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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.
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The request may be made by a banker
or any individual, but mostly it is the banker which
issues it.
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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.
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| 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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