Letter of Credit is an instrument issued by a Bank at the request of its customer, whereby it undertakes to pay value, provided all terms and conditions stipulated in L/C have been complied with. In other words, a Letter of Credit may be described as a written intimation from the buyer’s bank that they have been instructed to open a credit for a certain amount of goods to be exported under certain terms and conditions.

A Letter of credit or a Documentary Letter of Credit is a conditional written undertaking issued by a bank (i.e. L/C Issuing Bank) at the request and in accordance with the instruction of and for the account of the buyer (i.e. the applicant) to pay the beneficiary at sight or a determinable future date(s) up to a stated sum of money against presentation of stipulated drafts and/or documents provided that the terms and conditions of the L/C are complied with.

Types of Letter of Credit issued by bank:

  • Sight Letter of Credit
  • Usance Letter of Credit
  • Confirmed Letter of Credit
  • Advance Payment Letter of Credit

A Letter of Credit under which payment of the drafts and/or documents drawn under the Letter of Credit is made immediately (within 5 working days) upon receipt of such drafts and/or documents is called Sight Letter of Credit.