Definition of Letter of Credit

Letter of Credit (L/C) can be defined as the credit contract whereby the buyer’s bank is committed on behalf of buyer to place an agreed amount of money at the seller’s disposal under some terms and conditions agreed before. These conditions include amongst other things the presentation of some specified documents. The letter of credit is called the documentary letter of credit. In article no-2 of Uniform Customs and Practice for Documentary Credits (UCPDC) published by International Chamber of Commerce Publication 500 of 1993, “Documentary Credit has been defined as any agreement, however named and described where by a bank (Issuing Bank) acting at the request and on the instruction of a customer (the applicant) or on it’s own behalf,

I. is to make a payment to or to the order of third party (the beneficiary) or is to accept and pay bills of exchange (drafts) drawn by the beneficiary, or,

II. authorizes another bank to effect such payment, or to accept and pay such bills of exchange (drafts), or

III. authorizes another bank to negotiate against stipulated documents, provided that the terms and conditions of the credit are complied with.”

We can define letter of credit as a written undertaking given by a bank (issuing bank) to a seller (beneficiary/exporter) at the request and on the instructions of the buyer (applicant/importer) to pay either at sight or at a determinable future date, a stated sum of money against stipulated documents and fulfillments of all the terms and conditions in the L/C.

Share

Tweet