Standby letter of credit, how does the bank determine whether the applicant has fulfilled the contra

Standby letter of credit, also known as guarantee letter of credit, performance letter of credit, commercial paper letter of credit, it is a certificate that the issuing bank undertakes a certain obligation to the beneficiary according to the request of the applicant, that is, the issuing bank guarantees that when the applicant fails to perform its obligations, the beneficiary only needs to issue a bill of exchange (or not issue a bill of exchange) to the issuing bank in accordance with the provisions of the standby letter of credit, and submit a statement or supporting documents that the applicant has not fulfilled its obligations, and can obtain the repayment of the issuing bank. The standby letter of credit is a bank credit that the issuing bank guarantees that the issuing bank will pay if the applicant fails to fulfill its obligations. If the applicant fulfills the agreed obligations, the letter of credit does not need to be used.

Therefore, for the beneficiary, the standby letter of credit is a way to obtain compensation in the event of default of the applicant for the issuance of the letter of credit, and it has the nature of security. At the same time, the standby letter of credit has the legal characteristics of the letter of credit, which is independent of the transaction contract guaranteed by it as the basis for its opening, and the issuing bank deals with the documents related to the letter of credit, and has nothing to do with the transaction contract. To sum up, a standby letter of credit has both the general characteristics of a letter of credit and the nature of a guarantee.

The payment liability of the standby L/C issuing bank is different from that of the documentary credit issuing bank. In the standby letter of credit business, the standby letter of credit is a kind of bank guarantee, and the issuing bank is generally in the position of a secondary debtor, and its payment liability is secondary, that is, the issuing bank only bears the payment liability when the issuing applicant defaults. As long as the beneficiary submits the documents specified in the L/C and the documents are "consistent", the issuing bank must pay immediately, regardless of whether the applicant pays at this time.

Your understanding is incorrect, the standby letter of credit does not require the beneficiary to perform the contract, it is only a unilateral guarantee for the performance of the contract made by the issuing applicant.

In practice, as long as the beneficiary provides sufficient evidence to prove that the payer has failed to perform its obligations during the term of the letter of credit, it can be repaid, regardless of whether it has performed the contract or not. It is mainly used as a guarantee business for performance, bidding and repayment.

If the applicant fulfills its obligations, the standby letter of credit will not be effective and will become a "standby but not use" letter of credit.

The bank's determination of whether the applicant has performed the contract is based solely on the evidence provided by the beneficiary, rather than collecting the evidence itself, and the specific criteria for determining may vary from bank to bank.

Such proof includes: contracts, documents of performance (invoices, warehousing orders, proof of deposit, etc.).

Yes – the payment liability of the standby L/C issuing bank is secondary, i.e. the issuing bank will only pay the beneficiary when the beneficiary makes a claim if the issuing applicant fails to fulfill the obligations secured by the standby L/C.

In other words, the issuing bank of a standby letter of credit is a passive payment, while the issuing bank of a documentary credit is an active payment – one of the essential differences between the two.

The payment responsibility of the issuing bank is primary and independent of the contract.

The guarantee liability is started, and then the payment is made if the conditions are met.