Definition & Importance of Letter of Credit (L/C)

Definition of Letter of Credit (L/C)

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No direct cash translation isn't practised in foreign trade. Exporter can't be pre-known to importer. So, the certainty of cash payment is needed to it. Bank ensures the exporter to pay the value of exported goods & services on behalf of importer by Letter of Credit (L/C) which is an important bank document in foreign trade.

"Letter of Credit (L/C) is a letter from a bank allowing someone credit and promising to repay at a letter date." (A Ivanovic)

"Letter of Credit (L/C) is an instrument by which a bank substitutes its own credit for that of an individual, firm, or corporation to the end that domestic & foreign trade may be more safety." (The Dictionary of Banking)

"Letter of Credit (L/C) is a document issued by a bank on behalf of a customer authorizing payment to a supplier when the conditions specified in the document are met." (Dictionary of Business)

"An instrument or document issued on behalf of a buyer by a bank on another banker bank or banks or on itself." (M Rosenberg)

At last it is said that, Letter of Credit means-

a loan document or instrument where bank, importer & exporter concerns, are  issued by bank on behalf of importer to ensure payment to exporter on specified written condition.

Objectives / Importance /Advantage of Letter of Credit (L/C).

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Letter of Credit (L/C) is an important credit document used in foreign business or trade. Bank ensures the payment to exporter up to predetermined amount of money with foreign coins on behalf of importer. Without letter of Credit exporter isn't agree to sell his products, goods & services. The Objectives / Importance /Advantage of Letter of Credit are given below with detail :

1. Development of foreign trade :

By issuing letter of credit exporter sells product and importer becomes capable to purchase that commodities. As a result foreign trade is organized, expanded & developed.

2. Confirmation of payments :

Bank ensures the payment to exporter if importer becomes failure through letter of credit. As because exporter can sell his products without any hesitation.

3. Development of home trade :

The using of Letter of credit is practiced for domestic trade and commerce. As a result unknown traders can direct their trade and business & commerce are improved also.

4. Creating Relationship :

The relation among the domestic as well as foreign traders is created and build-up also by using letter of credit.

5. Risk Reduction :

The traders between the two countries are not acquaintance. So, their payment become risky. Bank lessens the risk introducing the traders of the two countries each other through letter of credit.

6. Settlement of transaction :

According to the condition of letter of credit if the importer don't pay the price of imported goods & services then bank settles the transaction by paying money in favour of importer.

7. Increasing Income / national income:

Letter of credit helps to increase the export of domestic. The income of seller, trades & industrialists is increased by export. As a result his capital & business is expanded.

8. Employment :

If bank issues letter of credit more then the county becomes capable to export more, the business & commerce is expanded as well as more employment opportunity is created.

9. Development of tourism industry :

Bank issues letter of credit to traveller. This is why, The tourists can make more journey and tourist industry is developed.

10. Market Creation :

In the continuity of issuing more letter of credit the foreign importers of various countries import more commodities and new markets are created.

11. Development of living standard :

Letter of credit helps to Increase the  exports of a county. As a result increasing per head income & national income bank improves the living standard of mass.

At last we can say that, foreign trades are impossible without letter of credit. The more used of letter of credit creates the balance of trade the country becomes self-sufficient.