BANKING AFFAIRS

Detailed explanation-1: -A letter of credit is a document sent from a bank or financial institute that guarantees that a seller will receive a buyer’s payment on time and for the full amount. Letters of credit are often used within the international trade industry.

Detailed explanation-2: -Under a bank guarantee, if the buyer is unable to make the payment to the seller or creditor, then the bank pays the fixed amount to the seller as the obligations of the contract are not met. On the other hand, under a letter of credit, the bank makes the payment to the seller once he or she delivers.

Detailed explanation-3: -1. 2. BANK GUARANTEES ON BEHALF OF CONSTITUENTS. DEFINITION: As per the section 126 of Contract Act – ‘A guarantee is a contract to perform the promise or discharge the liability of a third person in case of his default’.

Detailed explanation-4: -A Letter of Credit is an arrangement whereby Bank acting at the request of a customer (Importer / Buyer), undertakes to pay for the goods / services, to a third party (Exporter / Beneficiary) by a given date, on documents being presented in compliance with the conditions laid down.

Detailed explanation-5: -While issuing guarantees on behalf of customers, the following safeguards should be observed by banks: i. At the time of issuing financial guarantees, banks should be satisfied that the customer would be in a position to reimburse the bank in case the bank is required to make payment under the guarantee.