What is Letter of Credit in Banking

A customer often avail Letter of Credit services from bank while perform trading activities with the other parties around the globe.

What is Letter of Credit (LC) in Banking ?

Letter of Credit is basically a financial contract between three parties;-

1) A Bank.

2) A Bank’s Customer.

3) Beneficiary.

It is normally issued by an importer’s bank , the letter of credit actually guarantees that the beneficiary will be paid upon the fulfillment of LC condition’s.

Mostly LC are import/export of credit.

The LC’s are¬† mainly use while executing payment for international trade at large and hence is a safe way for doing trade while involving bank’s.

Huge number of LC’s are executed with billion’s of amount transaction to perform a trade agreement amongst parties.

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Documentation required

To receive the payment, the beneficiary need to present documentation of fulfillment of their part in the transaction to the issuing bank.

Usually the documents which the issuing bank will accept are mentioned precisely  in the LC, it may included documentation as follows;-

  • Bills of exchange.
  • Invoices.
  • Government documents, such as licenses, certificates of origin, inspection certificates, embassy legalization etc.
  • Shipping and transport documents, such as bills of lading and airway bills.
  • Insurance policies or certificates, except cover notes.

Payment is made by the bank after verification of document’s subject to a satisfactory KYC’s.

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