What is a letter of credit (LC)?


Do you have to trade LC for work? How is it done and what documents are required for that?

A letter of credit is a banking process in which a bank makes a guarantee at the request of a customer (importer and exporter). Such transactions are commonly used in international transactions. In this way, the exporter is guaranteed the reliability of the transaction to the importer. In this, the importing customer requests the foreign exporter to buy the goods from abroad.

The customer alone cannot do this. Bank guarantee of the importing country is required. The process by which the bank of the importing country guarantees the payment to the bank of the exporting country is called Letter of Credit (LC). Hence, the bank of the importer is obliged to pay the money after the arrival of the goods and the guarantee of getting the goods according to the quality shown in the sample is guaranteed by the bank of the exporter.

Letters of credit are generally of the following types:

1) Revocable (convertible) and evocable LC
2) Stand by LC
3) Confirmed LC
4) Transferable LC
5) Back to back (one after another continuous) LC
6) Payment at site (to be paid as soon as received) LC
7) Deferred Payment (Movable Payment) LC
8) Red Clause LC

For the purpose of opening a letter of credit, the following documents along with the application have to be submitted to the bank:

(A) Updated registration certificate of the importer firm
(B) Updated income tax registration certificate
(C) Various forms provided by Nepal Rastra Bank
(D) Proforma invoice, or contract

The following transaction should be open in such document:

  • Even if the goods have name, brand and model number
    Name of the country producing the goods
    Unit value, quantity and deposit value
    CIF, FOB, CFR documents
    Type of payment
    A harmonic code of at least eight digits
    Name, address and telephone of importer and exporter

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