Buyer/Seller - Details
What is Domestic LC Discounting?
While doing a trade, there is a lack of trust between buyers and sellers since neither party knows the other personally. Third parties (Mainly banks) are involved in such situations to ensure that the trade is successful.
Letter of Credit discounting is a financial instrument issued by a bank through which the bank guarantees payment from a buyer to the seller at a lower rate of interest against LC if certain criteria are met. When buyers and sellers both belong to India, the discounting process is called Domestic LC Discounting. The Letter of Credit will be dominated by INR.
Methods of LC Discounting
There are 2 methods of LC Discounting,
- Applicant Basis - A discounting bank establishes a limit for an applicant after receiving KYC and other required documents from the applicant and remitting the proceeds to the beneficiary. This saves the applicant cost due to the higher ROI offered to the individual beneficiaries.
- Beneficiary Basis- The supplier's limit is set up so that he can encash all LCS received from his various customers.
How Does It Work?
What is the complete process involved in LC Discounting?
- Buyer requests to issue a Letter of Credit from the issuing/opening bank.
- The opening/issuing bank sends the Letter of Credit to the advising bank, which forwards it to the seller.
- As soon as the supplier receives the Letter of Credit, the goods are dispatched.
- The Seller (beneficiary) presents the required document and complete compliance as per LC terms & conditions given by the ICC (International Chamber of Commerce) to discounting bank.
- The discounting bank purchased the Seller's documents against LC.
- The discounting bank transfer funds to the supplier after deducting their fees if the LC terms are met.