I. BANKING INSTITUTIONS AND THE BANKING PERSPECTIVE
History of Banking
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Banking has been around since the first currencies were minted—perhaps even before
that, in some form or another. Currency, in particular coins, grew out of taxation. In the
early days of ancient empires, annual taxation on one pig may have been reasonable,
but as empires expanded, this type of payment became less desirable.
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The history of banking began when empires needed a way to pay for foreign goods and
services, with something that could be exchanged more easily. Coins of varying sizes
and metals served in the place of fragile
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These coins, however, needed to be kept in a safe place. Ancient homes did not have
the benefit of a steel safe, therefore, most wealthy people held accounts at their temples.
Numerous people, like priests or temple workers whom one hoped were both devout

and honest, always occupied the temples, adding a sense of security
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Historical records from Greece, Rome, Egypt, and Ancient Babylon had suggested that
temples loaned money out, in addition to keeping it safe
The fact that most temples were also the financial centers of their cities is the major
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reason that they were ransacked during wars.
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Coins could be hoarded more easily than other commodities, such as 300-pound pigs,
so there emerged a class of wealthy merchants that took to lending these coins, with
interest, to people in need
Temples generally handled large loans, as well as loans to various sovereigns, and these
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new money lenders took up the rest.
The First Actual Bank
The Romans, great builders, and administrators in their own right took banking out of
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the temples and formalized it within distinct buildings.
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During this time, moneylenders still profited, as loan sharks do today, but most
legitimate commerce—and almost all governmental spending—involved the use of an
institutional bank.
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Julius Caesar, in one of the edicts changing Roman law after his takeover, gives the
first example of allowing bankers to confiscate land in lieu of loan payments.
This was a monumental shift of power in the relationship of creditor and debtor, as
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landed noblemen were untouchable through most of history, passing debts off to
descendants until either the creditor or debtor's lineage died out.
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The Roman Empire eventually crumbled, but some of its banking institutions lived on
in the form of the papal bankers that emerged in the Holy Roman Empire, and with the
Knights Templar during the Crusades. Small-time moneylenders that competed with the
church were often denounced for usury.
Financial Markets (Midterms)
Visa Royal
Eventually, the various monarchs that reigned over Europe noted the strengths of
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banking institutions
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As banks existed by the grace, and occasionally explicit charters and contracts, of the
ruling sovereignty, the royal powers began to take loans to make up for hard times at
the royal treasury, often on the king's terms.
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These easy finance-led kings into unnecessary extravagances, costly wars, and an arms
race with neighboring kingdoms that would often lead to crushing debt
In 1557, Philip II of Spain managed to burden his kingdom with so much debt (as the

result of several pointless wars) that he caused the world's first national bankruptcy.
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This occurred because 40% of the country's gross national product (GNP) was going
toward servicing the debt
Adam Smith and Modern Banking
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Banking was already well established in the British Empire when Adam Smith came
along in 1776 with his "invisible hand" theory.
Empowered by his views of a self-regulated economy, moneylenders and bankers
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managed to limit the state's involvement in the banking sector and the economy as a
whole
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This free-market capitalism and competitive banking found fertile ground in the New
World, where the United States of America was getting ready to emerge.
Merchant Banks
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Most of the economic duties that would have been handled by the national banking
system, in addition to regular banking business like loans and corporate finance, fell
into the hands of large merchant banks
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During this period of unrest that lasted until the 1920s, these merchant banks parlayed
their international connections into both political and financial power.
These banks included Goldman and Sachs, Kuhn, Loeb, and J.P. Morgan and Company.

Originally, they relied heavily on commissions from foreign bond sales from Europe,
with a small back-flow of American bonds trading in Europe. This allowed them to
build up their capital.
While upstart banks came and went, these family-held merchant banks had long
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histories of successful transactions.
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As large industry emerged and created the need for corporate finance, the amounts of
capital required could not be provided by anyone bank, and so initial public offerings
(IPOs) and bond offerings to the public became the only way to raise the needed capital.
History of the Philippine Banking 19th CENTURY UNTIL PRESENT
Obra Pias (Pious works)– banking in the Philippines began in the 16thCentury by
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establishment of this organization composing of layman associated with religious order
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Rodriquez Bank was among the first bank that emerged in the early 19thcentury which
was more of a loan association than a regular bank
British-Orient Bank - Expanded the Philippine-European trade following the opening
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of the Suez Canal.
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HSBC - Established its branch in Manila in 1872.
Monte de Piedad • First mutual savings established in Aug 2,1882

