Standby Letter of Credit

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Standby Letter of Credit

Documents evidencing failure of the bank's customer (the applicant) to pay an obligation when due.

Standby letter of credit

Agreement to guarantee invoice payments to a supplier; a standby LOC promises to pay the seller if the buyer fails to pay.

Standby 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 virtually 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.

standby letter of credit

Usually shortened to standby or to LOC. It is the agreement by a lender to disburse funds to a third party if the lender's customer defaults on its obligations to that third party (called the beneficiary).

Rather than pay a large security deposit for a lease, a tenant might offer the landlord a standby letter of credit (LOC) issued by the tenant's bank. For all but the most exceptionally credit-worthy customers, the bank will usually require cash collateral in the form of a certificate of deposit or comparable asset.

The issuance fee is generally in the range of 1/2 to 2 percent per year for the issuance of the standby,which should be less than the money earned by the cash collateral.

The LOC will usually specify the exact manner in which the beneficiary must collect funds, such as presentation of the original LOC at a certain branch location to a particular officer at that location, accompanied by a statement regarding the customer's default. Normally, the statement must be worded exactly in the manner specified within the body of the LOC and any paraphrasing at all will result in denial of payment.The LOC will also have a date and time of expiration.

Landlords (or anyone else) accepting standby letters of credit should be aware that the law in this area is very precise in its requirements.In many states,minor errors in wording the documents presented in order to collect on a letter of credit might result in the bank's legally justifiable refusal to pay. Presenting documents to the wrong person, or at the wrong location, could result in refusal to pay.That refusal might not be curable because of the expiration of the time limits within which to make the claim.The better practice is to pay a lawyer with good malpractice insurance to review the documents and prepare the request for payment.

References in periodicals archive ?
Exited relatively higher-risk loans to make room for more secure loans including those backed by direct mortgages, granted to state-owned enterprises and backed by parent bank standby letters of credit.
Presentations, led by Vincent O'Brien, international trade finance practitioner and Executive Committee Member of the ICC Banking Commission and director of the Institute of International Banking Law and Practice (IIBlP), Washington, USA, discussed the latest developments in international trade, financing issues and major legal, technical and operational issues to facilitate safe international trade, tips on negotiating terms and conditions, as well as the benefits of using documentary letters of credit and standby letters of credit.
Presentations, led by Vincent OBrien, international trade finance practitioner and Executive Committee Member of the ICC Banking Commission and Director of the Institute of International Banking Law and Practice (IIBlP), Washington, USA, discussed the latest developments in international trade, financing issues and major legal, technical and operational issues to facilitate safe international trade, tips on negotiating terms and conditions, as well as the benefits of using documentary letters of credit and standby letters of credit.
According to the corruption reference, the former finance minister, being the ECC chairman on April 13, 2009, approved a summary of the Ministry of Water and Power (MoWP) which carried recommendation of replacement of Standby Letters of Credit (SBLC) clause with GoP guarantee without getting any corresponding benefits, thereby violating PPRA Rules, 2004, and causing post-bid variation.
PROPOSAL ONE: STANDBY LETTERS OF CREDIT AND CLOSED-LOOP KIDNEY EXCHANGES
Coimbatore: State-run Bank of India has recovered Rs 7,000 crore worth Standby Letters of Credit in the last two months and the balance of Rs.2,000 crore would be recovered in another two months, a top bank official said on Monday.
Reportedly, this LC facility will allow the company to request standby letters of credit in an initial amount of up to USD200m and may be expanded at the request of the company and with the consent of the lenders under the facility by up to an additional USD300m.
The rating also takes account of the Company's healthy liquidity profile which is buffered by standby letters of credit - expected to be renewed every six months - to ensure that the Project Company's Finance Service Reserve Account is fully funded, acting as a cushion to meet any deficit in financial obligations.
Compare commercial and standby letters of credit, standard and silent letter of credit confirmations, bank and corporate guarantees, forfaiting, factoring, credit insurance, credit derivatives, and foreign exchange contracts from the perspective of what risks each one covers
The adjustment is for a USD 1.4m reserve being placed on certain standby letters of credit held by Severn, not previously reflected in the earnings statement.
Bank Guarantees in International Trade: The Law and Practice of Independent (First Demand) Guarantees and Standby Letters of Credit in Civil Law and Common Law Jurisdictions, 4th Revised Edition
Informed and informative, ""The Handbook of International Trade and Finance" covers a number of topics ranging from trade risks and risk assessment; export credit insurance: methods of payment; to trade and project finance alternatives; bonds, guarantees and standby letters of credit; structured terms of payment; currency exposure and risk management.