The bank issuance the SLOC can perform temporary underwriting duties to confirm the credit quality of the party seeking the Letter of Credit, then send announcement to the bank of the party requesting the LC. Through Letter of Credit, a bank provides its credit on behalf of its client's credit. Mostly it is used by the import and export traders where the bank plays a mediator role and helps in completing the transaction. Here the bank or the Letter of Credit issuer deals only in given credentials and does not examine the products or services themselves.
A valid Letter of Credit need to be issued:
1. for a particular recipient,
2. for an exact amount,
3. with a definite expiration date,
4. Declaration of how payment to the recipient will be made, and
5. The detailed conditions for payment release.
What is the role of banks?
In an import and export dealing, bank as an intermediary provides further security to both parties. The Letter of Credit issuing bank works from the importer's side likewise the exporter asks the advising bank. For releasing of money, the seller needs to furnish compulsory documents with the help of the advising bank to the issuer of letter of credits.
Different types of Letter of Credit:
1. Revocable L/C
2. Irrevocable L/C
3. Confirmed L/C
4. Unconfirmed L/C
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