Letter of credit Interview Questions & Answers

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Letter of credit Interview Questions & Answers

Are you a commerce graduate willing to work in financial sectors? Do you have experience in accounts handling then log on to www.wisdomjobs.comLetter of credit is a letter issued by a bank to another bank to serve as a guarantee for payments made to a specified person under specified conditions. It is a payment method used to discharge the legal obligations for payment from the buyer to seller. The seller of goods verifies through his bank that the letter of credit is valid and then ships the buyers order. The seller then takes the required documentation to the bank to collect on the letter of credit, the seller’s bank draws the money from the issuing bank and the issuing bank collects from the buyers. So browse your career as Finance Manager, executive, specialist in letter of credit, LOC officer, credit manager by looking into Letter of credit job interview question and answers given.

Letter Of Credit Interview Questions

Letter of credit Interview Questions
    1. Question 1. What Is The Difference Between Fiscal Deficit And Current Account Deficit?

      Answer :

      Fiscal deficit can be understood as when government’s total expenditure is more than the revenue earned (excluding money borrowed).
      A current account deficit means the value of imports of goods / services / investment incomes is greater than the value of exports. It is sometimes referred to as a trade deficit.

    2. Question 2. What Do You Understand By Balance Of Trade?

      Answer :

      balance of trade can be understood by the difference of total value of exports and total value of imports. If imports are more than exports there is a trade deficit, and in vice versa situation it is known as trade surplus.

    3. Question 3. Name A Few Items Which India Import The Most?

      Answer :

      India imports many items, major of which are petroleum products and coal.

    4. Question 4. Banks Issue Letter Of Credit To Customers. What Is Letter Of Credit?

      Answer :

      Letter of credit is a non fund based banking advance in which branch acts as a advisor or confirming position. Importers and Exporters are usually unknown to each other. In such cases they bring banking channel in between. A letter of credit is a commitment from the bank that they will pay the dues of the importer/exporter in case the payment fails or goods received are not of the same quality as agreed upon. All Transactions are done between . 

      Exporter >> Exporter Bank >>>> Importer Bank >>> Importer 

    5. Question 5. Why Are Letter Of Credit Known As Non Fund Based Advance?

      Answer :

      In Letter of credit, no money payment is done by the bank directly. Bank issues a letter of credit which is a confirmation to the Exporter/Importer about payment from the Importer/Exporter respectively. Bank issues Letter of credit on basis of security which is forfeited if Letter of credit issued by the bank on behalf of the customer is invoked.

    6. Question 6. Why Letter Of Credit Is A Contingent Liability?

      Answer :

      Contingent liabilities are those liabilities which are not a liability today but can become a liability tomorrow. Letter of credit are non fund based advances, which of invoked becomes a liability because it becomes a fund based advance.

    7. Question 7. What Is Direct Benefit Transfer?

      Answer :

      Sir When a LC is issued in continuation of an existing Letter of Credit. Arrangement in which one irrevocable letter of credit serves as the collateral for another; the advising bank of the first letter of credit becomes the issuing bank of the second letter of credit.

    8. Question 8. How Long Can A Usance Letter Of Credit Be Opened For?

      Answer :

      There are no explicit or implicit mentions in the UCP 600 or ISBP regarding the maximum time period in which a usance Letter of Credit can be issued. So the time period is often defined by the local laws of the issuing bank’s country which control LC terms.

    9. Question 9. Can A Bank Guarantee Be Issued For Services And Goods Such As Commodities?

      Answer :

      The instrument itself, be that a Bank Guarantee or a Standby Letter of Credit, is not as important as the contractual wording of the financial instrument, and the applicable UCP Rules governing the instrument.
      Generally Standby Letters of Credit, or commercial SBLCs are the cheaper and more normal payment guarantee over Bank Guarantees. Furthermore, looking at the processes of obtaining BGs versus SBLCs (issuance protocols and document examination- fees, time and expertise spent) and risk covered, LCs are the more popular means of payment in trade finance.

      BG and SBLCs are triggered out of default (a breach of any kind under any type of contract- financial, payment, tender/bid, insurance, and many other forms of contract). LCs, we all know, cover performance.

    10. Question 10. What’s Deferred Payment And How Does It Differ From A Usance Letter Of Credit?

      Answer :

      A usance Letter of Credit can be issued meaning that the payment is delayed until a period for time has passed or the buyer has had an opportunity to inspect or sell the related goods.

