How Is A Commercial Letter Of Credit Opened?

The following steps are involved in opening a letter of credit.

Application of letter of credit: The first step to obtain letter of credit for the importer is to prepear an application on the prescribed form available from the bank. The information which is supplied in the application is based on the contract of sale and includes only the important features of contract such as the value of merchandise, port of shipment, documents to be presented, port of unloading, expiry of date of the papers and brief description of the goods details of import license.

Scrutiny of the application: Before issuing a letter of credit the bank takes all kinds of necessary precautions for securing its credit. The bank first scrutinizes the application examines the customer's credit standing, the type of goods to be imported, the market demand of goods and the market demand of the goods, the collateral offered to cover the credit and then establishes the amount at any one time.

Cash margin: The importer is asked by the banker to deposit with the bank in the form of cash or securities proper margin depending upon the credit worthiness.

So this is the way the letter of credit is opened with the involvement of bank.