List of CEO name in Nepali Banking Industry
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Letter of Credit vs Letter Guarantee
Bank guarantee and letter of credit are similar in many ways they both are the part of non-fund based credit. But they are different things.
Letter of credit
Letter of credit in short (LC/DC) is a documentary credit which acts as a promissory note form a financial institution. Bank will take all obligation and make a payment once certain criteria (documents are presented). LC is issued by a bank to another bank to provide like a guarantee to make payments after the documents are received. For example: Nepal Corporation receives an order from Indian Corporation formal have no idea whether Indian Corporation can release their payments in such case buyer company will open letter of credit to assure seller for payment. LC is especially applicable in international/foreign trade due to the unknown characters among buyers and sellers.
Letter of credit is issued by a bank at the request of buyer in order to give assurance of payment to seller. Letter of credit will secure both buyers and seller so it reduces financial risk however it can also be an extra expense in mistake.
Letter of guarantee
Letter of guarantee in short (LG/BG) is a written document issued by a bank at the request of a customer who has entered in to an agreement to sale certain goods to buyers. BG can be used a security and is applicable if supplier (Seller) failed to perform the task as per the commitment. BG is normally applicable in local market and should contain certain amount and certain date. BG can be requested for bid and performance (Bid Bond Security, Performance Bond Security).
Bid Bond is a type of bond which protects owner of the bid for example If Bidder fails to perform the bid compensation shall be fulfilled by Bid Bond Security.
Performance Bond is a type of bond which arises after awarding bid bond for example if Bidder fails to perform as per the contract or specification compensation shall be fulfilled by Performance Bid Security.
Note: There are many types of Letter of Guarantee but we have only discussed above mentioned types.
Some differences between Letter of Credit and Letter of Guarantee
| Letter of Credit | Letter of Guarantee |
| a) It is a commitment taken by bank for payment to beneficiary once certain terms and conditions are fulfilled | a) It is bank’s commitment to honor payment to beneficiary if opposite party failed to meet certain terms and condition. |
| b) Mostly used by merchants involved in imports and exports of goods | b) Mostly used for contractual bidding/large projects |
| c) Mostly used in foreign trading | c) Mostly used in local market/ trading |
| d) It protects both parties but exporter get most of the benefit | d) It protects both party but beneficiary gets benefit |
| e) At least three or more than five parties are involved | e) Three parties are involved |
| f) It is more risky for bank | f) It is less risky for bank |
| g) It deals with documents only | g) It deals with product |
| h) It is guided by UCPDC ( rules) | h) It is guided by URDG( rules) |