Letters of credit are formal trade instruments and are used usually where the seller is unwilling to extend credit to the buyer. Thus, the international banking system acts as an intermediary between exporters and importers. A letter of credit guarantees payment of a specified sum in a specified currency. But this banking system does not take on any responsibility for the quality of goods.
Definition of letter of credit (L/C)
A written commitment to pay by a buyer (called the issuing bank) to the seller (called the advising bank).
A letter of Credit is the Buyer’s Banker’s promise to the Bank of the Seller that the bank will honor the invoice presented by the seller on due date and make payment, provided that the Seller has complied with all the requirements and conditions set by the buyer is called letter of credit.
Parties in Letter of Credit Transaction.
Letter of credit applicant.
LC applicant is normally means the buyer under the sales contract. He request to the issuing bank to issue an LC on its behalf. The LC applicant normally maintains banking facilities with the issuing Bank.
Letter of credit beneficiary.
LC beneficiary is normally means the seller under the sales contract. He will receive payment under the LC if he fulfills all the terms and conditions of the credit.
The issuing bank.
An issuing bank (LC opening bank) is a bank that issues the LC in favour of a seller at the request of the LC applicant. The Issuing Bank is normally located in the applicant’s country. By issuing an LC, the issuing bank undertakes to pay the seller the value of the documents, if all the terms and conditions of the LC are complied with.
The advising bank.
An advising bank (known as notifying bank/ Confirming Bank) is a bank that advises the LC beneficiary that there is an LC is issued in his favour. Advising bank is normally located in the seller’s country. Its primary responsibility is to ensure, that the LC comes from genuine source.
Stages in a Letter of Credit Transaction
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What is L/C?
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