SUBMITTED TO:- HARISH MEHTA

SUBMITTED BY:- KIRANDEEP KAUR

MBA-3RD SEM

(458)

LETTER OF CREDIT

INTRODUCTION TO Dhanlaxmi bankDhanalakshmi Bank was incorporated on 14th November 1927 by a

group of public spirited entrepreneurs at Thrissur, the cultural capital of Kerala with a capital of Rs.11, 000 and 7 employees. It became a Scheduled Commercial Bank in the year 1977.

Achievements

Serviced business worth Rs. 12,155 crores as on 31 March 2010, comprising deposits worth Rs. 7098 crores and advances worth Rs. 5056 crores.

Earned a net profit of Rs. 23.30 crores for the financial year ended 31st March 2010.

Put in place the Real Time Gross Settlement (RTGS) and National Electronic Fund Transfer (NEFT) systems to facilitate large value payments and settlements online in real time, on a transaction-by-transaction basis.

Set up NRI Boutiques (Relationship Centers) across nine locations in Kerala and Tamil Nadu, with plans to open specialized NRI outlets at potential locations with emphasis on impeccable service levels.

Dispensed Micro Credit among private and public banks in Kerala, the Bank's outstanding under micro credit was Rs. 270.62 crores at the end of March 2009.

Attained ISO 9001-2000 certification for the Bank's corporate office at Thrissur and industrial finance branch at Kochi.

WAYS TO BANK WITH DHANLAXMI

There are four ways through which customers can bank with Dhanlaxmi bank.

ATMs Internet banking.Debit cards.RTGS and NEFT.

A letter of credit is basically a document issued by a bank guaranteeing a client's ability to pay for goods or services. A bank or finance company issues a letter of credit on behalf of a buyer, authorizing the seller to obtain payment within a specified timeframe once the terms and conditions outlined in the letter of credit are met. The letter of credit acts like an insurance contract for both the buyer and seller and practically eliminates the credit risk for both parties, while at the same time reducing payment delays. A letter of credit provides the seller with the greatest degree of safety when extending credit. It is useful when the buyer is not well known and when exchange restrictions exist or are possible.

LETTER OF CREDIT

PURPOSE OF LETTER OF CREDIT

In International trade, the buyer and the seller who are located in different countries may not know each other and hence many times the problem of Buyer’s Creditworthiness hampers the trade between the buyer and the seller. The main objectives of the buyer and the seller in any international trade and contradictory in terms of Buyer will always try to delay the payment while the seller would like to receive funds at the earliest.To mitigate this problem, Seller always request Buyer to arrange for a Letter of Credit to be issued by Buyer’s Bank. Upon issuance of Letter of Credit, the Buyer’s bank replaces its own Creditworthiness to that of the Buyer, it undertakes to reimburse the Seller for the value of the Letter of Credit “Irrevocably” provided two underline conditions are fulfilled by the Seller:1.All the documents stated in the LC are presented;2.All the terms and conditions of the LC are complied with

PROCESS OF LETTER OF CREDIT

PARTIES TO AND ASSOCIATED WITH THE LETTER OF CREDIT

The various parties involved in letter of credit are:-

1.Applicant.2.Beneficiary.3.Issuing bank. 4.Advising bank.5.Confirming bank.

Advantages & disadvantages of letter of creditAdvantages of Letter of Credit:1. The beneficiary is assured of payment as long as it complies with the terms and conditions of the letter of credit. The letter of credit identifies which documents must be presented and the data content of those documents. The credit risk is transferred from the applicant to the issuing bank. 2. The beneficiary can enjoy the advantage of mitigating the issuing bank’s country risk by requiring that a bank in its own country confirm the letter of credit. That bank then takes on the country and commercial risk of the issuing bank and protects the beneficiary.3. The beneficiary minimizes collection time as the letter of credit accelerates payment of the receivables.4. The beneficiary’s foreign exchange risk is eliminated with a letter of credit issued in the currency of the beneficiary’s country.

Disadvantages of Letter of Credit.