A Spanish Franciscan friar Felix Huertas was the prime mover in convincing the

Archbishop of Manila and the Governor-General to establish a bank especially for the
poor.
The original name in Spanish was Monte de Piedad y Caja de Ahorros. • It was bank
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and a pawnshop.
Monte de Piedad and Savings Bank, Sta. Cruz, Manila
Oldest savings bank in the Philippines. Founded by Fr. Felix Huertas (de Huerta) of the
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Franciscan Order with the funds of the Obras Pias. Inaugurated 2 August 1882.
Bank of the Philippine Island
Established 1851, it was the first state bank.
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Banco Espanol-Filipinas de Isabel II
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It was renamed Bank of the Philippine Island in 1912
Philippine National Bank
First agricultural bank, established in 1916
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PNB has also functioned as the de facto Central Bank of the Philippines until 1949. It
was given the special power to issue circulating notes
The first universal bank in the Philippines (1980)
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Bangko Sentral Ng Pilipinas
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Established in 1949
The BSP actually started out as the Central bank of the Philippines established in
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January 3, 1949 as the Philippines’ Central Monetary Authority.
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II. STOCK VALUATION
the process of calculating the value of goods or materials owned by a company or
available for sale in a store at a particular time, or the value that is calculated: The
dispute was over the value of current assets, including basic stock valuation
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In financial markets, stock valuation is the method of calculating theoretical values of
companies and their stocks.
The main use of these methods is to predict future market prices, or more generally,
potential market prices, and thus to profit from price movement – stocks that are
judged undervalued (with respect to their theoretical value) are bought, while stocks
that are judged overvalued are sold,
in the expectation that undervalued stocks will overall rise in value, while overvalued
stocks will generally decrease in value.
There are several methods for valuing a company or its stock, each with its own
strengths and weaknesses.
Some models try to pin down a company's intrinsic value based on its own financial
statements and projects, while others look to relative valuation against peers.
For companies that pay dividends, a discount model like the Gordon growth model is
often simple and fairly reliable—but many companies do not pay dividends.
Often, a multiples approach may be employed to make comparative evaluations of a
company's value in the market against its competitors or broader market
When choosing a valuation method, make sure it is appropriate for the firm you're
analyzing, and if more than one is suitable use both to arrive at a better estimate.
Two Categories of Valuation Models
Valuation methods typically fall into two main categories: absolute valuation and
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relative valuation.
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Absolute Valuation
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Absolute valuation models attempt to find the intrinsic or "true" value of an investment
based only on fundamentals.
Looking at fundamentals simply means you would only focus on such things as

dividends, cash flow, and the growth rate for a single company—and not worry about
any other companies.
Valuation models that fall into this category include the dividend discount model,
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discounted cash flow model, residual income model, and asset-based model.
Relative Valuation
Relative valuation models, in contrast, operate by comparing the company in question

to other similar companies
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These methods involve calculating multiples and ratios, such as the price-toearnings (P/E) ratio, and comparing them to the multiples of similar companies.
For example, if the P/E of a company is lower than the P/E of a comparable company,
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the original company might be considered undervalued.
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Typically, the relative valuation model is a lot easier and quicker to calculate than the
absolute valuation model, which is why many investors and analysts begin their
analysis with this model.
Dividend Discount Model (DDM)
The dividend discount model (DDM) is one of the most basic of the absolute valuation
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models. The dividend discount model calculates the "true" value of a firm based on
the dividends the company pays its shareholders.
The justification for using dividends to value a company is that dividends represent the
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actual cash flows going to the shareholder, so valuing the present value of these cash
flows should give you a value for how much the shares should be worth.
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The first step is to determine if the company pays a dividend.
The second step is to determine whether the dividend is stable and predictable since
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it's not enough for the company to just pay a dividend.
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The companies that pay stable and predictable dividends are typically mature blue
chip companies in well-developed industries.
These types of companies are often best suited for the DDM valuation model. For

instance, review the dividends and earnings of company XYZ below and determine if
the DDM model would be appropriate for the company:
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In the above example, the earnings per share (EPS) is consistently growing at an
average rate of 5%, and the dividends are also growing at the same rate
Also, you should check the payout ratio to make sure the ratio is consistent.
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In this case, the ratio is 0.125 for all six years, which makes this company an ideal
candidate for the dividend discount model.
Pay-out ratio = dividends per share / earnings per share
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Payout Ratio Definition
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The payout ratio is a financial metric showing the proportion of earnings a company
pays its shareholders in the form of dividends, expressed as a percentage of the
company's total earnings.
On some occasions, the payout ratio refers to the dividends paid out as a percentage of

