Letter of credit (L/C) is a written undertaking by the importers bank (the issuing bank) on behalf of its customer ( the importer/ applicant ) promising to effect payment in favor of the exporter (beneficiary) up to a stated sum of money within a prescribed time limit and against stipulated documents. Under L/C the seller/exporter can feel assured for the payment and the buyer/importer can also feel assured for the goods he has purchased. The high degree involvement of banks in the L/C process builds in trust into the transactions has contributed to a large extent the growth of international trade in modern times.
A key principle underlying LC is that banks deals only in documents and not in goods. The decision to pay under LC will be based entirely on whether the documents presented to the bank appear on their face to be in accordance with the terms and conditions of the LC.
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