How you can leverage a Letter of Credit to remove risks associated with foreign trade deals



The global Letter of Credit confirmation market size is projected to grow from around $4 billion in 2020, to more than $5 billion by 2030. Thanks to rising globalisation, there has been a significant increase in the number of international trade deals and Letters of Credit have become critical for businesses, particularly importers engaging in cross-border deals.
For example, India’s merchandise exports touched a record $418 billion, with the country now targeting $1 trillion in goods exports by 2030. To fuel the export-led economic growth, unlocking the trade potential of Indian businesses engaged in cross-border transactions is critical. To do this, it is crucial to build trust between buyers and sellers along with putting in place robust mechanisms to mitigate risks associated with trade.
Some of the most common risks encountered by exporters are related to differing political systems and legal structures in different countries. In addition to this, shipping risks, ethical risks, intellectual property risks, foreign exchange risk and credit risks are some of the other notable risks encountered by exporters.

Out of this, credit risk is particularly important to manage as it is at the heart of a successful trade relationship. The
Letter of Credit (LC)
is one instrument which helps mitigate credit risk as it is a secure and more effective method of securing payments and easing transfer of payments between the exporter and importer. A Letter of Credit is basically a commitment made by the importing party’s bank wherein the bank agrees to pay the agreed amount to the seller within the stipulated time, subject to certain conditions.

ICICI Bank offers an easy online process to apply for a Letter of Credit to facilitate easier purchase of goods from international markets. Through the ICICI Bank Edge service, an LC can also be availed against 100% cash margin in the form of Fixed Deposits.
There are two types of LCs – Sight LC and Usance LC – to take care of different payment demands. Letters of Credit can be booked with the issuing bank against cash margins and sanctioned credit limits. ICICI Bank also issues an LC in return on opening a Fixed Deposit with the bank. Similarly, LC can also be obtained against enterprise credit limits.
Benefits of Letter of Credit for importers

The instrument helps build and strengthen business relationships with clients through timely payments and also allows for exploration of new business opportunities by removing risk of default
Letter of Credit (or Documentary Credit) is an arrangement whereby the issuing bank guarantees to pay a third party (beneficiary) by a given date, as per the agreed terms and conditions, and against presentation of credit compliance documents. Thus, exporters can look for trade opportunities without having to bear the risk of the buyer’s default
Such a mechanism offers protection to both importers and exporters. In a trade involving LC, an exporter substitutes the credit risk of the importer with that of the issuing bank. An LC can help bridge the gap between buyer and seller and also improve efficiency if it is issued by a bank of international repute such as ICICI Bank, which has a correspondent network of over 360 foreign banks across over 59 countries. Under an LC, the creditworthiness of the bank replaces that of the customer
LCs are a preferred instrument particularly in the case of high-value and higher-risk transactions. Importers and exporters are often not known to each other and therefore risks are higher in case of high value transactions. LCs are specifically useful for high value transactions as the bank provides a safeguard in such situations.

Conclusion
ICICI Bank offers an easy and secure online process to its customers to apply for different types of LCs that can be availed anytime, anywhere. Through the ICICI Bank Edge service, an LC can be availed against 100% cash margin in the form of fixed deposits. Bank Edge service is not only sanctioned and issued quickly, it also has a wide global acceptance.
A Letter of Credit helps forge relationships and closes trust gaps between trading partners. It serves as a mechanism to maintain consistent cash flow while also promoting efficiency in international trade. With
ICICI Bank
’s LC service coupled with other
trade services
, businesses can compete in global markets with ease and trade relations can be strengthened.
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