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Called a letter of bank guarantee, is issued by the bank at the request and on behalf of a borrower customer in favour of a beneficiary (who may be other individuals, companies / firms / govt. departments)
committing to pay on demand a specified sum of money. if demanded within a specified period in terms of this guarantee letter, for non discharge of a financial obligation or non performance of a contract as per terms of the contract between the customer and the beneficiary
Bills of exchange drawn on a bank’s borrower , are accepted by the borrower as well as co-accepted by the bank to supplement the credit worthiness of the borrower to pay the amount of the bill to the drawer if the borrower (drawee) is unable to pay on due date.
A definite undertaking on the part of the bank to make payment to the supplier of the goods, (the beneficiary of the letter of credit ) on submission of documents as stipulated and on fulfillment of terms and conditions of the letter of credit .
This is a mechanism to settle the payments in trade.
The seller controls the ownership of goods till the buyer pays to a bank as agent of the seller.
The buyer pays only when he gets proper documents as per his needs as stipulated in the letter of credit