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A standby letter of credit is a contingent credit exposure for the issuing bank. Before an SBLC is issued, the bank generally underwrites the applicant, the underlying obligation, the beneficiary, the proposed wording and the source of reimbursement if the instrument is drawn.
This is why legitimate SBLC issuance is not simply a matter of paying an issuance fee. The bank must first be satisfied that the applicant has sufficient credit capacity, collateral or another acceptable reimbursement structure to support the contingent obligation.
Applicants new to standby instruments should first review our standby letter of credit guide. This page focuses specifically on the underwriting that takes place before issuance.
The bank is assessing whether it is prepared to place its own independent undertaking in favour of the beneficiary. If a complying demand is made under the standby, the issuer may have to honour regardless of whether it has already recovered the corresponding amount from the applicant.
The underwriting therefore centers on the applicant's ability to reimburse the bank, the quality of available security, the legitimacy of the underlying transaction and the legal and operational acceptability of the proposed SBLC.
The underwriting process usually begins with the commercial purpose of the standby. The bank needs to understand why the SBLC is required, who requires it, what obligation it supports and the maximum potential exposure.
The bank reviews the contract, financing agreement, supply agreement, lease, construction obligation, loan agreement or other transaction giving rise to the standby requirement.
The issuer determines whether the instrument is supporting a payment obligation, performance obligation, advance payment, bid requirement or another permitted commercial exposure.
The identity, jurisdiction and contractual relationship of the beneficiary are reviewed before the bank accepts the proposed obligation.
A USD 2 million twelve-month standby and a USD 100 million multi-year performance standby represent very different credit exposures and approval requirements.
The instrument type matters as well. Our comparison of financial and performance SBLCs explains how the supported obligation changes the commercial function of the standby.
An applicant cannot normally move directly from a draft SBLC request to issuance. The bank must first satisfy its onboarding and transaction-compliance requirements.
Depending on the institution, applicant and transaction, the required package may include:
Compliance approval and credit approval are separate questions. A commercially strong applicant may still face restrictions because of the beneficiary, transaction purpose, country, sanctions exposure or proposed instrument wording.
Once the transaction is understood, the bank evaluates the applicant as a credit risk. The question is straightforward: if the standby is drawn, how will the bank be reimbursed?
The credit team may examine leverage, liquidity, cash flow, profitability, existing debt, contingent liabilities, banking conduct, collateral coverage and the applicant's ability to absorb a drawing under the SBLC.
| Underwriting Area | What the Bank May Assess |
|---|---|
| Liquidity | Cash balances, operating liquidity, revolving facilities and ability to meet reimbursement obligations. |
| Leverage | Existing funded debt, guarantees, letters of credit and other contingent exposures. |
| Cash Flow | Historical and projected cash generation relative to the potential SBLC exposure. |
| Existing Facilities | Whether an approved guarantee or trade-finance line is already available for issuance. |
| Security | Cash, securities, receivables, real assets, guarantees or other collateral available to support the facility. |
| Underlying Exposure | Nature, amount, tenor and probability of a drawing under the supported obligation. |
An applicant does not necessarily need to deposit 100% cash for every standby letter of credit. Collateral requirements depend on the applicant's credit quality, banking relationship, approved facilities and the issuing bank's credit policy.
Common structures can include:
Strong corporate borrowers may issue the SBLC under an existing revolving, guarantee or trade-finance facility without separately cash-collateralizing each instrument.
The bank may require a percentage of the face amount to be blocked as cash while taking the remaining exposure under an approved credit line.
Where the bank is unwilling to take meaningful unsecured applicant risk, it may require cash cover equal or close to the maximum exposure.
Subject to bank policy, the facility may be supported by eligible securities, pledged assets, guarantees or other acceptable collateral, generally after applying the bank's valuation and haircut policies.
If a bank is requesting full cash cover, review options when a bank requires 100% SBLC cash collateral.
