Letter of credit
It is a bank instrument frequently issued between banks in different countries for the payment of import contracts. It may be defined as an instrument authorizing the (issuing) bank on behalf of the purchaser (Applicant) to pay a certain sum of money to specified seller(s) (Beneficiary) provided the seller(s) submit the documents as prescribed in the Letter of Credit.
In other word letter of credit is a piece of document that serves as instruction of guaranteed payment from the buyer to the seller. Also known as a documentary credit, a letter of credit is issued by the bank and acts as a promise of timely payment to the seller. If the buyer supposedly fails to perform his due obligation, then the bank pays the seller on behalf of the buyer who in turn repays the bank. This is a brief summation of the letter of credit process.
With effect from 01 April 2018 letter of credit (LC) is a mode of payment as an option in supply & works contracts to improve transparency and the ease of doing business.
It is Applicable for supplies & works, including all service and maintenance contracts for tenders having an estimated value of or above Rs. 10 Lakhs.
The Letter of Credit (LC) payment method for supply and work contracts will significantly increase transparency and improve the ease of doing business.
Letter of Credit transactions works as
- SBI issues Letter of Credit to a Seller
- Railways will issue DA i.e., Document of Authorisation to the supplier and contractor for completed work.
- The supplier or contractor will present the DA to his banker for necessary payment.
- After release of payment to the supplier or contractor, the banker will send this DA to the Railways' banker (SBI) for release of payment to them
- The Railways banker (SBI) will reimburse the supplier or contractor bank, against the original DA issued by railway and the bill of exchange issued by the supplier, contractor, after verifying the signatures.
