Who are the parties involved in Letter of Credit? 

Let us talk about the parties involved in a letter of credit in this article.

 

The key players in a letter of credit are discussed below. A Letter of Credit can be divided into eight major parties.

  • Applicant: The applicant is the importer who requests the LC from their bank.
Applicant is one of the primary parties in a Letter of Credit. Who is a Letter of Credit applicant?

The party who opens the Letter of Credit is known as the applicant. Typically, the Applicant who opens the letter of credit is the buyer of the products. The letter of credit is opened per his instructions, and the appropriate payment is made to open the letter of credit with his bank. The applicant arranges for a letter of credit to be opened with his bank in accordance with the terms and conditions of the purchase order and business contract between the buyer and seller. As a result, Applicant is one of the primary parties engaged in a Letter of credit.

  • LC Issuing Bank: The issuing bank is the bank that issues the LC on the applicant's behalf. As long as the beneficiary follows the terms and conditions of the LC, the issuing bank is liable for making payment to the beneficiary.

  • Beneficiary/Seller: if the exporter or sale complies with the LC's terms and conditions, they are the party (exporter or seller) who will get money under the LC. The beneficiary must provide the necessary paperwork to the issuing bank in order to receive payment.

One of the key stakeholders in a letter of credit is the beneficiary. The reward under the letter of credit is received by the beneficiary. The recipient of the funds under the letter of credit is known as the beneficiary. The Beneficiary party has the LC opened in their favor. According to the letter of credit's terms and conditions, the beneficiary party must present all necessary documentation to their bank.

  • Advising Bank: The correspondent or intermediate bank in the beneficiary's nation is frequently the advising bank. The beneficiary is to be made aware of the existence and terms of the LC as well as its authentication by the advising bank. The beneficiary has the option of using or declining the services of the advising bank.


An additional party under the LC is the advising bank. As part of the letter of credit, the advising bank is responsible for communicating with the relevant parties and other authorities. Sending letters of credit paperwork to the opening bank is done by the advising bank.
  • Confirming Bank (optional): Bank Confirmation (Optional) The advising bank may also serve as the confirming bank in specific instances. The confirming bank adds its commitment to fulfill the LC terms, providing the beneficiary with an added degree of payment protection, especially when dealing with less reputable issuing banks.

  • Negotiating Bank:-  If the beneficiary's bank (advising bank or another nominated bank) is not the confirming bank, the beneficiary's bank may act as the negotiating bank. The negotiating bank examines the beneficiary's documents and may advance funds to the beneficiary prior to receiving payment from the originating bank.

One of the key parties involved in Letter of Credit negotiations is the negotiating bank.

Negotiating Bank, which negotiates documents provided to the bank by the LC beneficiary. To avoid errors, the negotiating bank verifies documents and confirms the terms and conditions of the LC on behalf of the recipient.


  • Reimbursing Bank:- One of the parties involved in an LC is the reimbursing bank. The party authorized to honour the reimbursement claim of negotiation/payment/acceptance is the  reimbursing bank.

  • Second Recipient :- One of the other parties engaged in the Letter of Credit is the second beneficiary. 

In the absence of the first beneficiary or original beneficiary, the credits belonging to the original beneficiary are transferable according to the terms.


  • Accepting Bank (Optional): The accepting bank may be involved if the LC is payable at a later date (sight draughts or usance draughts). This bank adds its promise to pay on the maturity date if the beneficiary meets the conditions.

These parties collaborate to ensure a safe and smooth transaction, with the ultimate goal of promoting international trade by lowering payment and delivery risks. The particular roles and obligations of these parties can vary depending on the conditions of the LC and the parties' wishes.