LETTER OF CREDIT

The English name “letter of credit” derives from the French word “accreditation”, a power to do something, which in turn is derivative of the Latin word “accreditivus”, meaning trust. This applies to any defense relating to the underlying contract of sale. This is as long as the seller performs their duties to an extent that meets the requirements contained in the letter of credit.

In international trade, the buyer and the seller who are located in different countries may not know each other. As a result buyer's creditworthiness becomes inknown to the seller. Intentions of the buyer and the seller in any trade are contrsdictory in terms that buyers always tries to delay the payment while the seller would like to receive funds at the earliest. Therefore trade between the buyer and the seller becomes beyond one's imagination. Letter of credit is that instrument which makes the trade possible between the importer and exporter. There are several methods of payments in International trade. Trade can take place when buyers pays inadvance and wait for the seller to forward the goods. This method is known asa advance payment. Where the supplier ships the goods and waits for the buyer to remit the bill proceeds the its known as an open account method. Bothe of the methods have many drawbacks. In advance payment seller is in secure position and in open account buyers becomes secure. Letter of credit overcomes the problem of secutity for one party only. Its regarded as more secure for the seller as well as buyers. A Letter of credit is the letter form one banker to another authorizing the payment of a sepcified sum to the person named in the letter on specified conditions.

Commercial Letter of credit are widely used in the international import and export trade as means of payment. In an export contract the exporter may requires the foreign importer to open a letter of credit at the importer's local bank( the issuing bank) for the amount of the goods. This will state that it is to be negotiable at a bank(the negotiating bank) in the exporter's country in favour of exporter; often the exporter(who is called beneficiary of the credit) will give the name negotiating bank. On presentating of the shipping documents(which are listed in the letter of credit) the benificiary will receive payments from the negotiating bank