Letters of Credit (LC) - Adam Wong
LC is a written undertaking by a bank to pay a certain sum of money, upon fulfilment of certain
documentary conditions within a prescribed time limit.
The issuing bank, acting at the request and on the instructions of a customer (the applicant for the
- is to make a payment to or to the order of a third party (the beneficiary), or
- is to accept and pay bills of exchange (drafts) drawn by the beneficiary, or
- authorises another bank to effect such payment, or to accept and such bills of exchange or
- authorises another bank to negotiate.
against stipulated documents, provided that the terms and conditions of the credit are compiled with.
An irrevocable credit constitutes a definite undertaking of the issuing bank, provided that the stipulated
documents are presented to the Nominated Bank or to the Issuing Bank and that the terms and conditions
of the credit are complied with.
The written undertaking given by the issuing bank is a conditional one. Therefore, the issuing bank will
only effect payment to the beneficiary up to a prescribed amount within a prescribed time period against
prescribed documents, provided these are complied with.
The documents include those required for the commercial purpose of effecting the sale, insurance and
transport (usually bills of lading).
Payment is made either against presentation of the documents together with drafts drawn on a bank or
the applicant where the credit is available. The drafts may be payable at sight or at a specified number of
days after a specific date or after sight.