Letters of Credit | Deferred Payment Guarantee | | PAPER II – PRINCIPLES & PRACTICES OF BANKING | MODULE B: FUNCTIONS OF BANKS
Letters of Credit and Deferred Payment Guarantee Letters of Credit and Deferred Payment Guarantee 1. Letters of Credit – General Consideration A Letter of Credit (LC) is a financial instrument issued by a bank at the request of a buyer, guaranteeing the seller will receive payment upon the presentation of specified documents. It facilitates international trade by reducing payment risks. 2. Parties to a Letter of Credit Applicant: Buyer who requests the LC. Beneficiary: Seller in whose favor the LC is issued. Issuing Bank: Bank that issues the LC on behalf of the applicant. Advising Bank: Bank that informs the beneficiary about the LC. Confirming Bank (optional): Bank that adds its confirmation to the LC. Negotiating Bank: Bank that negotiates documents under LC. 3. Types of Letters of Credit Revocable LC: Can be amended or canceled without consent of the beneficiary. Irrevocable LC: Cannot b...