Standby Letter of Credit (SBLC) acts almost like a substitute for guarantee. SBLC is a guarantee to make payment in case of non-performance, which is issued by a bank on behalf of a client. Unlike Letter of Credit under which are primary method of payment, SBLCs are used as secondary method of payment i.e., SBLC is utilized in case primary payment method does not work. To simplify, an Importer open a letter of credit to its supplier to make payment for the goods it bought and when the exporter present certain set of documents he gets payment from the LC issuing bank, however in case of SBLC, importer will make the payment to supplier after the supplier has performed its obligation and in case importer fails to make payment, supplier will resort to SBLC and demand payment from the SBLC issuing bank.
SBLC is issued under International Standbys Practices (ISP) 98. SBLC can be canceled as soon as the terms of the contract have been met by the purchaser or borrower
In India, rules in this respect are formulated by FEDAI (Foreign Exchange Dealers Association of India).
Authorized Dealer (Banks) issue SBLC on selective basis, to special category importers (like Star Trading Houses, Export Houses, 100% EOUs, importers of crude oil, power producers, PSUs and reputed public limited companies). Apart from this, credit reports on overseas suppliers are obtained by Banks before issuing SBLC.