Inland Letter of Credit is issued to meet out the credit requirement for domestic trade. This is a form of no fund based credit extended by the banks. This is given to the seller of the goods on behalf of the buyer by the bank where the buyer deals. It offers the comfort of obligation from the banker to the issue of the Inland letter of credit that they undertake to make good of the loss. If any in the case of non payment of the amount as accepted by the buyer. As such the seller of the goods can take finance by tendering the bills along with the ILC to his banker before the proceeds are realized.
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:
All the documents stated in the LC are presented;
All the terms and conditions of the LC are complied with.
The beauty of the LC is that if above two conditions are fulfilled, Issuing Bank will effect payment to the Beneficiary, irrespective of Applicant reimburses the Issuing Bank or not. 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)
Documentation process for the ILC / FLC may vary from bank to bank, bank will guide the same at the time of open ILC / FLC.