Almost 80% of import purchases are financed by L/C (letters of credit). The main idea of a letter of credit is to ensure certainty of payment. Seller is assured of payment because the bank undertakes a position and intervenes and makes the commitment to pay. The theme behind this is like a credit card. You purchase from a departmental store and they sell to you on credit although you’re a total stranger because you show your credit card, which means that the bank which issued the credit card tells the seller that it will pay the goods being bought.
CONDITIONS OF A LETTER OF CREDIT
1. Issued in favor of a particular person and not to order. Hence, it is not a negotiable instrument governed by the Negotiable Instruments Act.
2. Limited to fixed or specific amount, or to one or more amounts, but with maximum stated limit. If any circumstance it is missing, the letter becomes a mere letter of recommendation.
CONDITIONS OF A LETTER OF CREDIT
1. Issued in favor of a particular person and not to order. Hence, it is not a negotiable instrument governed by the Negotiable Instruments Act.
2. Limited to fixed or specific amount, or to one or more amounts, but with maximum stated limit. If any circumstance it is missing, the letter becomes a mere letter of recommendation.
Importance of Letter of Credit
![Importance of Letter of Credit]()
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