SBLC - Var iouS uSeS
A standby letter of credit may be defined as ‘a
guarantee of payment issued by a bank on behalf of a client that is used as “Payment of last resort” should the client fail to fulfil a contractual commitment with a third party’.
This means that if and only if the client fails to
perform an act or omission as per the terms and conditions of a particular contract, only then does the role of the bank comes into being.
In such cases, the bank would be held liable to the extent of
the initial liability of the client.
This method of financing which involves the
use of SBLC Standby Letter of Credit may be used by clients who have low creditability or those face various hindrances in trade due to their lack of goodwill among the suppliers.
Contrary to this, a letter of credit is a statement of guarantee
by the issuing bank that the payment will be made by the buyer to the seller.
 Here, mostly, the bank becomes the surety of the client ab
initio, and thus is jointly liable with the client, and while the expiry term for a Letter of Credit is three months, that of an SBLC extends up to one year or so.
 The client may sometimes be required to produce or present
before the issuing bank cash, securities or some other immovable property as collateral for the issuance of a standby letter of credit.
 Collateral in simple terms is a mortgage or security at the
bank for security purposes.
 Advantages of SBLC are that, as mentioned above, it increases
the creditability of the client, and also secures the payment to the supplier.
 This would mean that the suppliers would be more confident to
supply goods to a client with relatively less creditability or creditworthiness, which they otherwise would have been apprehensive or unwilling to do.
 Besides, a standard letter of credit is used mostly in case of
international trade; while a standby letter of credit may be used within the nation, for purposes concerned with construction activities etc.
 Moreover, the supplier can accept payments through
bank transfer which is comparatively a more simplified and convenient method of transaction in recent times, and the cost of usage of this method of finance is relatively lower than that in case pf documentary credit, or the standard letter of credit.
 Thus, the use of SBLC is more convenient and more
feasible compared to the standard letter of credit.