Banking Exam Question - What is Letter of Credit (LC) in Banking System? What are it's Types? Explain

Introduction - Letter of Credit

What is Letter of Credit?

A letter of credit is a letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. In the event that the buyer is unable to make payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase. Due to the nature of international dealings, including factors such as distance, differing laws in each country, and difficulty in knowing each party personally, the use of letters of credit has become a very important aspect of international trade. 

Types of Letters of Credit
A commercial letter of credit: It is an immediate installment technique in which the issuing bank makes the installments to the recipient. Interestingly, a standby letter of credit is an auxiliary installment technique in which the bank pays the recipient just when the holder can't.

A revolving letter of credit: It gives the client a chance to make any number of draws inside a specific point of confinement amid a particular day and age. A voyager's letter of credit ensures the issuing banks will respect drafts made at certain remote banks.

A confirmed letter of credit: It includes a bank other than the issuing bank ensuring the letter of credit. The second bank is the affirming bank, regularly the dealer's bank. The affirming bank guarantees installment under the letter of credit if the holder and the issuing bank default. The issuing bank in global exchanges regularly asks for this plan.