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....Read More
