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What is Restricted Letter of Credit in Foreign Trade

Restricted Letter of Credit. The issuing bank may restrict the negotiation of the documents under the letter of credit to a specified bank in the exporter’s country. The letter of credit contains a provision: “Negotiation restricted to…bank”. The exporter may submit the documents for negotiation to the bank specified in the credit.

If the exporter’s bank is not the negotiating bank under the credit, it may still purchase the documents, depending upon the credit enjoyed by the customer with his bank. The exporter’s bank which purchases the documents has to present them to the negotiating bank, to whom the letter of credit is restricted, to obtain payment. Where a letter of credit is restricted to another bank, the exporter’s bank may not readily agree to purchase the documents under the credit because

(i) it is not a foreign exchange transaction for the bank; it has to present the documents to the bank named in the credit and obtain payment in Indian rupees; and

(ii) it is not a negotiating bank and, therefore, does not enjoy the privileges of the negotiating banker under Uniform Customs and Practice.

Restriction of letter of credit may be resorted to by the opening banker under instructions from the applicant of the credit, or it may he done to confine business to a favored bank (of the same group or a correspondent bank). If the beneficiary wishes to negotiate the documents through his own banker, he may require suitableĀ  amendment of the credit removing the restriction.

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