a company's cash flow. The payout ratio is also known as the dividend payout ratio.
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For example, let's assume Company ABC has earnings per share of $1 and pays
dividends per share of $0.60. In this scenario, the payout ratio would be 60% (0.6 / 1).
Let's further assume that Company XYZ has earnings per share of $2 and dividends per
share of $1.50. In this scenario, the payout ratio is 75% (1.5 / 2). Comparatively
speaking, Company ABC pays out a smaller percentage of its earnings to shareholders
as dividends, giving it a more sustainable payout ratio than Company XYZ.
Financial Markets (Midterms)
Discounted Cash Flow Model (DCF)
What if the company doesn't pay a dividend or its dividend pattern is irregular? In this

case, move on to check if the company fits the criteria to use the discounted cash
flow (DCF) model.
Instead of looking at dividends, the DCF model uses a firm's discounted future cash

flows to value the business. The big advantage of this approach is that it can be used
with a wide variety of firms that don't pay dividends, and even for companies that do
pay dividends
The DCF model has several variations, but the most commonly used form is the Two
Stage DCF model. In this variation, the free cash flows are generally forecasted for five
to 10 years, and then a terminal value is calculated to account for all the cash flows
beyond the forecasted period.
The first requirement for using this model is for the company to have positive and
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predictable free cash flows. Based on this requirement alone, you will find that many
small high-growth companies and non-mature firms will be excluded due to the
large capital expenditures these companies typically encounter.
In this snapshot, the firm has produced an increasing positive operating cash flow,
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which is good. However, you can see by the large amounts of capital expenditures that
the company is still investing much of its cash back into the business in order to grow.
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As a result, the company has negative free cash flows for four of the six years, which
makes it extremely difficult or nearly impossible to predict the cash flows for the next
five to 10 years.
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To use the DCF model most effectively, the target company should generally have
stable, positive, and predictable free cash flows. Companies that have the ideal cash
flows suited for the DCF model are typically mature firms that are past the growth
stages.
The Comparables Model
The reason why the comparables model can be used in almost all circumstances is due
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to the vast number of multiples that can be used, such as the price-to-earnings
(P/E), price-to-book (P/B), price-to-sales (P/S), price-to-cash flow (P/CF), and many
others.
Of these ratios, the P/E ratio is the most commonly used because it focuses on the
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earnings of the company, which is one of the primary drivers of an investment's value.
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This model doesn't attempt to find an intrinsic value for the stock like the previous two
valuation models.
Instead, it compares the stock's price multiples to a benchmark to determine if the stock
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is relatively undervalued or overvalued.
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The rationale for this is based on the Law of One Price, which states that two similar
assets should sell for similar prices.
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III. BANK FUNCTIONS
Although banks do many things, their primary role is to take in funds—called
deposits—from those with money, pool them, and lend them to those who need funds.
Banks are intermediaries between depositors (who lend money to the bank) and
borrowers (to whom the bank lends money).
BANK RESERVES
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Bank reserves are the cash minimums that financial institutions must have on hand in
order to meet central bank requirements.
This is real paper money that must be kept by the bank in a vault on-site or held in its
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account at the central bank.
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Cash reserves requirements are intended to ensure that every bank can meet any large
and unexpected demand for withdrawals.
Excess reserves are the additional cash that a bank keeps on hand and declines to lend
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out.
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Bank reserves are kept to prevent the panic that can arise if customers discover that a
bank doesn't have enough cash on hand to meet immediate demands.
These numbers refer to the amount of cash, as a fraction of their customers' deposits,
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that banks must keep on hand to make sure that they are able to meet their liabilities in
case of sudden withdrawals.
A central bank may also use bank reserve levels as a tool in monetary policy. It can
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lower the reserve requirement so that banks are free to make a number of new loans and
increase economic activity. Or it can require that the banks increase their reserves to
slow economic growth.
BANK RESERVE IN THE PHILIPPINES
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The BSP will cut the reserve requirement ratio (RRR) for most banks and non-bank
financial institutions by 250 basis points, from 12% to 9.5%. It will also lower the RRR
for digital banks by 200bp to 6%. The measure will cut thrift banks' reserve
requirements to 2% and rural and co-operative banks to 1%
What Is the Reserve Ratio?
The reserve ratio is the portion of reservable liabilities that commercial banks must hold
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onto, rather than lend out or invest. This is a requirement determined by the
country's central bank.
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It is also known as the cash reserve ratio.
The Formula for the Reserve Ratio
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Reserve Requirement=Deposits × Reserve Ratio​
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Financial Markets (Midterms)
Gold reserve
A gold reserve is the gold held by a national central bank, intended mainly as a
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guarantee to redeem promises to pay depositors, note holders (e.g. paper money), or
trading peers, during the eras of the gold standard, and also as a store of value, or to
support the value of the national currency.
Gold Reserves in Philippines averaged 188.93 Tonnes from 2000 until 2023, reaching
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an all time high of 274.42 Tonnes in the first quarter of 2003 and a record low of
126.89 Tonnes in the third quarter of 2007.
Loan/credit products:
1.
TERM LOAN
2.
SHORT TERM LOAN
3.
REVOLVING CREDIT LINE
4.
BACK TO BACK LOAN
5.
INVENTORY FINANCING
6.
BILLS PURCHASE LINE / CHECK DISCOUNTING LINE
7.
TRUST RECIEPT
TERM LOAN
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A term loan is borrowing a lump sum of money that a business shall pay back
periodically with interest.
It is ideal for businesses that need to acquire equipment or other assets to start rolling

