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An alternative to
the bond is a Stand-by Letter of Credit issued in favour of the beneficiary, promising
to pay a given amount against specified documents, usually a formal default claim.
There are various types of SBLCs, the main ones being linked to the various types
of obligations covered by bonds. Thus the main stand-by credits are called:
a) Bid/tender bond stand-by credits
b) Counter stand-by (to support the issue of a performance stand-by if a commercial
contract is awarded which had a bid/tender stand-by included)
c) Performance stand-by
d) Advanced payment stand-by
As a generalisation, the applicant of such a credit would be the equivalent of the
person who applied for a bond/guarantee and the beneficiary would be the same as
the beneficiary of a bond/ guarantee. Thus in the equivalent of a bid, counter and
performance bond situation, the applicant would be the exporter/seller and the beneficiary
would be the importer/buyer. However, the use of SBLCs is not necessarily restricted
to the above situations and there are many instances where a documentary credit
promising to pay a given amount against specified documents such as a formal default
claim would be appropriate.
From a bank’s point of view an SBLC is better than a bond because it will be subject
either to Uniform Customs and Practice for Documentary Credit (1993 revision), or
to the International Standby Practices 1998, instead of being subject to complex
legalities. In addition, an SBLC will always have a definite expiry date which can
overcome one of the main problems for issuers of bonds. It is anticipated that the
bulk of SBLCs in future will be drawn subject to ISP 1998, since these rules are
more appropriate than the traditional UCP for a bond type situation. The new rules
make SBLCs even more attractive as an alternative to bonds. |
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