Standby Letter of Credit (SBLC)
Looks like a letter of credit, works like a guarantee: drawn only when the applicant defaults.
A standby letter of credit looks like a letter of credit and works like a guarantee. The issuing bank undertakes to pay the beneficiary on presentation of the documents the standby calls for, usually a demand and a statement that the applicant has defaulted. If the applicant performs, the standby is never drawn.
That is the reverse of a commercial LC, which is the expected way of paying for goods. A standby is the backup: it pays only when the primary arrangement fails. The form grew up in the United States, where banks historically lacked the power to issue certain guarantees but could always issue letters of credit.
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Standby vs Commercial Letter of Credit
Purpose
Commercial LC
Primary payment for a trade
Standby LC
Secondary payment if the applicant defaults
Expected to be drawn?
Commercial LC
Yes, every shipment
Standby LC
Usually never
Typical documents
Commercial LC
Invoice, transport and insurance documents
Standby LC
Demand or draft plus a beneficiary's statement of default
Typical life
Commercial LC
Months, tied to a shipment
Standby LC
Often a year or more
Rules
Commercial LC
UCP 600
Standby LC
ISP98, or UCP 600 to the extent applicable
| Commercial LC | Standby LC | |
|---|---|---|
| Purpose | Primary payment for a trade | Secondary payment if the applicant defaults |
| Expected to be drawn? | Yes, every shipment | Usually never |
| Typical documents | Invoice, transport and insurance documents | Demand or draft plus a beneficiary's statement of default |
| Typical life | Months, tied to a shipment | Often a year or more |
| Rules | UCP 600 | ISP98, or UCP 600 to the extent applicable |
Which Rules Govern a Standby
UCP 600 Article 1 says the UCP apply to standby letters of credit to the extent they are applicable. Many UCP articles, on transport and insurance documents for example, have nothing to say about a default claim, which is why a separate rule set exists.
ISP98, the International Standby Practices, was written for standbys, became effective on 1 January 1999 and is endorsed by ICC as Publication No. 590. URDG 758 is the rule set for demand guarantees. ICC's own guidance is that an undertaking which incorporates URDG 758 is treated as a demand guarantee, not a standby. So for a standby, the choice is ISP98 or UCP 600, and whichever the standby names governs.
ISP98 Rules Worth Knowing
- Nature (Rule 1.06)
- A standby is an irrevocable, independent, documentary and binding undertaking when issued.
- Scope (Rule 1.01)
- Performance, financial and direct pay standbys are all covered.
- Implied demand (Rule 4.08)
- If the standby lists no documents, a documentary demand for payment is still required.
- Partial and multiple drawings (Rules 3.07, 3.08)
- A presentation may be for less than the full amount, and a non-complying presentation does not stop another timely one.
- Notice of dishonour (Rule 5.01)
- Notice within three business days is not unreasonable; beyond seven business days it is unreasonable.
- Closure on the last day (Rule 3.14)
- If the place for presentation is closed on the last business day, the deadline extends to 30 calendar days after it reopens.
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The FEMA Side for an Indian Bank
When an AD bank issues a standby on behalf of a resident in favour of a non-resident, the question of whether it may do so sits under FEMA, not ISP98. The Foreign Exchange Management (Guarantees) Regulations, 2026 define a guarantee as a contract "by whatever name called" to discharge a liability on the principal debtor's default, so a standby is checked against them in the same way as a bank guarantee.
How CCFE Tests This
- check_circle"An SBLC is drawn when..." the applicant defaults. The trap option describes a commercial LC drawn against shipment.
- check_circle"Which rules are written specifically for standbys?" ISP98. UCP 600 also applies if named, but only to the extent applicable.
- check_circleISP98 day counts: three and seven business days for notice of dishonour. Do not mix them with UCP 600's five banking days.
- check_circleQuestions on the documents: a standby usually needs only a demand and a statement of default, not shipping documents.
FAQs
What is a standby letter of credit?expand_more
A bank's independent, documentary undertaking to pay the beneficiary if the applicant fails to perform or pay. It functions as a guarantee in the form of a letter of credit.
What is the difference between an SBLC and an LC?expand_more
A commercial LC is the primary way a trade gets paid and is drawn on every shipment. An SBLC is a backup drawn only on default, usually against a simple demand and default statement.
Which rules apply to a standby letter of credit?expand_more
Whatever the standby states: ISP98 (ICC Publication 590), or UCP 600 to the extent applicable. An undertaking issued subject to URDG 758 is treated as a demand guarantee instead.
What is ISP98?expand_more
The International Standby Practices, a rule set written specifically for standby letters of credit, effective from 1 January 1999 and endorsed by ICC as Publication No. 590.
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