Bank's Work in Issuing Letter of Credit

A Letter of Credit is written obligations of an issuing bank to pay a sum of money to a beneficiary on behalf of their customer in the event that the customer does not pay the beneficiary. A statement issued by a bank to the buyer of a good stating that the seller will receive payment on time and in the correct amount. Letter of Credit is a deed which guarantees payment by a bank to a third-party for a certain amount of cash. The payments produced if specific conditions are met. This is a vital trade finance instrument through which the banks transact and finance import and export businesses.

The bank issuance the SLOC can perform temporary underwriting duties to confirm the credit quality of the party seeking the Letter of Credit, then send announcement to the bank of the party requesting the LC. Through Letter of Credit, a bank provides its credit on behalf of its client's credit. Mostly it is used by the import and export traders where the bank plays a mediator role and helps in completing the transaction. Here the bank or the Letter of Credit issuer deals only in given credentials and does not examine the products or services themselves. 

Letter of Credit

A valid Letter of Credit need to be issued:

1. for a particular recipient,

2. for an exact amount,

3. with a definite expiration date,

4. Declaration of how payment to the recipient will be made, and

5. The detailed conditions for payment release.

What is the role of banks?

In an import and export dealing, bank as an intermediary provides further security to both parties. The Letter of Credit issuing bank works from the importer's side likewise the exporter asks the advising bank. For releasing of money, the seller needs to furnish compulsory documents with the help of the advising bank to the issuer of letter of credits.

Different types of Letter of Credit:

1. Revocable L/C

2. Irrevocable L/C

3. Confirmed L/C

4. Unconfirmed L/C

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