DLC full form in banking is Documentary letter of Credit, It is a financial instrument used in International Trade between an importer and an exporter as a guarantee to confirm that payment will be made for goods or services as long as certain conditions are met.
How DLC Works ?
- Agreement: Exporter and importer agree on the terms and conditions of sale and use the letter of credit to facilitate the transaction.
- Issuance: The importer requests its bank to issue a letter of credit in favour of the exporter. DLC is issued against a pledge of Security or cash. Bank collects a percentage of the amount of DLC as a fee.
- Confirmation: The exporter’s bank receives the letter of credit and confirms it.
- Shipment: The exporter ships the goods and prepares the required documents (like bills of lading, invoices, etc.) as specified in the letter of credit.
- Presentation: The exporter presents these documents to their bank, which then forwards them to the issuing bank.
- Payment: The issuing bank checks the documents against the terms of the letter of credit. If everything is in order, it makes the payment to the exporter or arranges for the payment to be made at a later date, depending on the terms.
- Reimbursement: The issuing bank collects the payment from the importer, and the transaction is complete.
Importance of DLC
DLC is a reliable payment mode. DLC benefits both, the exporter as well the importer. It helps in ensuring that the exporter receives the payment as long as he meets the terms. It also assures the importer that the payment will be made to the exporter only if the goods are documented and shipped properly.
