A letter of credit is a written commitment from a bank guaranteeing payment to a seller if the terms of the letter are met. There are various types of letters of credit, including commercial, export/import, transferable, un-transferable, revocable, irrevocable, standby, confirmed, and unconfirmed letters of credit. To open a letter of credit, a buyer approaches their bank with a purchase order/export contract and other required documents. The bank may require the buyer to deposit a margin amount using their account as collateral since the bank is guaranteeing payment under the letter of credit.

2.  A letter of credit (LC), also known as
a documentary credit, is a written
commitment by a bank on behalf of a buyer
that payment be made to a seller provided
that the terms and conditions stated therein
have been met.

3. 1. COMMERCIAL LC
2. EXPORT/IMPORT LC
3. TRANSFERABLE LC
4. UN-TRANSFERABLE LC
5. REVOCABLE LC
6. IRREVOCABLE LC
7. STANDBY LC
8. CONFIRMED LC
9. UNCONFIRMED LC
10. REVOLVING LC
11. BACK TO BACK LC
12. RED CLAUSE LC
13. GREEN CLAUSE LC
14. SIGHT LC
15. DEFERRED PAYMENT LC
16. DIRECT PAY LC

4.  Procedures to open a Letter of Credit.

 You can approach your bank to open a Letter of credit. The
concerned officer at bank helps you in filling up necessary
application to open an LC. Since the LC is opened on the basis of
your purchase contract, a copy purchase order / export contract
has to be produced with along with other required documents.
Your bank may ask you to keep certain percentage of ‘margin
amount’ with bank.
 What is ‘margin amount’ while opening Letter of Credit.
 As I have explained to you, bank is guaranteeing the
payment. In turn, what guarantee are you providing to bank
against the amount of LC? So a margin amount is blocked in your
bank account to make the payment under the said letter of
credit. Certainly you may ask, what would be the ‘margin’, bank
blocks. This amount is determined, purely based on your financial
relationship with your bank