Classification of Letters of Credit
From Supply Chain Management Encyclopedia
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|Transferable letters of credit are particularly well adapted to the requirements of international trade. They allow an intermediary to transfer a letter of credit to a supplier, thus enabling the intermediary to reduce the extent to which it uses its own funds to process business transactions. | |Transferable letters of credit are particularly well adapted to the requirements of international trade. They allow an intermediary to transfer a letter of credit to a supplier, thus enabling the intermediary to reduce the extent to which it uses its own funds to process business transactions. | ||
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- | | | + | |'''Standby L/C''' |
- | | | + | |Standby letters of credit are similar to guarantees. Due to their documentary nature, they fall under the UCP (Uniform Customs and Practice for Documentary Credits). Standby letters of credit can also be issued under ISP98 (International Standby Practices). |
+ | If the guaranteed service/payment is not provided, the seller can invoke the bank's obligation to pay by submitting, together with any other documents that the letter of credit might require, a declaration stating that the letter of credit customer has failed to meet his obligations/payment | ||
|- | |- | ||
- | | | + | |'''Revolving L/C''' |
- | | | + | |If the buyer requests partial deliveries of the ordered goods at specific intervals (contract for delivery by installments), payment can be made under the terms of a revolving letter of credit that covers the value of each consecutive installment. The bank is normally liable for the total value of all agreed partial deliveries. |
+ | However, the second partial payment is not effective until the first installment has been paid, and so forth. | ||
|- | |- | ||
- | | | + | |'''Red Clause L/C''' |
- | | | + | |In the case of a red clause credit (letter of credit with advance payment), the seller can request an advance for an agreed amount (defined in the terms and conditions of the letter of credit) from the correspondent bank. This advance is basically intended to finance the manufacture or purchase of the goods to be delivered under the letter of credit. The advance is normally paid against receipt and a written undertaking from the seller to subsequently deliver the transportation documents before the credit expires. |
|- | |- | ||
- | | | + | |'''Green Clause L/C''' |
- | | | + | |Unlike the red clause letter of credit, in the case of a green clause letter of credit, the advance is normally paid not only against receipt and a written undertaking from the seller to subsequently deliver the transportation documents before the credit expires, but also against receipt of an additional document providing proof that the goods to be shipped have been warehoused. |
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Revision as of 00:16, 9 July 2014
Russian: Классификация аккредитивов
There is a multitude of forms/types of Letters of Credit. Letters of credit may be classified[1], according to whether the issuing bank may or may not rescind its obligation to the beneficiary. When a bank agrees to honor the drafts of the exporter within a certain period of time the instrument is called an irrevocable letter of credit, while a revocable credit may be canceled at any time by the bank. Letters of credit are frequently transmitted to the beneficiary not directly by the issuing bank, but indirectly through a second notifying bank. If the latter institution adds its guaranty to the obligation of the former, the letter of credit is then said to be confirmed, otherwise it is considered unconfirmed. Banks may therefore give beneficiaries the following kinds of credits: (1) irrevocable by issuer and confirmed by notifier, (2) irrevocable by issuer and unconfirmed by notifier, (3) revocable by issuer and unconfirmed by notifier. A revocable confirmed letter of credit is of course impossible in actual practice, for a notifying bank would under no condition add its confirmation to an instrument which could be nullified by the issuer at will. Letters of credit may also be grouped according to the currency in which they are issued. Before the war the letter of credit drawn in sterling was the standard instrument of international commerce, but in recent years the dollar credit has been growing in favor, not alone among American merchants, but also with foreign firms.
Therefore, there could be different classification criteria. However, we consider as the most reasonable and closest to sense and scope of the ICC Uniform Customs and Practice for Documentary Credits (UCP 600)[2] two-dimensional (forms[3] and types[4]) classification system coined by Credit Suisse.The various forms of letters of credit are distinguished by the agreed level of security and the point in time at which risk is assumed.Letters of credit are distinguished by their different types of use.
Forms and Types of Letters of Credit
FORMS of L/C | DESCRIPTION |
Unconfirmed |
|
Confirmed |
|
Revocable |
|
Irrevocable |
|
TYPES of L/C | DESCRIPTION |
Sight |
|
Deferred Payment |
|
Acceptance |
|
Negotiable Credit |
|
PARTICULAR TYPES of L/C | DESCRIPTION |
Transferable L/C | Transferable letters of credit are particularly well adapted to the requirements of international trade. They allow an intermediary to transfer a letter of credit to a supplier, thus enabling the intermediary to reduce the extent to which it uses its own funds to process business transactions. |
Standby L/C | Standby letters of credit are similar to guarantees. Due to their documentary nature, they fall under the UCP (Uniform Customs and Practice for Documentary Credits). Standby letters of credit can also be issued under ISP98 (International Standby Practices).
If the guaranteed service/payment is not provided, the seller can invoke the bank's obligation to pay by submitting, together with any other documents that the letter of credit might require, a declaration stating that the letter of credit customer has failed to meet his obligations/payment |
Revolving L/C | If the buyer requests partial deliveries of the ordered goods at specific intervals (contract for delivery by installments), payment can be made under the terms of a revolving letter of credit that covers the value of each consecutive installment. The bank is normally liable for the total value of all agreed partial deliveries.
However, the second partial payment is not effective until the first installment has been paid, and so forth. |
Red Clause L/C | In the case of a red clause credit (letter of credit with advance payment), the seller can request an advance for an agreed amount (defined in the terms and conditions of the letter of credit) from the correspondent bank. This advance is basically intended to finance the manufacture or purchase of the goods to be delivered under the letter of credit. The advance is normally paid against receipt and a written undertaking from the seller to subsequently deliver the transportation documents before the credit expires. |
Green Clause L/C | Unlike the red clause letter of credit, in the case of a green clause letter of credit, the advance is normally paid not only against receipt and a written undertaking from the seller to subsequently deliver the transportation documents before the credit expires, but also against receipt of an additional document providing proof that the goods to be shipped have been warehoused. |
References
- ↑ http://chestofbooks.com/finance/banking/Banking-And-Business/V-Classification-Of-Letters-Of-Credit.html#.U7wqDZR_t8E#ixzz36to1G8xb
- ↑ ICC Uniform Customs and Practice for Documentary Credits (UCP 600) - http://shippingandfreightresource.com/wp-content/uploads/2013/05/ucp-600.pdf
- ↑ Forms of Letters of Credit - https://www.credit-suisse.com/ch/en/unternehmen/kmugrossunternehmen/import_export/newindex/akkreditiv/akk_formen.html
- ↑ Types of Letters of Credit - https://www.credit-suisse.com/ch/en/unternehmen/kmugrossunternehmen/import_export/newindex/akkreditiv/akk_arten.html