What is ‘margin amount’ while opening Letter of Credit.
As I have explained to you, bank is guaranteeing the payment. In turn, what guarantee are you providing to bank against the amount of LC? So a margin amount is blocked in your bank account to make the payment under the said letter of credit. Certainly you may ask, what would be the ‘margin’, bank blocks. This amount is determined, purely based on your financial relationship with your bank.
Let us discuss about your creditworthiness with your bank while keeping ‘margin amount to open LC’. If you are a new account holder for your bank and bank does not know your other financial status, you cannot expect any financial support from your Bank. You need to keep 100% margin amount with your bank. If the LC amount is for USD 10000, your amount of USD 10000 is blocked from your account to pay LC amount to your overseas seller on maturity date. You may have a good relationship with your banker for the past many years, and your banker knows your fixed assets, your fixed investments with bank, other financial transactions and are happy with the credit worthiness, bank decides the amount of margin to be collected from you to open the Letter of Credit. It can be from 1% to 100%, as explained. I hope, you came to know the basic procedures to open Letter of credit.
