What is a Letter of Credit?

What is a Letter of Credit?

An LC is a contract by which a bank guarantees the seller that the buyer will make the payment for the goods and services. The use of LCs to effect payment is widespread in international trade. This is because they offer security of payment for and receipt of goods to the parties involved in the trade transaction who may be in different countries.


You can choose from the different types of LCs available according to your specific requirements.

What are the different types of Letters of Credit?

The different types of Letters of Credit offered by banks in India are as follows:

1. Documentary
   
   A documentary LC is an obligation by the issuing bank to pay the agreed amount to the beneficiary (usually the seller) on behalf of the applicant (buyer) upon receipt of specified documents.
   
   

2. Sight LC or Usance Credit
   
   A sight LC guarantees the payment once the beneficiary (the party which is about to receive the payment) presents the sight LC to the bank along with any other required documents.
   
   

3. Standby LC
   
   A Standby LC (SBLC) is a type of guarantee issued by the buyer’s bank in favour of the seller. If the buyer fails to pay for the goods and services provided by the seller, the seller will demand the buyer’s bank to step in and make the payment. An SBLC essentially acts as a backup.
   
   

4. Revocable and Irrevocable Credit
   
   With a Revocable LC, the terms and conditions can be changed or cancelled by the bank that has issued the LC. Banks do not need to give any prior notice to beneficiaries before doing so. On the other hand, an irrevocable LC is one wherein the terms and conditions cannot be changed or cancelled; the Issuing Bank is bound by the commitments given in the LC.
   
   

5. Back-to-Back Credit
   
   With this LC, the beneficiary (i.e., the seller) can request their bank to issue an LC on behalf of their supplier on the basis of the export LC received.
   
   

6. Transferable Credit
   
   This is an LC with an added provision permitting the bank to transfer the sum specified by the LC to another party at the request of the original beneficiary.
   
   

7. Revolving LC
   
   A Revolving LC is a single LC that can cover multiple shipments, so the credit can be renewed either as to the amount or as to the time it is available. These are often used where regular shipments are made from the same seller over a period of time.
   
   

8. Confirmed LCs
   
   Confirmation is usually requested if the seller is concerned about the creditworthiness of the issuing bank and/or the buyer’s country risk. The advising bank adds its confirmation to the LC at the issuing bank’s request The advising bank then becomes the confirming bank and undertakes to pay the seller (this is a separate undertaking from the one given by the issuing bank and so offers extra security to the seller).
   

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GST INFO TAMIL