Letter of Credit (LC)

A bank instrument guaranteeing payment to a seller upon presentation of specified documents (invoice, bill of lading, insurance). If the buyer (applicant) defaults, the issuing bank pays the seller. LCs are widely used in trade finance. Fraudulent LCs (where documents are forged) are a major banking fraud category and attract IPC S.420/S.467 and BNS S.320/S.340 charges.

In practice, a letter of credit is both a trade-finance instrument and, when abused, a fraud vector that pulls a banking dispute into criminal court. The issuing bank pays the seller against conforming documents, so the bank's exposure crystallises if the buyer-applicant defaults and the bank must honour the LC. Recovery counsel for the bank then treat the devolved LC as a debt enforceable through the usual SARFAESI/DRT channels against the applicant and any security. Where the underlying documents — invoices, bills of lading — are forged or the goods never existed, the matter escalates: the firm pairs civil recovery with prosecution, since LC fraud attracts charges under provisions on cheating and forgery of valuable security (IPC S.420/S.467, now BNS S.318/S.338). The classic mistake is treating a devolved LC as a routine overdraft and missing the fraud markers in the documentary trail. Banks examine document authenticity before assuming the LC is a clean commercial loss.