The bank will issue a letter of credit in
favour of the seller to assure the payment for the cost of goods
sold. If the seller delivers the goods to the buyer and acts in accordance
with the conditions agreed upon by both the buyer and the seller as
specified in such a letter of credit, the bank makes payment according to
the letter of credit. The issuance of a domestic letter of credit helps
facilitate business conduct between the buyer and the seller and ensues
safety in transacting goods between the two parties.
The bank issues a letter of guarantee to its client by making a
promise to the recipient (receiver) a guarantee that if the client
acts in compliance with the terms and conditions as agreed upon
in the letter of guarantee. This prevents damage to the receiver of the
letter of guarantee and if the client fails to make payment, the bank will
make payment to the amount specified in the letter of guarantee. eg, guarantee of bidding tender, guarantee of construction
contract, guarantee of payment for electricity, etc. The method of
issuing a letter of guarantee helps the client & avoids cash
as a guarantee.It also acts as a safeguard between both parties.
The buyer and seller agree terms,
including means of transport, period of credit offered, latest date of
shipment and the relevant Inco-term to be used. The buyer applies to the bank for a
letter of credit to be issued. The bank will then evaluate the buyer's
credit rating, and may require cash cover and/or reduction of other
lending limits. The issuing bank will issue a letter of
credit. This will be sent to the advising bank by airmail, telex or
SWIFT. The advising bank will establish
authenticity of the letter of credit using signature books or test
codes, then informs seller (beneficiary). The advising bank may confirm the letter
of credit, i.e. add its own payment undertaking. The seller should check that the letter
of credit matches the commercial agreement, and that the terms and
conditions can be satisfied in goodtime. If there is anything that may cause a
problem, an amendment should be requested. The seller ships the goods and gathers
together all the documents asked for in the letter of credit including
the invoice, bill of lading, insurance policy certificate, as well as
the certificates of origin and quality.
Before presenting the documents to the
bank, the seller should check them for discrepancies against the letter
of credit, and correct the documents where necessary. The documents are presented to one of the
banks, usually the advising bank. The advising bank checks the documents
against the letter of credit. If the documents are compliant, the bank
pays the seller and forwards the documents to the issuing bank. The issuing bank will also check the
documents. If they are in order the issuing bank will reimburse the
seller's bank immediately. The issuing bank debits the buyer and
releases the documents (including transport document), so that the buyer
can claim the goods from the carrier.
It should be noted that the letter of
credit refers to documents representing the goods, and not the physical
goods themselves. The banks do not examine the goods on behalf of their
customers but instead only care about the documents representing the
HOW IT IS DONE:
Irrevocable Letter of Credit
goods using a letter of credit, the buyer must meet terms and
conditions that are acceptable to both parties. Compliance with these
terms and conditions will ensure prompt shipment of buyer’s order. Any
deviations from the terms and conditions without our agreement may
result in additional bank charges and a delay shipment until the Letter
of Credit can be amended.
We require an irrevocable commercial letter of credit with the
following as beneficiary:|
Company name &
Our L/C term is at sight.
Preferred advising and negotiating banks.|
- Bangkok Bank Public Company Limited
- Thai Farmers Bank Company Limited
All bank charges outside Thailand, any discount and acceptance
charges are on account of the buyer.
All documents to be in English. Documents presented within 21 days
after B/L date.
If trade term is CIF basis, you should allow us to select the
Usual terms FOB Bangkok.
Unless otherwise stated, the Letter of Credit must be subject to
the Uniform Customs and Practice for Documentary Credits.
Opening the Letter of
Description of goods: The latest shipment date from the opening
date of letter of credit as well as the expiration date from the
last shipment date are subject to prior negotiation.
Partial shipment allowed
-Commercial invoice : 1 original, 2 copies
-Packing list : 3 copies
-B/L or Airway Bill : 3 copies to include
(i) Letter of Credit number
(ii) Consignment to issuing bank
(iii) Marked freight collect, notify applicant (if term is F.O.B)
If required, Certificate of Origin is Thailand
2. Wire transfer
Payment should be made to the address stated on the invoice. We
have outlined a guideline for remittance.
Account name : ........................ Branch
3. Payment in advance
Payment must be received prior to release of shipment. Please
remit payment via wire transfer according to our account information
4. Export Terms:
Lof C at sight. FOB Bangkok.
PROBLEMS THAT CAN ARISE:
The following problems frequently occur when
letters of credit are used and can be prevented with due care:
Exporters and importers must
coordinate the wording of all documents before submission, using the same
criteria that the banks apply. Ensure that all the terms used match.
The banks use limited discretion in matching the
terms and conditions of the L/C against documents presented. There is often
little room for judgment. For example, suppose that a letter of credit describes
goods as "cocoa butter with a maximum fat content of 15%". However the
exporter presents a commercial invoice referring to the goods as "cocoa
butter with 12% fat content". Common sense would suggest that this
consignment would be accepted; yet some banks will reject the documents on the
grounds of a discrepancy in the goods description.
Often the letter of credit
fails to anticipate an aspect of the transaction. To avoid such problems,
exporters need an understanding of the different types of commercial document
(transport document, insurance document, etc.) and the things on each document
that may matter to a bank in the context of presentation under a letter of
For example a common requirement on a letter of
credit is for a 'clean on-board bill of lading' - a document supplied by the
shipping company attesting that the goods were received in apparently good
condition, and were loaded in the ship's hold. However if the goods are
hazardous or flammable, they will be put on the deck of the ship instead of the
hold, and the bill of lading will be marked 'on deck'. This is not an on-board
bill of lading, so the bank can reject the documents.
Time limits can be missed
when presenting required documents. The parties must be aware of up to three
time constraints - the expiry date of the credit, the latest shipping date and
the maximum time allowed between dispatch and presentation.
Upon first advice of the letter of credit, check
that all its terms and conditions can be complied with within the prescribed
time limits. If the letter of credit calls for documents supplied by third
parties, make reasonable allowance for the time this may take to organize. After
dispatch of the goods, check all the documents both against the terms of the
credit and against each other for internal consistency.