Opening an L/C

The Mechanism for opening an L/C is as follows:

When a sales contract is made between the exporter and the importer, both sides agree to do business on an L/C basis

The importer requests the issuing bank to issue an L/C.

If the issuing bank determines that the importer’s financial standing is acceptable, the bank will issue the L/C to the exporter (beneficiary of L/C). The bank may request the importer to make a deposit (security) in order to guarantee them.

The issuing bank notifies the exporter through the correspondent bank (notifying bank) by telegram first and then sends the original L/C to the exporter.

The exporter executes the shipment according to the conditions of the L/C.

The exporter presents the Bill of Exchange (Draft) based on the condition of the L/C together with a full set of the shipping documents and applies for negotiation of the documentary bill at the exporter’s bank (negotiating bank).

The negotiating bank checks the conditions of L/C and shipping documents. If the conditions of L/C are found to be consistent with the shipping documents, the bank pays the exporter. However, the exporter has to be very careful, as the bank is not able to honour the Bill of Exchange, if there is any discrepancy between the condition of L/C and the documents attached. If a discrepancy occurs, the exporter has to inform the importer and have him request the issuing bank for an amendment to the L/C accordingly.