What Are The Benefits Of Letter Of Credit?


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Nouman Umar answered
The banks charge nominal commission on financing the import and export shipment, whereas the handling costs of the shipping documents is normally greater than the amount received as commission for issuing or discounting the letters of credit. The banks also undertake considerable risks in accepting the shipping documents. The question therefore arises as to why the commercial bank handles letters of credit. The main benefits of letter of credit for the commercial banks are as follows:-

Benefits for the bankers:
Increased balances: There is no doubt that banks charge low rates of commission but they offset this advantage by maintaining balances up the line of credit so that the drawings of the exporters are met under the credit. The balances of course are the life-blood of every commercial bank.

Commission: The commissions charged by the banks vary with the kinds of letters issued by them. Though the commissions are small, yet when counted on the whole they form a significant part of earning of the commercial banks.

New business opportunities: The letter of credit provides new business opportunities to the banks. The new firms which are engaged in the export and import of merchandise are introduced to the banks which by serving them effectively develop profitable relationship.

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