Possibility of Misuse – Fraud Risk A letter of credit poses a material fraud risk to the importer. The bank will pay the exporter upon looking at the shipping documents and not the actual quality of goods. Disputes can arise if the quality is different from what was agreed upon.

How many beneficiaries can be there in case of a back to back LC?

The LC can be transferred to more than one second beneficiary provided LC permits partial shipment and aggregate value of amounts so transferred does not exceed value of original LC.

What is the difference between transferable back to back LC?

In a transferable LC middleman only gets “profit” and no debit is made to his account and hence no impact on his cash flow whereas in Back-to-Back LC the middleman is applicant and beneficiary of first credit and the hence the transaction will move through his account.

What is benefit of letter of credit?

A LC from a bank guarantees that a seller will receive payment as long as certain conditions are met. In the event that a foreign buyer changes or cancels an order for example, a letter of credit ensures that the seller will still get paid by the buyer’s bank for the shipped goods, thus reducing production risk.

Which of the following is the advantage of letter of credit to the buyer?

Letter of credit advantages for the buyer The buyer can control the time period for shipping of the goods; In the case of issuing a letter of credit providing for delayed payment, the seller grants a credit to the buyer. Providing a letter of credit allows the buyer to avoid or reduce pre-payment.

What is the process of back to back LC?

The broker asks his bank to issue another letter of credit to the actual supplier, keeping the first one as collateral. This letter of credit is known as the back to back LC. The supplier transports the cargo to the original buyer and submits the documents of transport like the bill of lading, etc. to its bank.

Who can open back to back LC?

An exporter can open a Back to Back LC 75% to 100% of FOB value of the Export LC and the payments of back to back LC is adjusted when the export proceeds is received. A company can open more than one Back to Back import LC against one or more Export LC.

Can irrevocable LC be Cancelled?

An irrevocable letter of credit cannot be canceled, nor in any way modified, except with the explicit agreement of all parties involved: the buyer, the seller, and the issuing bank. For example, the issuing bank does not have the authority by itself to change any of the terms of an ILOC once it is issued.

When to use back to back letter of credit?

In that case, exporter gives lien of export L/C to bank as security and opens an L/C against it for importing raw materials. This L/C is called Back To Back L/C. In back to back L/C, ABBL keeps no margin.

Are there risks in issuing a letter of credit?

As the documents are complying on their face, the issuing bank may honor the presentation and in this case, the applicant must pay to the issuing bank for the goods it will never be receiving. Beneficiaries of L/Cs are also open to significant amount of fraud risks. This happens if an applicant issues a counterfeit letter of credit.

Can a company open more than one back to back LC?

A company can open more than one Back to Back import LC against one or more Export LC. Back to letter of Credit is a secondary letter of credit open by a bank on behalf of the beneficiary (exporter) against Original Export LC. This type of letter of credit is opened to supplier located inside or outside the beneficiary’s or Exporter’s country.

What are the risks of a back to back loan?

The greatest risk in such agreements is asymmetrical liability, unless it is specifically covered in the back-to-back loan agreement. This liability arises when one party defaults on the loan leaving the other party still responsible for repayment.