Ideally any seller of goods/services would like to receive payment before the delivery of goods/services to a buyer. Similarly the buyer would also like to ensure that the goods/services bought are as per his specifications and deliveries are affected in time, before parting with the money. If the buyer and seller are at two different, far away stations, both the factors can not be satisfied simultaneously. As a compromise, services of third party as an intermediary are utilized. This intermediary is usually a bank who issues a letter of assurance to a seller at the request of a buyer for payment of cost of goods / services sold on certain terms and conditions. Such an assurance letter is named as a "Letter of Credit". A letter of credit is a written instrument issued by a banker at the request of a buyer (applicant) in favor of the seller (beneficiary) undertaking to honor the documents or drafts drawn by the seller in accordance with the terms and conditions specified in the credit, within a specified time. Thus the credit is made available to the seller against delivery of certain specified documents.
Parties to a Letter of Credit
- Applicant (The buyer of Goods/Services )
- Beneficiary ( the party whom the credit is addressed)
- LC opening bank
- LC advising bank
- Confirming Bank ( in case of confirmed LC)
- Negotiating Bank ( mostly confirming bank is negotiating the LC amount)
Kinds of Letter of Credit
Ghazanfar Bank is issuing & accepting all kinds of Letter of Credit complying national & international standard practices and International Chamber Commerce latest documentary credit revision (UCP 600) Uniform Customs & Practice for Documentary Credits, 2007 Revision.