Question

Q8. Consider the following statements with respect to Letter of Credit:

1. Letter of Credit is an instrument for assured payments.

2. It is an undertaking of the issuing bank to make payment to the beneficiary.

Which of the above statements are correct?

• A. a) 1 only
• B. b) 2 only
• C. c) Both 1 and 2
• D. d) Neither 1 nor 2

Answer 1

The correct option is C

c) Both 1 and 2

Foreign Letter of credit

• Foreign Letter of credit is issued to meet out the credit requirement for International Trade.
• In International trade, the buyer and the seller who are located in different countries, may not know each other and hence many times the problem of Buyer’s Creditworthiness hampers the trade between the buyer and the seller.
• The main objectives of the buyer and the seller in any international trade and contradictory in terms of Buyer will always try to delay the payment while the seller would like to receive funds at the earliest.
• To mitigate this problem, Seller always request Buyer to arrange for a Letter of Credit to be issued by Buyer’s Bank.
• Upon issuance of Letter of Credit, the Buyer’s bank replaces its own Creditworthiness to that of the Buyer, it undertakes to reimburse the Seller for the value of the Letter of Credit “Irrevocably” provided two underline conditions are fulfilled by the Seller.
• Thus, a Letter of Credit is an undertaking issued by a bank in favor of a Beneficiary (Seller), which substitutes the bank’s creditworthiness for that of the Applicant (Buyer).