Distinguish between Letter of Credit Limit and Bank Guarantee Limit.

Letter of Credit Limit: Letter of credit (LC) is a method of settlement of payment of a trade transaction and is widely used to finance purchase of raw material, machinery etc. It contains a written undertaking by the bank on behalf of the purchaser to the seller to make payment of a stated amount on presentation of stipulated documents and fulfilment of all the terms and conditions incorporated therein. Letters of credit thus offers both parties to a trade transaction a degree of security. The seller can look forward to the issuing bank for payment instead of relying on the ability and willingness of the buyer to pay. Bank Guarantee Limit: Appraisal of proposals for Bank guarantees is done with same diligence as in the case of fund-based limits. Whenever an application for the issue of bank guarantee is received, Bank examine & satisfy the following aspects: The need of the bank guarantee & whether it is related to the applicant's normal trade/business. Whether the requirement is one time or on the regular basis. The nature of bank guarantee i.e., financial or performance. Applicant's financial strength/ capacity to meet the liability/ obligation under the bank guarantee in case of invocation. Past record of the applicant in respect of bank guarantees issued earlier, e.g., instances of invocation of bank guarantees, the reasons thereof, the customer's response to the invocation, etc. Present outstanding on account of bank guarantees already issued. Margin Collateral security offered.