A letter of credit is a banking process in which a bank makes a guarantee at the request of a customer (importer and exporter). Such transactions are commonly used in international transactions. This guarantees the reliability of the exporter over the importer. In this, the importing customer requests the foreign exporter to buy the goods from abroad.

The customer alone cannot do this. Bank guarantee of the importing country is required. The letter of credit (LC) is the process by which the bank of the importing country guarantees the payment to the bank of the exporting country. 

Letters of credit are generally of the following types:

1) Revocable and convertible LC

2) Stand by LC

3) Confirmed LC

4) Transferable LC

5) Back to back (one after another continuous) LC

6) Payment at site (to be paid as soon as received) LC

7) Deferred Payment (Movable Payment) LC

8) Red Clause LC

For the purpose of opening a letter of credit, the following documents along with the application have to be submitted to the bank:

(A) Updated registration certificate of the importer firm

(B) Updated income tax registration certificate

(C) Various forms provided by Nepal Rastra Bank

(D) Proforma invoice, or contract

The following transaction should be open in such document:

Even if the goods have name, brand and model number

Name of the country producing the goods

Unit price, quantity and deposit price

CIF, FOB, CFR documents

Type of payment

Harmonic code of at least eight digits

Name, address and telephone of importer and exporter