Companies with a viable transaction but a collateral shortfall may also review our discussion of how the cash collateral gap for an SBLC can be addressed.
The issuing bank's undertaking to the beneficiary is independent from the applicant's obligation to reimburse the bank.
As part of the facility documentation, the applicant will normally agree that amounts paid by the issuing bank under the standby become reimbursable by the applicant, together with applicable costs, fees and other amounts contemplated by the bank documentation.
This is why the applicant's reimbursement and indemnity obligations matter to underwriting. The bank needs a contractual right of recovery against the applicant even though the beneficiary's rights arise under the separate SBLC.
Do not confuse applicant indemnity with a counter-indemnity. The applicant's reimbursement obligation is part of its relationship with the issuing bank. A counter-standby or bank-to-bank counter-indemnity involves a different structure, typically because another bank is being asked to issue the final undertaking.
Not every SBLC requires a counter-indemnity.
A counter structure typically arises where the beneficiary requires an undertaking from a specific local bank, domestic institution or acceptable correspondent rather than directly from the applicant's relationship bank.
In that case, the structure can operate as follows:
Applicant → Applicant's Bank → Local / Correspondent Bank → Ultimate Beneficiary
The applicant supports its bank through the agreed reimbursement and security package. The first bank supports the second bank through the counter undertaking. The second bank then issues the final beneficiary-facing standby or guarantee.
Counter structures are particularly relevant where local-law requirements, public-sector procurement rules, beneficiary policy or bank acceptability requirements dictate that the instrument must come from a particular jurisdiction or institution.
For a deeper treatment, see our article on how counter-indemnities work in SBLC collateral structures.
| Feature | Applicant Reimbursement / Indemnity | Counter-Standby / Counter-Indemnity |
|---|---|---|
| Parties | Applicant and its issuing bank. | Normally one bank and another bank. |
| Purpose | Requires the applicant to reimburse the issuer for amounts payable under the SBLC. | Supports issuance of a separate undertaking by another institution. |
| Used in every SBLC? | A reimbursement relationship normally exists between applicant and issuer. | No. It applies only where the transaction requires the additional bank-to-bank structure. |
| Beneficiary facing? | No. It generally governs the applicant-bank relationship. | The counter undertaking normally supports the bank that issues the beneficiary-facing instrument. |
Credit approval alone does not mean the bank will accept any wording proposed by the beneficiary.
The bank's trade-finance and legal teams may review:
ISP98 is specifically designed for standby practice and recognizes financial, performance, direct-pay and counter standbys. Our SBLC wording guide covering ISP98, UCP 600 and URDG 758 explains the main rule-set considerations.
Once the credit structure, collateral, compliance position and proposed wording have been reviewed, the transaction moves through the bank's applicable approval process.
Depending on size and risk, approval may sit with a relationship manager and delegated credit officer or require escalation to more senior credit committees.
Approval may include conditions such as:
Approval is normally conditional until the conditions precedent are satisfied. A discussion with a banker, indicative pricing or even an internally supported transaction should not be confused with an issued standby.
Once all issuance conditions have been satisfied, the bank can prepare and release the operative standby.
Where the SBLC is transmitted bank-to-bank through SWIFT, the operative instrument is commonly sent using an MT760.
The beneficiary's bank may then authenticate and advise the standby according to the agreed banking route.
Our MT760 SBLC format and requirements guide covers the message in more detail, while our SBLC process from application to MT760 covers the broader execution sequence.
Not automatically. An MT799 is a free-format authenticated SWIFT message and is not itself a substitute for credit approval, collateral, an executed reimbursement facility or the operative standby.
Whether any preliminary bank-to-bank communication is used depends on the transaction and the institutions involved. See our MT799 vs MT760 comparison.
Applications frequently fail before issuance because the applicant focuses on finding an "SBLC provider" while ignoring the credit process.
The applicant lacks an approved facility, cash cover or sufficient balance-sheet strength for the requested exposure.
