What is Letter of Credit ? a- an application for loan b- Application for Export of Goods c- Application for Import of Goods d- None of the above

Letter of Credit (L/C) is basically one of the payment method used in international trade. It is governed by ICC's UCP norms which are universal. The answer for this question depends upon the use of Letter of Credit to every party involved in this legal binding.

As an Importer, my answer would be 'C'....  because an importer opens a L/C through his issuing bank to the exporter, so that the importer will import goods from the exporter as per the agreed sales contract between them. 

As an Exporter, my answer would be 'A'......... If the L/C is not 'At Sight L/C' or it is a 'Differed payment L/C', then after fulfilling all the complying requirements of L/C (as demanded by the importer) and all the trade documents are submitted/presented to the appropriate bank. Further when all these documents are accepted by intermediate banks involved in L/C and the remittance payment will be honored to the Exporter's bank at a specified time period. At this instance, an Exporter can use L/C as an collateral to draw loan from that bank. We can not say L/C is an application for export from the exporter's point of view, as it is opened by an importer. 

c

My answer is: Options a, b, c

Basically, L/C is the documents by which minimum2 banks and2 trading companies bind themselves to achieve a set target of importing goods in acceptable condition from one loading point to other destination port and ensure the payment release to shipper after receiving correct documents.

a) If shipper has any financial limited with any bank, L/C can be used as loan application for lien in bank as collateral / mortgage and receive funds in advance which will be adjusted upon dispatch of shipment, its documents to consignee bank and repatriate of export proceeds in lending bank.

b) Against L/C issued by a first class national or international bank, exporter feels comfortable to dispatch their goods in acceptable condition according to L/C terms for timely payment by L/C opening bank.

c) L/C also serve the purpose of receiving the goods in strict complies of agreed terms and conditions so Importer feel comforts to receive the shipping documents in time after acceptance and payment release.

So, L/C fulfills the need of all parties involved in the transactions for safe, smooth operation of import / export using both sides banks.

A

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