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Know eleven types of Letters of Credits (LCs) used in trade transactions

Know eleven types of Letters of Credits (LCs) used in trade transactions


(This post explains the meaning  of different LCs viz.Standby LC, Green Clause LC, Red clause LC, Without Recourse LC, back to back LC,Revolving credit LC, Irrevocable Letter of Credit confirmed by advising bank, Irrevocable Credit not confirmed by advising bank, Irrevocable Credit, Revocable Credit)

  1. Revocable credit: Credit may be either revocable or irrevocable. Revocable credits may be amended or cancelled by issuing bank at any moment and without prior notice to the beneficiary. In the absence of specific indication, the credit will be deemed to be irrevocable. Because it offers little security to the seller, revocable credit is normally not used. 
  2. Irrevocable Credit: An irrevocable credit constitutes a definite undertaking of the issuing bank, provided that the stipulated documents are presented to the nominated bank or to Issuing Bank and that the terms and conditions of the credit are complied with. Irrevocable LC once opened can not be revoked without the consent of all the parties.
  3. Irrevocable Credit not confirmed by advising bank: A credit may be advised to the beneficiary without commitment on the part of advising bank. A bank merely advising a credit to the beneficiary undertakes no obligation to pay, accept or negotiate the bills/drafts drawn thereunder. However advising bank should take reasonable care to check the apparent authenticity of the credit if it elects to advise the credit. 
  4. Irrevocable Credit confirmed by advising bank: The advising bank enters into the commitment to pay, by confirming the credit, regardless of whether or not the issuing bank is in a position to reimburse it. Hence it is a double guarantee of payment to the beneficiary.
  5. Revolving Credit:: In fixed L.C, which remains valid for a specified period, once the credit is fully utilized, a fresh letter of credit to be issued for further drawings. In revolving LC the issuing bank restores the credit to the original amount after it has been utilized, so that there is no need for a fresh LC. The number of utilizations and period of utilizations are specified in revolving letter of credit. Revolving letter of credit is required when the dealings between the importer and the exporters are on continuing or repeat orders basis (multiple delivery contracts).
  6. Transferable Credit::  In a transferable letter of Credit, the first beneficiary may instruct the advising/negotiating bank to make it available to a third party (the second beneficiary). The transferable letter of credit is issued when the first beneficiary is a middleman and not the actual supplier of goods. However, the second beneficiary cannot transfer it further, except to the first beneficiary.  A credit can be transferred only if it is expressly designated as “transferable” by the issuing bank to transfer the credit fully or in part to another beneficiary.
  7. Back-to-back credit:: A back to back the letter of credits refers to the issuance of an outward letter of credit issued by a bank against the backing of the inward letter of credit issued by another bank in favour of intermediary . The intermediary is the middleman or broker. The intermediary is the beneficiary of first credit, who seeks to open a second credit in favour of the actual producer of goods on the strength of first credit. The second credit is separate and distinct from the first. Thus the beneficiary of the original letter of credit (intermediary) becomes the applicant for the back to back  the letter of credit.
  8. Without Recourse letter of Credit: Under ‘without recourse’ letter of credit, the drawer (exporter) is discharged from all liabilities after the bill is negotiated.
  9. Red Clause letter of credit : A ‘Red clause LC’  is a  specific clause printed in an  LC,  whereby the exporter will be permitted to draw a portion or whole of the LC amount from his bank or correspondent bank even before negotiation of the documents. Thus the ‘Red clause LC’ enables the exporter to get pre-shipment finance to be exported under said LC. Since the above clause is usually printed in red ink, such a credit is called red clause letter of credit. Banks in India do not issue such LC.
  10. Green Clause LC: Under Green Clause LC, in addition to the credit facilities available in terms of ‘Red clause LC’ the exporter also gets finance for warehousing and insurance charges at the port where the goods are stored pending availability of ship.
  11. Standby LC: A Standby LC is a form of irrevocable guarantee for   a payment. Since American Banks are prevented from giving the  guarantee in that country, the concept of ‘Standby LC’ came into existence.(To know more about Standby LC  (Click Standby LC)

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