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CS Professional · Strategic Management and Corporate Finance · Raising of Funds - Non Fund Based

Sundaram Textiles in Coimbatore exports garments to a buyer in Germany under a letter of credit. The Indian advising bank also adds its own undertaking to honour complying documents, so that Sundaram is protected even if the German issuing bank fails to pay. What is this arrangement called?

This is a confirmed letter of credit. The advising bank adds its own undertaking to pay on top of the issuing bank's, so the exporter is covered against the issuing bank's failure or country risk. An unconfirmed credit has only the issuing bank's undertaking.

  1. AAn unconfirmed letter of credit
  2. BA confirmed letter of creditCorrect
  3. CA revocable letter of credit
  4. DA transferable letter of credit

Explanation

When a bank other than the issuer adds its own definite undertaking to honour complying presentations, the credit becomes confirmed. The beneficiary then has recourse to two banks. An unconfirmed credit carries only the issuing bank's undertaking, so it is not the answer here.

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