The use of LCs and SLCs may result in an FI having a higher concentration ratio than desired for a particular industry.

Question

Quizplus · Accepted Answer

LCs (Letters of Credit) and SLCs (Standby Letters of Credit) are often used in international trade transactions to mitigate the risk of non-payment by the buyer. However, the use of these instruments may result in an FI (Financial Institution) having a higher concentration ratio than desired for a particular industry because LCs and SLCs are considered as off-balance sheet contingent liabilities, which are not reflected in the balance sheet. This may potentially increase the risk profile of the FI and could affect their liquidity and capital adequacy.

The Use of LCs and SLCs May Result in an FI