
  • ✅ Ensures shipment as per agreed terms.
  • ✅ Builds trust with overseas suppliers.
  • ✅ Better control over transactions.
  • ✅ Ability to negotiate better commercial terms.

TYPES OF NON-FUND BASED LETTERS OF CREDIT

Import LC (Non-Fund)

Bank's commitment to pay on behalf of the importer upon presentation of compliant documents.

Deferred Payment LC

Letter of Credit with deferred payment terms allowing the importer to pay at a future date.