Various types of Letter of Credit

A letter of credit (LC) is a financial instrument issued by a bank that guarantees payment to a seller of goods or services, provided certain conditions are met. There are several types of letter of credit, each with its own specific features and purposes. Here are some of the most common types of LCs:

Revocable letter of credit: A revocable letter of credit can be cancelled or modified by the issuing bank at any time without prior notice to the beneficiary (the seller). Revocable LCs are rarely used because they offer little protection to the beneficiary.

Irrevocable letter of credit: An irrevocable letter of credit cannot be cancelled or modified without the consent of all parties involved. This type of LC provides a higher degree of protection to the beneficiary.

Confirmed letter of credit: A confirmed letter of credit is one that has been guaranteed by a second bank, in addition to the issuing bank. This type of LC provides additional security to the beneficiary, as the confirming bank is obliged to pay if the issuing bank fails to do so.

Unconfirmed letter of credit: An unconfirmed letter of credit is one that has not been guaranteed by a second bank. This type of LC provides less security to the beneficiary, as the issuing bank can still cancel or modify the LC without prior notice.

Standby letter of credit: A standby letter of credit is a type of LC that is used as a backup form of payment, typically in case the buyer fails to fulfill their contractual obligations. Standby LCs are often used in construction contracts or for the purchase of goods or services.

Transferable letter of credit: A transferable letter of credit allows the beneficiary to transfer all or part of the LC to another party, typically a supplier or sub-contractor. This type of LC is often used in complex supply chains where multiple parties are involved.

Back-to-back letter of credit: A back-to-back letter of credit is a type of transferable LC where the beneficiary uses the LC from one buyer to purchase goods or services from another supplier. This type of LC is often used in international trade.

Overall, the specific type of LC used will depend on the specific needs and requirements of the buyer and seller involved in the transaction. It is important to carefully consider the terms and conditions of the LC to ensure that it provides the required level of protection and security to all parties involved.

Assessments of LC limit , Bill Purchase/ Discounting under LC

Assessing the LC limit and bill purchase/discounting under an LC involves evaluating the creditworthiness and risk associated with the buyer, seller, and the underlying transaction. Here are some factors to consider when assessing LC limit and bill purchase/discounting under an LC:

Buyer’s creditworthiness: The issuing bank will evaluate the buyer’s creditworthiness to determine if they have the ability to pay for the goods or services being purchased. This may involve reviewing financial statements, credit reports, and other relevant information.

Seller’s track record: The bank will also evaluate the seller’s track record and reputation to determine their ability to fulfill their obligations under the LC.

Transaction risk: The bank will assess the risk associated with the underlying transaction, including factors such as the quality of the goods or services being purchased, the delivery schedule, and any other relevant factors that could impact the transaction.

Country risk: If the transaction involves parties located in different countries, the bank will assess the country risk associated with each party’s jurisdiction. This may involve evaluating political and economic conditions, currency exchange risk, and other relevant factors.

When assessing the bill purchase/discounting under an LC, the bank will also evaluate factors such as the tenor of the bill, the interest rate, and any fees associated with the transaction. The bank will typically require that the seller provide all relevant documents required under the LC, including bills of lading, invoices, and other relevant documentation.

Overall, assessing the LC limit and bill purchase/discounting under an LC involves a careful evaluation of the creditworthiness and risk associated with the parties involved and the underlying transaction. The bank will typically use a variety of tools and techniques to assess these risks and determine the appropriate level of credit exposure to take on.