Letter of Credit

  • A letter of credit (L/C) is a type of “documentary credit”. It is a document issued by a bank or financial institution at the request of a buyer whereby the bank or financial institution gives assurance of payment to a seller if the terms and conditions specified in the document are fulfilled.
  • This means that Letter of Credit is a promise made by Bank to pay to exporter / seller on behalf of importer / buyer. The seller receives the payment only when all the requirements specified in the L/C are met including the documents, delivery dates, product specification, etc.
  • Letters of credit deal in documents, not goods, thus the Bank scrutinizes the ‘documents’ and not the ‘goods’ for making payment. .Therefore Letter of credit is also referred to as ‘Documentary Credit’.
  • Letter of Credit has three parties:
  1. Buyer / Importer: Also known as Opener, as he opens the credit
  2. Bank / Financial Institution: Also known as Issuer, as it opens the letter of credit
  3. Seller / Exporter: Also known as beneficiary as credit is opened in favour of him.
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