Letter Of Credit (L/C)
It is a letter of open request by a bank or other financial institution to a prospective borrower, for an agreed amount and for a definite or indefinite period. It enables the borrower to draw a bill of exchange on the bank which is automatically accepted.
Letter of credit is an open letter of request by a bank requesting a person to. lend a certain sum of money to the person named therein and promises that the sum in question will be paid by itself In other words, the bank guarantees the payment of the debt.
The request may be made by a banker or any individual, but mostly it is the banker which issues it.
It is a document issued by a bank or other financial institution to a borrower who is allowed to thaw a bill of exchange on the institution
and is accepted automatically. The letter of credit is used in local and foreign trade. The buyer requests his bank to open an L/C addressed to the seller in the foreign country or other city within a country. The exporter or seller obtains the payment by presenting all necessary documents which have been accepted and returned by the importer or buyer. The L/C becomes irrevocable when the seller is informed of the credit.
The L/C states the use of the bill, the amount, period, and documents attached.
It consists of an undertaking by a bank that the bill of exchange drawn on it will be honored.
Kinds of Letter of Credit (L/C)
Letter of credit can be divided into two broad categories.
1. Letters of commercial credit
2. Letters of travellers’ facility
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