their operations.
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The common types of term loans are short-term loans, intermediate-term loans, and
long-term loans.
A term loan is a loan that is given for a fixed duration of time and must be repaid in

regular instalments, also known as EMI (Equal Monthly Instalment).
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These loans are usually extended for a longer duration of time which may range from 1
year to as long as 30 years.
Types of Term Loans
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Term loans come in several varieties, usually reflecting the lifespan of the loan. These
include:
Short-term loans: These types of term loans are usually offered to firms that don't
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qualify for a line of credit. They generally run less than a year, though they can also
refer to a loan of up to 18 months
Intermediate-term loans: These loans generally run between one to three years and
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are paid in monthly installments from a company’s cash flow.
Long-term loans: These loans last anywhere between three to 25 years. They use
company assets as collateral and require monthly or quarterly payments from profits or
cash flow.
Both short- and intermediate-term loans may also be balloon loans and come
with balloon payments. This means the final installment swells or balloons into a much
larger amount than any of the previous ones.
A balloon payment is a type of loan structured so that the last payment is far larger than
prior payments.
Borrowers have lower initial monthly payments under a balloon loan.
The interest rate is usually higher for a balloon loan, and only borrowers with high
creditworthiness are considered.
Prepayment is discourage on this type of loan.
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Revolving credit line - rcl
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Revolving credit is generally approved with no date of expiration.
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The bank will allow the agreement to continue as long as the account remains in good
standing. Over time, the bank may raise the credit limit to encourage its most
dependable customers to spend more.
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Common examples of revolving credit include credit cards, home equity lines of credit
(HELOCs), and personal and small business lines of credit.
Credit cards are the best-known type of revolving credit.
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However, there are numerous differences between a revolving line of credit and a
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consumer or retail credit card.
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First, there is no physical card involved in using a line of credit as there is with a credit
card.
Second, a line of credit does not require the customer to make a purchase. It allows
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money to be transferred into a customer's bank account for any reason without requiring
an actual transaction using that money.
This is similar to a cash advance on a credit card but does not typically come with the

