Distinguish between Letter of Guarantee and Bank Guarantee.

Letter of Credit: A letter of credit, sometimes referred to as a documentary credit, acts as a promissory note from a bank. It represents an obligation taken on by a bank to make a payment once certain criteria are met. Once these terms are completed and confirmed, the bank will transfer the funds. The letter of credit ensures the payment will be made as long as the services are performed. Bank Guarantee: Bank guarantees are part of non-fund based credit facilities provided by the bank to the customers. Bank issue bank guarantee on behalf of his client as a commitment to third party assuring her/ him to honour the claim against the guarantee in the event of the non-performance by the bank's customer. A Bank Guarantee is a legal contract which can be imposed by law. The banker as guarantor assures the third party (beneficiary) to pay him a certain sum of money on behalf of his customer, in case the customer fails to fulfill his commitment to the beneficiary. While letters of credit are used mostly in international trade agreements, bank guarantees are often used in real estate contracts and infrastructure projects. Both bank guarantees and letters of credit work to reduce financial risk. (Note: Student may read as Letter of Credit instead of Letter of Guarantee in Question No. 2A(ii)).