Proposed collateral is illiquid, difficult to perfect, heavily encumbered or subject to unacceptable valuation haircuts.
The commercial purpose, beneficiary, jurisdiction or underlying agreement falls outside bank policy or risk appetite.
The beneficiary insists on language that creates legal, sanctions, operational or drawing risk the proposed issuer will not accept.
Ownership, corporate authority, source of funds or other compliance information cannot be satisfactorily established.
The applicant expects bank credit without providing the balance-sheet support, collateral or commercial economics necessary to obtain it.
| Item | Why It Matters |
|---|---|
| Underlying Contract | Establishes the commercial obligation the SBLC is intended to support. |
| Required SBLC Wording | Allows the bank to assess drawing conditions, expiry, governing rules and legal acceptability. |
| Financial Statements | Supports credit analysis of the applicant. |
| Existing Bank Facilities | Shows whether contingent credit capacity already exists. |
| Collateral Schedule | Allows the bank to determine whether the proposed security is acceptable and sufficient. |
| Beneficiary Details | Required for transaction, sanctions and compliance review. |
| Requested Amount and Tenor | Defines the maximum contingent exposure the bank is being asked to approve. |
| Corporate KYC | Needed before the applicant can complete onboarding and transaction approval. |
Financely provides paid advisory services for companies seeking to structure standby letter of credit facilities for legitimate commercial, trade, project and corporate obligations.
Our work can include applicant credit assessment, transaction structuring, collateral analysis, counter-indemnity structuring, proposed SBLC wording review, bank mapping and distribution, and coordination of the underwriting process with relevant financial institutions.
Financely is an advisory firm and does not itself issue bank instruments. Final credit approval, pricing, collateral requirements and issuance remain solely with the relevant financial institution.
Businesses requiring execution support can review our standby letter of credit advisory and bank introduction services.
If you have a live commercial requirement for a standby letter of credit, submit the applicant, amount, tenor, beneficiary requirement, underlying obligation and available collateral. We will determine the advisory scope required before engagement.
Request an Advisory QuoteYes. An SBLC creates contingent exposure for the issuer, so banks generally review the applicant's credit quality, transaction, collateral or facility availability, compliance position and proposed instrument terms before issuance.
No. Cash cover depends on the applicant's credit profile and the issuing bank's facility structure. Strong borrowers may use approved credit facilities, while other applicants may be required to provide partial or full cash cover or another acceptable form of security.
It governs the applicant's obligation to reimburse the issuing bank for amounts the bank becomes obligated to pay under the standby, together with other amounts covered by the facility documentation.
A counter-standby is an independent undertaking used to support the issuance of another separate standby or guarantee by another institution. It is commonly used when the ultimate beneficiary requires an instrument from a local or specifically acceptable bank.
No. A counter structure is generally relevant only where another bank must issue the beneficiary-facing undertaking. A direct SBLC issued by the applicant's bank does not inherently require a second bank counter-standby.
A bank may issue under an approved unsecured or partially secured credit facility for a sufficiently creditworthy applicant. That does not mean the SBLC has avoided underwriting; it means the bank has accepted the applicant's credit risk under its approved facility.
Requirements vary by institution, but commonly include corporate KYC documents, financial statements, authorized-signatory evidence, the underlying agreement, proposed SBLC wording, beneficiary information and documents supporting the proposed credit or collateral structure.
Remaining conditions precedent must be completed, facility and security documentation finalized, fees settled and final wording approved. The issuing bank can then release the operative instrument through the agreed delivery method, commonly including SWIFT MT760 for bank-to-bank transmission.
No. An adviser can structure the transaction, prepare the applicant for underwriting, identify suitable institutions and manage execution, but final approval remains with the issuing bank.
Disclaimer: This page is for general informational purposes and does not constitute legal, banking or financial advice. Underwriting criteria, collateral requirements, instrument wording and credit approval vary by institution, jurisdiction and transaction. Financely provides paid advisory services and is not a bank or the issuer of standby letters of credit.
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