1.Since all the parties involved in Letter of Credit deal with the documents and not with the goods, the risk of Beneficiary not shipping goods as mentioned in the LC is still persists.

2.The Letter of Credit as a payment method is costlier than other methods of payment such as Open Account or Collection

3.The Beneficiary’s documents must comply with the terms and conditions of the Letter of Credit for Issuing Bank to make the payment.

4.The Beneficiary is exposed to the Commercial risk on Issuing Bank, Political risk on the Issuing Bank’s country and Foreign Exchange Risk in case of Usance Letter of Credits

OBJECTIVES OF THE PROJECT•To study the concept of “LETTER OF CREDIT”.

•What is the purpose and need of letter of credit?

•What is the process of this letter and how many parties are involved in this process.

•By availing this facility what are the benefits and drawbacks.

Research Methodology

RESEARCH:

“Systematized effort to gain any branch of knowledge”.

In simple words the search for knowledge through objective and systematic method of finding solution to a problem is research.

Research Methodology is an art of scientific investigation or one can say it is a careful investigation or enquiry specifically through search for new facts in any branch of knowledge.

DATA COLLECTION:

DATA SOURCE:

The report consist data from the secondary source gathering through books, Journals and websites.

OBJECTIVES OF RESEARCH METHODOLOGY

The purpose of research is to discover the answers to the questions through the application of scientific procedures. The main aim of the research is to find out the truth which is hidden and which has not been discovered as yet

Findings of the study•A letter of credit is basically a document issued by a bank guaranteeing a client's ability to pay for goods or services.

•A bank or finance company issues a letter of credit on behalf of a buyer, authorizing the seller to obtain payment within a specified timeframe once the terms and conditions outlined in the letter of credit are met.

•LC consists of four parties and the whole process contains lots of time and money value. •It deals with lots of legal formalities and paper work.

•The Letter of Credit as a payment method is costlier than other methods of payment such as Open Account or Collection

•This letter relief the seller in regard to payment of delivered goods.

•As international trade becomes more and more rationalized, the use of commercials has diminished; but the use of the standby has enjoyed something of a boom, for it accomplishes much that security interests, surety ship arrangements, and other credit enhancing devices accomplish and does it with significantly lower transaction costs.

•The rules that govern letter of credit transactions(UCP 500) have been under review for the past three years and an updated set of rules (UCP 600) is introduced on 1July 2007

Limitations of the study•Paucity of time and resources was the major constraints.

•Whole report considered the secondary research and some aspects cannot be judged because of non presence of primary data.• •For exporter the letter of credit has presented difficulties in meeting the compliance requirements necessary for the payment to be triggered.

•The analyses of problems concerning the strict compliance lead to the result that still today, about 100 years after letters of credit became a common method to pay, problems exist.

•There are some points which are not included because of less information provided by the bank.

suggestions•Letter of credit is very old and traditional way of financing the trade, which now a days is not as popular as the factoring is, so banks should follow some ways to promote it.

•UCP 600 Rules should be practiced by banks to improve the conditions of letter of credit.

•The analyses of problems concerning the strict compliance lead to the result that still today, about 100 years after letters of credit became a common method to pay, problems exist. Because the term strict compliance have different interpretation in different countries.

•The term ‘strict compliance’ should be clearly defined.

conclusionAfter analyzing the whole data it has been concluded that “LETTER OF CREDIT” is a promise to pay. Banks issue letters of credit as a way to ensure sellers that they will get paid as long as they do what they've agreed to do. Letters of credit are common in international trade because the bank acts as an uninterested party between buyer and seller. For example, importers and exporters might use letters of credit to protect themselves. In addition, communication can be difficult across thousands of miles and different time zones. Letter of credit includes four parties i.e. buyer and seller of goods, buyers’ bank and sellers’ bank. This way of financing is very costlier and includes lots of formalities. The rules that govern letter of credit transactions(UCP 500) have been under review for the past three years and an updated set of rules (UCP 600) is introduced on 1July 2007