Opening a Letter of Credit

A banker runs great risks in opening a letter of credit. Therefore, to protect his interest he must be very careful. He should take the following steps while opening a letter of credit:

1. Application for Opening a Letter of Credit: The applicant is required to fill an application form giving the necessary details viz.,

(a) Amount and nature of credit required-documentary or clean, revocable etc.,

(b) Goods to be imported along with prices, nature of invoice and other terms,

(c) Shipping details and other documents like B/L, Invoice, Insurance policy etc.,

(d) The details about the bill like the amount, name of the drawee, mode of delivery of documents – D/A or D.P,

(e) Other operating instructions.

It will be accompanied with an undertaking by the applicant that he will pay the bill drawn under the letter of credit.

2. Scrutiny of the Application: The banker should carefully examine the application and check that all the necessary information has been given by the applicant. He should particularly see that the applicant has signed the undertaking.

3. Taking Security: After the banker has examined the application and is satisfied that the necessary information has been submitted, he should ask for necessary security from the applicant in the form of cash and valuables.

4. Fixing Margin: The banker should fix the margin to be maintained. This margin is fixed keeping in view the creditworthiness and standing of the applicant.

5. Effective Insurance: The banker should ask the applicant to take appropriate insurance policy to cover the risks involved. The policy should be taken in joint names of the applicant and the importer.