high fees and higher interest charges that a cash advance can trigger.
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Third, secured vs unsecured
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Lenders consider several factors about a borrower's ability to pay before setting a credit
limit. For an individual, the factors include credit score, current income, and
employment stability. For an organization or company, the bank reviews the balance
sheet, income statement, and cash flow statement.
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Inventory financing
The term inventory financing refers to a short-term loan or a revolving line of credit
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that is acquired by a company so it can purchase products to sell at a later date. These
products serve as the collateral for the loan.
Financial Markets (Midterms)
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Inventory Financing is a short-term loan or a line of credit that keeps revolving after a
pre-decided period used to finance the inventory of the company and the purchased
inventory acting as collateral for the availed loan.
Inventory forms a significant part of the company’s current assets as it constitutes the
goods held for a short-term duration to meet the expected demands. But if the number
of days of receivables is high, the company’s capital may get locked, and it’ll not have
sufficient funds to purchase more inventory.
The lender has complete authority to seize and sell the merchandise to recoup the lent
capital if the company fails to pay the debt.
Since they frequently have their capital restricted due to a lengthier cash conversion
cycle, companies that manufacture and sell consumer goods, such FMCG products, are
more likely to employ inventory finance. If accessible, this financing can be used to
increase sales.
Fast-moving consumer goods are products that sell quickly
FMCGs have a short shelf life because of high consumer demand (e.g., soft drinks and
confections) or because they are perishable (e.g., meat, dairy products, and baked
goods).
BACK TO BACK LOAN
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Back-to-Back Loan is a standby loan available to existing Savings and Time Deposit
account holders that intends to bridge financial gaps for personal and business purpose.
Domestic Bills Purchase Line – bp line
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Domestic Bills Purchase Line is the right answer to both your expected and unexpected
business expenses. It lets you maximize the use of your funds and replenish the day-today working capital requirements of your business without having to wait for normal
check-clearing procedures.
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Bank purchase your dated checks or sales bills, and advance the money to you pending
payment from your clients and bank clearances.
This way, funds from receivables will immediately be made available to you. The
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sooner you receive the proceeds from your sales, the faster you can seize opportunities
and take your business to the next level.
LINE AMOUNT - Based on 50% of Average Daily Balance for the past 6 months
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LINE EXPIRY - One (1) year from date of approval ; subject to renewal
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COLLATERAL - Any prime residential/commercial/industrial properties with or
without buidling improvements
Check discounting line
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Cheque discounting is a practice followed by a number of banking and financial
institutions.
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It allows a consumer to deposit a check or receive cash based on their reputation and
comprehensive checks before clearing your check. They do, however, deduct interest or
discounted costs from each check.
INTEREST - Usual DBP charges. If check is dishonored, prevailing lending rate + 36%
of p.a. penalty to be collected from the date of clearing until fully paid
PRINCIPAL - Principal payable upon clearing of the check
COLLATERAL - Cash deposits / Check itself
No collateral, OR clean, but given to valued clients with substantial ADB for the past 6
months (subject to approval)
TRUST RECEIPT
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A trust receipt is a financial document attended to by a bank and a business that has
received delivery of goods but cannot pay for the purchase until after the inventory is
sold.
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In most cases, the company's cash flow and working capital may be tied up in other
projects and business operations.
TRUST RERCEIPT AGREEMENT
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a trust agreement between a lender and a borrower by which the lender gives up
possession of goods without abandoning title and the borrower agrees to hold the goods
in trust for the lender and if the goods are sold to turn the proceeds over to the lender in
settlement of the debt.
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No. 119845, July 5, 1996, the Court said that a Trust Receipt is a commercial document
whereby the bank releases the goods in the possession of the entrustee but retains
ownership thereof while the entrustee shall sell the goods and apply the proceeds for
the full payment of his liability with the bank.
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Once the dealer sells a car and uses the funds to pay off the lender, the lender shifts title
to the dealer, who in turn transfers title to the buyer of the vehicle.
LETTER OF CREDIT
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A letter issued by a bank to another bank (typically in a different country) to serve as a
guarantee for payments made to a specified person under specified conditions.
A Letter of Credit is a contractual commitment by the foreign buyer's bank to pay once
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the exporter ships the goods and presents the required documentation to the exporter's
bank as proof. As a trade finance tool, Letters of Credit are designed to protect both
exporters and importers.
Letters of credit guarantee sellers that they will be paid for a large transaction.
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Banks and financial institutions typically take on the responsibility of ensuring that the

seller is paid.
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Such documents are commonly used in international or foreign exchange transactions.
Financial Markets (Midterms)
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Applicant: The applicant in an LC transaction is usually the buyer or importer of goods.
The applicant of the LC has to make the payment if documents, as per the conditions of
the LC, are delivered to the Bank.
Beneficiary: The beneficiary is the party to whom the LC is addressed, i.e., the seller or
exporter. The beneficiary would receive payment from the nominated bank against the
submission of documents as per the LC condition.
Issuing Bank: The issuing bank is the Banker to the importer or buyer, which lends its
guarantee or credit to the transaction. The issuing bank is liable for payment once the
documents are per the conditions of the LC received from the Negotiating Bank.
Negotiating Bank: The Negotiating Bank is the beneficiary’s bank. The beneficiary in
an LC transaction would be the seller or exporter. The negotiating bank would claim
payment from the issuing bank or the opening bank.
Stages of LC
1. Asking for issuance of LC by Issuing Bank.
2. Acceptance of LC by seller through Advising Bank.
3. Manufacturing & shipping of goods & documents
4. Seller sends original documents to Issuing Bank.
5. Checking of documents, payment collection & transfer of documents to buyer & payment
to seller via Advising Bank. 6. Goods clearance by buyer.
Secured and unsecured LC
SECURED - Applicant of LC gives some mortgage/personal guarantee to obtain LC
UNSECURED - No security. Bank issues this LC solely by looking at applicants history &
credit score.
Types of a Letter of Credit
1. Sight Credit / LC sight
Under this Letter of Credit, documents are payable at the sight/ upon presentation of the

