Question

Explain the following term/concept:
Letter of Credit

Answer 1

(1) A Letter of Credit is ‘an undertaking given by the importer’s bank stating that the payment for the goods imported will be made to the exporter if the required documents of title are presented to the bank’. Issuing a Letter of Credit is a method of making payment to the exporter by the importer for the goods imported Under this method the importer maintains a bank account with a banker and purchases a Letter of Credit (L/C) from the banker.
(2) In the Letter of Credit, the banker of the importer writes to the banker of the exporter to make the payment of a certain amount to the exporter on the delivery of certain specified export documents by the exporter. The Letter of Credit is sent to the exporter after complying with the shipment formalities the exporter submits this letter to his bank along with necessary documents and can secure the payment in his own country and in his own currency. Thereafter, the exporter’s bank sends these documents to the importer’s bank. The importer’s bank delivers them to the importer. The importer can produce these documents to the Port authorities and get his goods.