Standby letters of credit (SBLCs) originated in the U.S., where old banking legislation forbade commercial banks to issue contingent liabilities in the form of guarantees (bonds) from the late 1930s onward. Documentary credits were therefore used for this purpose. Subject to the Uniform Customs and Practice for Documentary Credits (UCP), they were then modified into standby letters of credit. Standby letters of credit are guarantee- like instruments to secure a claim and may, in principle, apply anywhere that a guarantee would be used. For example, they may be used to guarantee the following types of performance and payment:
- payment of term bills of exchange
- repayment of bank loans and advance payments
- payment for goods delivered
- Contract fulfillment of all types, etc.
Like guarantees, standby letters of credit are payable on demand and no defense against the claim is permitted. As such, they constitute abstract commitments that are independent of the underlying transaction. To trigger payment, the documents stipulated in the wording of the standby letter of credit must be submitted in accordance with the applicable regulations.
Alongside UCP, ISP98 (International Standby Practices) has been in force since January 1, 1999. This set of rules was developed and approved specifically for standby letters of credit by the International Chamber of Commerce (ICC). In practice, use of ISP98 is now becoming increasingly widespread.