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Letter of Credit Business Introduction Global Banking International Settlement
The documentary credit is a conditional bank payment promise. To be specific, upon the client (applicant) requirement and instruction, or in its own name, under the condition consistent with the terms of letter of credit, by the prescribed document, a bank (issuing bank) shall: 

1. Pay to the third party (beneficiary) or designated person, or accept and pay the draft issued by the beneficiary.
2. Authorize another bank to pay, or accept and pay the draft.
3. Authorize another bank for negotiation.


Types of letter of credit

According to different purposes, natures, periods and circulation methods, documentary
credit can be divided into:

1. Documentary credit and clean credit.
2. Confirmed credit and unconfirmed credit. The confirmed credit refers to the letter of credit issued by another bank that accepts the requirement of the issuing bank to bear the acceptance responsibility.
3. Site credit, negotiation credit, acceptance credit, deferred payment credit and usance credit payable at sight.

(1) Site credit refers to the credit by which the beneficiary (importer) issues sight draft according to the instruction of issuing bank, or requesting payment to designated bank only by transport document.
(2) The negotiation credit refers to the credit by which the issuing bank proposes to extend to the third party, that is, the negotiating bank that owns the right of negotiation or purchase of the draft/document regulated by the credit submitted by the beneficiary. If the letter of credit does not limit the negotiation bank, the beneficiary (exporter) can choose any available negotiating bank, submit draft, document to the selected bank to request the negotiation, in which the letter of credit is known as freely negotiation credit. otherwise, it is known as restricted negotiation credit.

(3) The acceptance credit refers to the letter of credit that regulates the issuing bank to issue the usance draft whose payer is the issuing bank or other bank, and accept draft and pay on the maturity day after checking the document.

(4) The deferred payment credit refers to the letter of credit by the document submitted by the beneficiary without draft from the day when the designated bank bears the deferred payment responsibility to the maturity day for payment after the document is checked. This letter of credit can exempt the European region importer from issuing draft to avoid paying stamp tax to the government, and others are similar to usance credit.

(5) The usance credit payable at sight is also known as buyer (importer) usance credit, in which the bank provides the buyer (importer) with letter of credit for financing, and the buyer applies to issue the letter of credit whose draft payer is the bank where the discount market locates in order to obtain the financing of discount market and to prove the contract as a sight credit.

4. The transferable credit and nontransferable credit. The transferable credit is a settlement method in which the issuing bank provides the intermediary (beneficiary) with convenience for right transfer of credit terms. It refers to the letter of credit by which the beneficiary (primary beneficiary) can request the bank (transfer bank) authorized for payment, bearing the deferred payment responsibility, acceptance or negotiation, or it is freely negotiation credit, the beneficiary can require the transfer bank with special authorization to transfer all or part of the letter of credit in lump sum to one or several beneficiaries (secondary beneficiaries) for use.   5. The back-to-back credit and reciprocal credit. The back-to-back credit (or the secondary credit) in which the intermediary as the issuing applicant, requires the original advising bank, or designated bank to issue letter credit with the terms restricted by the terms of original letter of credit to the secondary beneficiary.

6. The stand-by credit. The stand-by credit is a bank credit provided by the bank with the purpose of client guaranteed debt repayment or loan financing. It is generally divided into loan guarantee and performance guarantee.

7. The revolving credit. The revolving credit refers to the letter of credit all or part of whose amount is used, automatically, semi-automatically or non-automatically updated or recovered for use till reaching the prescribed service frequency, period or the prescribed amount is used up according to certain condition without letter of credit modification.


Function of letter of credit:

1. As to importer, the payment in the method of letter of credit can exempt from paying full-amount earnest money when applying for issuing credit, only a certain proportion of earnest money is required, or issue credit by the line of credit granted by the issuing bank to avoid overstocking of working capital.
2. As to the exporter, as long as receiving effective letter of credit issued by the bank with good credit, the exporter can apply for packing loan or other loan before shipping to his current bank.
3. As to the issuing bank, the letter of credit it issues is the credit for the importer, not the capital and does not occupy its own capital. As to the issuing handling charge income, the credit has deposit or guarantee instead of being unconditional.
4. As to the bank of place of export, due to the guarantee of issuing bank, as long as the document submitted by the exporter conforms to the regulation of credit terms, it can advance in cash as bill purchase, collect handling charge and discount, and claim against the issuing bank or designated reimbursement bank.
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