Your post confuses me somehow on the "letter of credit" part. I represent a specialized Trade Finance Company. In our line of work, we deal a lot with Letter of Credit (L/C) as we use it as our financing tools to our clients. But your explaination of L/C doesn`t sound like the one we are dealing with everyday.
In general, L/C is a commercial payment tool to ensure vendor gets paid after goods is shipped. It normal accompanies with a transaction/purchase.
In your post, it looks like your banker wants a Stand by LC which in fact it is a not commercial L/C. It is rather a cash payment guarantee. In the case of default term happens, the LC payment is automatically activated and the issuing bank of such stand-by LC has the obligation to pay. In turn, whoever provides you this stand-by LC will have to deposit 100% cash in issuing bank in case need to honor such obligation.
If your banker is lending against such stand-by LC, it is NOT realy lending. It is the one providing such LC who is lending here. Then why dont this guy lend to you directly as it actually trusts you so much?
Well, this post is more than half year old. I guess you have probably figured that out already. Hope it still helps, somebody.