Letter Of Credit Financing Risk Issues

Currently, with the development of global economy, China’s international trade has kept on agood development trend and been closely related to our life. T/T, Collection, and Letter of Credit(L/C) are the three main ways for international trade settlement. Among them, L/C takes thegreat proportion, accounted for80%-90%; fully deserve a title of the most widely used methodfor international trade settlement. The modern version of L/C has appeared in the19th century,with the development of the next300years, there’s a booming for the financing methods whichclosely connected with the L/C, Packaged Loans, Export Bill Discount, Export Bill Purchase,Forfeiting, Shipping Guarantee, Inward Collection etc. These financing methods gainincreasingly attention from the bank, since they can bring margin deposits, intermediate businessincomes. However, with the revenue raised from the L/C and the consequent finance, the riskinevitably comes. What’s worse, L/C crime always comes with the huge amount of money, andwill bring irrevocable financial loss and reputation attacks to the firm, bank and even the country.This article is using Jinan a bank as an example. Firstly, collect domestic and overseas researchdata relating to specific L/C crime and its prevention. Secondly, choose several banks’international trade experts to conduct Field Interview, learning their work experience. In order tofind the risk for L/C and its consequent finance, then analysis the reasons for a bank’s potentialL/C risk. Finally, bring out the high reference value practical method for L/C participants toprevent risks.This article will be divided into six chapters. The first chapter introduces the researchbackground, theoretical significance, practical value, and research methods for this article. Thesecond chapter states the definition of the Letter of Credit (L/C), characteristics of the L/C,process of the L/C business, the types of trade finance, and the effective management actions thebank should take after trade finance. In the third chapter, the author will detailed analyze the L/Cfinancing risks (credit risk, market operation risk, political risk, legal risk, fraud risk etc.) whichbank faces in L/C business by demonstrate Jinan city’s import and export situation. The fourthchapter combines the pervasive risks and a bank’s characteristics to analysis the reason for itspotential L/C risks. The final chapter will provide the risk prevention measures for each specificrisk on purpose to help bankers to control risk. Finally, sincerely hope this article can play a role as bankers’good reference for prevention and control L/C and finance risks, help them clearly notice the existence of these risks. Moreover give the bankers advice to improving their business quality, risk prevention awareness, and keeping financing business situation closest to risk free. In a nut shell, the writer would like to give a scant help to improve the quality of the bank’s asset and liabilities.