Documentary credit is a financial arrangement used in international trade under which a bank, on behalf of the importer or buyer, undertakes to make payment to the exporter or seller, provided that the exporter submits the documents specified in the terms and conditions of the credit. It is also commonly known as a Letter of Credit (L/C). Documentary credit is one of the most important methods of payment in export-import transactions because it reduces the risk of non-payment for the exporter and provides assurance to the importer that payment will be made only when the required documents are presented in accordance with the credit. In an international transaction, the buyer and seller may be located in different countries and may not know each other personally. Therefore, there is a risk for both parties. The exporter may fear that the importer will not make payment after receiving the goods, while the importer may fear that the exporter will not ship the goods according to the contract. A documentary credit helps overcome these difficulties by introducing banks as intermediaries. The importer requests his bank, known as the issuing bank, to issue a letter of credit in favour of the exporter. The exporter then ships the goods and presents the required documents, such as the commercial invoice, bill of lading, insurance document, certificate of origin and packing list. If the documents comply with the terms of the credit, the bank makes payment or undertakes to make payment according to the agreed arrangement. A documentary credit is therefore a documentary rather than a physical transaction. Banks generally deal with documents and not with the actual goods. For example, if an Indian importer purchases machinery from a German exporter under a letter of credit, the bank will examine whether the documents presented by the German exporter comply with the conditions of the credit. The bank does not normally inspect the machinery itself. Different kinds of letters of credit are used in export-import procedures according to the needs and level of risk involved in a transaction. A revocable letter of credit is one that can be amended or cancelled by the issuing bank without prior notice to the beneficiary, subject to the applicable rules governing the credit. Such credits provide relatively less security to the exporter because the terms may be changed or the credit cancelled. For example, an Indian importer may ask his bank to issue a revocable credit for purchasing electronic components from a supplier in Japan. Before the exporter presents the required documents, the issuing bank may alter or cancel the credit according to its terms. In modern international banking practice, revocable credits are uncommon because exporters generally prefer stronger payment protection. An irrevocable letter of credit provides greater security because it cannot normally be cancelled or amended without the agreement of the relevant parties, particularly the beneficiary. Once the bank has issued an irrevocable credit, the exporter can rely on the undertaking of the bank, provided the exporter complies with the conditions of the credit. For example, an Indian textile importer may purchase machinery from a supplier in Italy under an irrevocable L/C. If the Italian exporter ships the machinery and submits all documents exactly as required, the bank is obliged to honour the credit