What are the salient features of the letter of credit that have to be observed while executing the export order?

Answer 1

A written commitment to pay, by a buyer's or importer'sbank (called the issuing bank) to the seller's or exporter'sbank (called the accepting bank, negotiating bank, or paying bank).

A letter of credit guarantees payment of a specified sum in a specified currency, provided the seller meets precisely-defined conditions and submits the prescribed documentswithin a fixed timeframe. These documents almost alwaysinclude a clean bill of lading or air waybill, commercial invoice, and certificate of origin. To establish a letter of credit in favor of the seller or exporter (called the beneficiary) the buyer (called the applicant or account party) either pays the specified sum (plus service charges) up front to the issuingbank, or negotiates credit. Letters of credit are formal tradeinstruments and are used usually where the seller is unwilling to extend credit to the buyer. In effect, a letter of credit substitutes the creditworthiness of a bank for the creditworthiness of the buyer. Thus, the internationalbanking system acts as an intermediary between far flungexporters and importers. However, the banking systemdoes not take on any responsibility for the quality of goods, genuineness of documents, or any other provision in thecontract of sale. Since the unambiguity of the terminology used in writing a letter of credit is of vital importance, theInternational Chamber Of Commerce (ICC) has suggested specific terms (called Incoterms) that are now almost universally accepted and used. Unlike a bill of exchange, a letter of credit is a nonnegotiable instrument but may betransferable with the consent of the applicant. Although letters of credit come in numerous types, the two most basic ones are (1) Revocable-credit letter of credit and (2)Irrevocable-credit letter of credit, which comes in twoversions (a) Confirmed irrevocable letter of credit and (b) Not-confirmed irrevocable letter of credit.