Letter of credit is a conditional bank undertaking of payments. It is a written undertaking by a bank ( issuing bank ) given to the seller ( beneficiary ) at the request, and on the instruction of the buyer ( applicant ) to pay at sight or at a determinable future date up to a stated sum of money, within a prescribed time limit and against stipulated documents or other conditions. The issuing bank is putting out its credit and good name for the sake of the buyer.
Letter of credit are commanly used to reduce credit risk to sellers in both domestic and international sales arrangements. by having a bank issue a letter of credit, in essence one is substituting the bank's credit worthiness for that of the customer. Almost all foreign trade in Nepal is carried out through Letter of Credit but other few methods such as Dcoumentary Collection, advance payment, cash against documents etc are also popular in foreign trade.