Wednesday, October 15, 2014

Difference between Bill of Exchange and Letter of Credit (L/C)

In brief, a "bill of exchange" or a "Hundi" is a kind of legal negotiable instrument used to settle a payment at a future date. It is drawn by a drawer on a drawee wherein drawee accepts the payment liability at a date stated in the instrument. The Drawer of the Bill of Exchange draw the bill on the drawee and send it to him for his acceptance. Once accepted by the drawee, it becomes a legitimate negotiable instrument in the financial market and a debt against the drawee. The drawer may, on acceptance, have the Bill of Exchange discounted from his bank for immediate payment to have his working capital funds. On due date, the bill is again presented to the drawee for the payment accepted by him, as stated therein the bill. 

Letter of Credit (LC) is a declaration of financial soundness and commitment, by a bank for its client, for the amount stated in the LC document, to the other party (beneficiary) named therein. The LCs may or may not be endorse-able. In case of default of payment by the party under obligation to pay, the LC issuing Bank undertakes to honour the payment - with or without conditions. Normally, there may be sight LCs or DA LCs containing a set of conditions in both the cases. There "may be" Bills of Exchange(s) drawn under the overall limits of the LC amount for payment later on.


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