
Letter of credit

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A letter of credit is a financial instrument commonly used in international trade transactions. It is essentially a written promise from a bank to pay a seller a certain amount of money, provided that the seller meets certain conditions specified in the letter of credit.
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The letter of credit is typically issued by the buyer's bank, known as the issuing bank, on behalf of the buyer. The seller, also known as the beneficiary, is usually located in a different country and may not have a relationship with the issuing bank.
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Letter of credit services are financial services provided by banks, financial institutions, or other companies that facilitate and support international trade transactions. A letter of credit is a written commitment by a bank to pay a seller a certain amount of money, provided that the seller meets the terms and conditions specified in the letter of credit.
Different Types Of LC's
LETTER OF CREDIT
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Documentary credit (LETTER OF CREDIT) is one of the most convenient method of settling payments in International Trade.
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Parties Involved: Applicant Issuing Bank Advising Bank or the Beneficiary Bank and the Beneficiary.
IRREVOCABLE LETTER OF CREDIT
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The irrevocable credit is a definite undertaking of the issuing bank and cannot be amended or cancelled without the agreement of the issuing bank, the confirming bank (if any) and the Beneficiary.
REVOCABLE LETTER OF CREDIT
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The credit where the terms and conditions can be amended or cancelled without the agreement of the issuing bank, confirming bank and the beneficiary. Need to be specifically stated in the credit.
PAYMENT CREDIT (SIGHT LC)
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It is a sight credit- payment against presentation of certain documents as per LC.
DEFFERED PAYMENT CREDIT (USANCE LC)
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It is a usance credit where payment will be made by the designated bank on respective due date determined in accordance with the stipulations of the credit.
CONFIRMED LETTER OF CREDIT
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This is the credit where another Bank added its confirmation or guarantee. The Beneficiary will have a firm undertaking of not only the issuing bank but also of another Bank.
UNCONFIRMED CREDIT
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This is the converse of a confirmed credit where there is only one undertaking that of the issuing bank.
RESTRICTED CREDIT
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The issuing bank restricts the negotiation of documents to a particular nominated bank.
UNRESTRICTED CREDIT
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Freely negotiable credit is the one which can be negotiated by any bank of beneficiary’s choice.
TRANSFERABLE CREDIT
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It is transferred by the original beneficiary to another beneficiary. But it should be specifically stated in the credit.
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This credit can be transferred only once – from the first beneficiary to the second beneficiary and subject to the original terms and conditions of the credit.
REVOLVING CREDIT
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In this credit the amount is revived or reinstated without requiring specific amendment to the credit.
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The basic principle of Revolving Credit is after the drawing is made; the credit reverts to its original amount for re-use by Beneficiary
BACK-TO-BACK CREDIT
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When a second set of credit is issued based on the parent credit, the second credit is termed as Back-to-Back Letter of Credit.It is issued on the backing or on the security of another credit.
Front to Back Letter of Credit
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Front to Back letter of credit is a type of LC that is issued to the supplier by the broker’s bank even before they receive the principal LC.

