letter of credit

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Letter of credit (LOC)

A form of guarantee of payment issued by a bank on behalf of a borrower that assures the payment of interest and repayment of principal on bond issues.

Letter of Credit

A statement issued by a bank to the buyer of a good stating that the seller will receive payment on time and in the correct amount. If the buyer fails to make payment, the bank will do so on his/her behalf. The buyer presents a letter of credit to the seller, which eliminates the risk that the seller will not be paid. Letters of credit have become very common in international commerce, as distance and other factors make it difficult for sellers to establish the creditworthiness of every buyer.

letter of credit

A promise of payment in the event that certain requirements are met. A letter of credit essentially substitutes the credit of a third party (usually a large bank) for that of a borrower. In the case of municipal bonds, an LOC generally permits a trustee to draw six months' interest and sufficient funds to retire outstanding bonds at par in the event of default.

letter of credit

a document used to effect payment for internationally traded goods, usually as part of a contract for the sale of goods which ensures that the supplier receives prompt and guaranteed payment while the purchaser obtains a short-term CREDIT line. In brief, under this facility, a purchaser in country A of goods supplied by a firm in country B can arrange a letter of credit from his bank (the credit issuing bank) authorizing it to make payment to the supplier either through a branch of the bank in country B or, more usually, through a bank (the negotiating bank) holding the supplier's account. Under a contract of sale of goods this will be done on the presentation to the negotiating bank of documents stipulated in the letter of credit, such as the bill of lading, insurance policy, certificate of origin, etc. In the case of certain letters of credit relating to particular transactions and customers located in heavily indebted countries, a secondary market has developed to offset political as well as commercial risk. See EXPORTING.

letter of credit (LOC)

(Pronounce each letter of the abbreviation;it is not pronounced as a word.) An instrument issued by a bank or other financial institution (issuer) agreeing that it will pay money to another (beneficiary), on behalf of the bank's customer (account party), upon the happening of certain named events.There is usually an issuance fee of 1 to 2 percent of the face amount of the LOC.Modern banking regulations require the same underwriting as for a commercial loan.The LOC will set out the exact prerequisites to be met before the bank will issue payment. These usually include a particular time and place to present the original letter of credit and the exact documents that must accompany the letter.Some states still follow the old “strict compliance”rule holding that any deviation from the instructions, no matter how minor, will justify the bank in refusing to pay. Others follow a “substantial compliance” rule, so that minor typographical or syntax errors in the presenting documents will not justify nonpayment. See also the two types of letters of credit: documentary letter of credit and standby letter of credit.

References in periodicals archive ?
After a brief interlude reviewing basic foreign trade concepts, the author begins the real meat of the book--11 consecutive chapters on the ins and outs of documentary credits.
As such, an L/C will remain an off-balance sheet exposure until the documents are presented and honoured by the bank, usually in accordance with the provisions of a standardised code of practice, the ICC Uniform Customs and Practice for Documentary Credits (UCP 600).
The law provides them with an enormous added safety net with the backing of documentary credit guaranteeing payment, hence avoiding risks and defaults.
Nanning Branch will mainly serve domestic and foreign-invested corporate customers, offering them a wide range of banking and financial solutions in Renminbi and foreign currencies, including customer deposits; short, medium, and long-term loans; bills acceptance and discounting; trading of government bonds, financial bonds and other securities (except equities); documentary credit and bank guarantees, remittance and settlement; and credit search and consulting services.
However, concern has been expressed by some commentators regarding the following potential conflict: how will the current regulatory regime governing banks which has become so much tighter over the last 10 years following the introduction of legislation intended to prevent money laundering impact the fundamental documentary credit principle that banks deal with documents and nothing else?
VTB Bank has approved a 500 million rouble documentary credit line for construction company Privolzhtransstroi, under which the company received two bank guarantees worth a total of 428 million roubles for a term of up to 545 days.
DC-Focus makes all of the ICC's documentary credit information, text of rules, official opinions, unpublished queries, legal cases, and back issues of newsletters, among other resources, available in fully searchable texts.
Services include account and deposit services, loans and advances, bill acceptance and discounting, dealing in government and financial bonds and non-equity foreign currency-denominated securities, documentary credit and bank guarantees, remittance and settlement, foreign exchange, debit cards and credit cards, and overseas investment services for local residents and enterprises.
Some of these programmes include Credit Card Management (CCM) - Certification with Hong Kong Institute of Bankers (HKIB); Certified Documentary Credit Specialist (CDCS) - Certification with the British Institute of Financial Services; ACCA Certification with the Association of Chartered Certified Accountants and others.
Therefore they have difficulty establishing documentary credit facilities with international banks.
Arab Petroleum Investments Corporation (APICORP), which is the multilateral development bank owned by the 10-member nations of the Organization of Arab Petroleum Exporting Countries (OAPEC), has signed a documentary credit insurance policy (DCIP) with the Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC) that is a member of the Islamic Development Bank (IDB) Group.