correct documentation. For example, a businessman can present a bill of exchange to a
lender along with a sight letter of credit and take the necessary funds immediately. A
sight letter of credit is more immediate than other forms of letters of credit.
A sight letter of credit is a document that guarantees the payment against any services

or goods that are being delivered. The amount is payable when the party presents the
Sight LC along with other necessary documents.
2. Usance LC (Acceptance Credit/ Time Credit)
A usance letter of credit is a type of LC wherein the buyer is allowed to make the

payment after the delivery, within a stipulated grace period. Unlike with sight LCs, the
buyer doesn't have to make payment immediately to receive the documents.
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Usance LC (Acceptance Credit/ Time Credit)
Under acceptance credit, these usance bills are accepted upon presentation and
eventually honored on their respective due dates.
3. Revocable Letter of Credit
As the name suggests, the issuing bank can revoke a letter of credit without the

beneficiary’s agreement.
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A revocable letter of credit is a financial instrument that can be amended or cancelled
by the issuing bank without the approval and consent of the beneficiary or trading
parties. This LC does not provide any security and could be terminated at any time,
resulting in financial loss for the seller.
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Reasons for Revocation:
1.
Political Tension
2.
Deteriorated market condition
3.
Insufficient funds
4.
Risks of non-payment
5.
Negates the purpose of LC
6.
Extravagant insistence by seller
4. Irrevocable Letter of Credit
An irrevocable letter of credit (ILOC) is a guarantee for payment issued by a bank for
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goods and services purchased, which cannot be cancelled during some specified time
period. ILOCs are most commonly used to facilitate international trade.
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In that case, this is confirmed and certified by the exporter’s bank in a relevant Bank
Certificate of Export and Realization.
Payment of export proceeds will be considered to have been realized.
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For Status Holders, an irrevocable letter of credit will suffice.
5. Confirmed Letter of Credit
A confirmed LC is a type of letter of credit in which the advising bank, at the request of

the issuing bank, adds confirmation that payment will be made. The confirming bank’s
liability is similar to the issuing bank. The confirming bank has to honor the payment if
tendered by the beneficiary.
Confirming bank as a party of letter of credit confirms and guarantees to undertake the

responsibility of payment or negotiation acceptance under the credit. The bank adds its
confirmation to a credit upon the issuing bank's authorization or request.
Financial Markets (Midterms)
6. Back-to-Back Letter of Credit
In a back-to-back LC, a 2nd LC is opened by the original beneficiary in favor of the

2nd beneficiary against the security of the original LC. In general, a back-to-back LC is
open for the suppliers.
7. Transferable Letter of Credit
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If the beneficiary can transfer an LC in whole or part to a second beneficiary (usually a
supplier to the seller), then the LC is transferable. The 2nd beneficiary, however, cannot
transfer the LC further.
8. Restricted Letter of Credit

A restricted LC is one wherein it designates a specific bank to pay, accept or negotiate
the LC.
Revolving Letter of Credit


In a revolving LC, the applicant can use the LC facility again based on drawings and
payments made against the LCs.
9. A Standby Letter of Credit (SBLC / SLOC)

It is a guarantee that is made by a bank on behalf of a client, which ensures payment
will be made even if their client cannot fulfill the payment.
It is a payment of last resort from the bank, and ideally, is never meant to be used.

A standby letter of credit (SLOC) is a legal document that guarantees a bank's

commitment of payment to a seller in the event that the buyer–or the bank's client–
defaults on the agreement.
A standby letter of credit helps facilitate international trade between companies that

don't know each other and have different laws and regulations. Although the buyer is
certain to receive the goods and the seller certain to receive payment, a SLOC doesn't
guarantee the buyer will be happy with the goods.
In the worst-case scenario, if a company goes into bankruptcy or ceases operations, the

bank issuing the SLOC will fulfill its client's obligations.

For the business that is presented with a SLOC, the greatest advantage is the potential
ease of getting out of that worst-case scenario. If an agreement calls for payment within
30 days of delivery and the payment is not made, the seller can present the SLOC to the
buyer's bank for payment. Thus, the seller is guaranteed to be paid. Another advantage
for the seller is that the SBLC reduces the risk of the production order being changed or
canceled by the buyer.