      There is not a huge difference between usance and deferred payment LCs, although the latter are rarely issued.

      The essential difference is the absence of the draft. The draft serves no significantly useful purpose in an LC anyway, so LCs calling for usance drafts would be just as effective if they did not call for the draft and were merely issued as a deferred payment LC.

    11. Question 11. What Documents Are Required For A Letter Of Credit?

      Answer :

      When financiers put together a Letter of Credit, generally, the following documents are required for preparation:

      • B/E
      • Commercial Invoice
      • Packing list
      • Bill of Lading, B/L
      • C/O
      • Generalized System of Preferences (GSP)
      • Beneficiary certificate, fax, email etc.
      • Phytosanitary and fumigation certificate
      • Shipping company certificate

      All above documents are in practice but some buyers require short documents rather than “Container of Documents”.

    12. Question 12. How Many Times Can A Letter Of Credit (lc) Can Be Amended?

      Answer :

      None of the existing applicable ICC published rules (UCP 600, URDG 758, ISP 98) limit the number of amendments to which an LC can be amended. That said, it is often difficult to examine documents against LCs with multiple amendments, and especially when beneficiaries do not communicate which amendments are accepted.

    13. Question 13. How Relevant Is A Letter Of Credit In A World Where Most Trade Is Done Under ‘open Account’ Terms?

      Answer :

      The vast majority of trade is intra-national (in-country), which is clearly less risky. Yet in the global international trade space, where there is risk of no payment and no insurance available, LC’s suddenly become a must have item.

      We do however note that the hot topic right now is the blockchain, and how it can disrupt trade finance. However, when we look closely, the same approach taken for Letters of Credit in giving both parties the proof that the transaction is fair. As market complexity increases, and speed of transaction and efficiency is important, we think that there will be a new set of opportunities in the future.

    14. Question 14. What Is Avalisation?

      Answer :

      In simple terms Avalisation is another word for endorsing a Bill of Exchange. This is where a person or a corporate effectively acts as a guarantor for the obligations of the Bill. In most cases this would be a Bank. An endorser of good credit will increase the value of the Bill should drawer of the Bill wish to discount it with a financial institution.

      In other words, it is a guarantee on a negotiable instrument which states that the party providing it’s AVAL will pay the instrument upon its maturity if the drawee or obligor fails to fulfill their obligation. When overseas companies are the obligors on negotiable instruments, the provision of an AVAL by a bank is often necessary to make the instrument acceptable for discounting.

    15. Question 15. What Is Reverse Factoring? How Is This Different From Factoring?

      Answer :

      Reverse factoring (also a form of Supply Chain Finance) is when a finance company, such as a bank, places itself between a company and its suppliers, and commits to pay the company’s invoices to the suppliers at an accelerated rate.

      Reverse factoring allows suppliers to receive discounted payments of invoices which are due to be paid by a buyer (i.e. an account payable (AP)). Once the buyer has approved the invoice for payment, the finance is raised separately against the AP by the supplier from a finance provider (usually a bank or factoring company), who relies on the creditworthiness of the buyer. The buyer will pay the finance provider at the agreed invoice due date, and the supplier receives a much prompter discounted payment from the Factor.

    16. Question 16. Is The Issuing Bank Allowed To Make Payment In A Currency Other Than The Currency Agreed In The Letter Of Credit?

      Answer :

      Generally speaking, the currency specified in the Letter of Credit should be what is paid by the Issuing Bank to the beneficiary. However, whilst the bank is obliged to pay in the currency of the LC, there is nothing to stop the bank agreeing to the beneficiary’s request to settle the equivalent amount in a different currency.

    17. Question 17. Does The Marine Insurance Cover The Risk Of Damage To Goods At A Warehouse At Port Of Discharge Or Just During Voyage?

      Answer :

      It is standard practice for perishable goods to be shipped under temperature-controlled conditions, regardless of whether carried in containers or otherwise.

      The exporter should have included such a condition in his instructions to the carrier and if the contract of carriage included storage at a warehouse in the port of destination, the temperature-controlled condition should have applied there also. These conditions should also have been reflected in the contract of insurance, but you have not given us this information for either of these two contracts. If delivery is at the port, standard insurance terminates there.

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