Letter of credit is a document issued by a financial institution on behalf of a buyer stating the amount of credit the buyer has available, and that the institution will honor drafts up to that amount written by the buyer. It gives the buyer the prestige and financial backing of the issuing institution and satisfies the requirements of the seller in completing the transaction. The accepting institution has a prior agreement as to how the buyer will pay for the drafts as they are presented.

In other words, Letter of credit issued by a bank authorizing the person named therein to draw money up to a specified amount from the bank's branches or correspondents, providing the conditions set out in the letter are met.

Any instrument by which one person authorises another to give credit to the person in whose favour it is drawn. [Section 2(3)(c); The Stamp Act, 1899]

Document provided, e.g., for the exporter by the importer, so that the exporter can draw his draft upon a bank. It usually states the period within which it can be drawn, the maximum amount, and refers to documents accompanying it. [Power Curber Ld. vs. Nat. Bank of Kuwait (1981) 1 WLR 1233]

Letter of Credit (L/C) is a mechanism of great importance in international trade. Any interference with L/C is found to have serious repercussions on the international trade of a country and as such the convenience is always in favour of the L/C. [Sarhind Garments Ltd. vs. Glory Truth Industries Ltd. and anr, 17 BLD (HCD) 204]