Introduction

1.1 Introduction

A Letter of Credit is an undertaking by the bank issuing it to pay the beneficiary of the credit provided stipulated documents are presented and other terms and conditions of the LC are complied with.

It is the preferred mode of settlement between a buyer and a seller under the following circumstances:

They are not well-known to each other.
They are located in different countries and the seller is not sure of the credit worthiness of the buyer.

In such cases, the seller would like a bank to provide assurance of payment. As an instrument of international trade, It is one of the most secure methods for a seller to be paid. Besides credit risk considerations, LCs is the customary business practice for long distance trade and a particularly important commission earning service for any bank.

The Letters of Credit (LC) module constitutes a part Oracle Banking Trade Finance comprehensive trade financing system. Together with the Bills and Collections module, it automates the entire gamut of trade financing. While the LC module handles the opening, advising and amending of all types of LCs, the BC module handles collection of bills which may or may not be presented under LC. The documents required under an LC are maintained in the BC module. Once an LC is opened, the documents presented by the beneficiary and LC negotiation are also processed in the BC module.

The LC module primarily supports the processing of all types of documentary and clean LCs. It can handle all activities during the life cycle of an LC. This includes the generation of messages and advices for all the applicable events, and the update of account balances. The system also handles the collection of various commissions and charges defined for an LC.

Parent topic: An overview of Letters of Credit