Classification of Letters of Credit
From Supply Chain Management Encyclopedia
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* In the case of a letter of credit with deferred payment, the payment to the seller is not made when the documents are submitted, but instead at a later time defined in the letter of credit. | * In the case of a letter of credit with deferred payment, the payment to the seller is not made when the documents are submitted, but instead at a later time defined in the letter of credit. | ||
- | * In the Far East, this kind of documentary credit is also known as a "usance L/C." | + | * In the Far East, this kind of documentary credit is also known as a "usance L/C."<ref> A usance letter of credit is a financial instrument that sets the terms and conditions for the payment of a debt at a specific date in the future. Typically, the terms and conditions found within the letter of credit will cover details such as the mode of payment used to settle the debt, the total amount owed at the time of settlement, and the name of the beneficiary. It is not unusual for the letter of credit to be accompanied by supporting documents, such as an invoice for the total amount due for payment, and even a time draft that can be processed on the agreed-upon date. |
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+ | While a usance letter of credit may carry a due date of any duration agreeable to the parties concerned, documents of this type usually include a date that is no more than six months from the date that the letter of credit is issued. This makes the letter of credit a useful financial tool for meeting short-term needs, allowing the recipient of the letter to obtain the credit needed to finance a specific project and hopefully generate enough return from that project to settle the total amount due within the time frame allotted. As with most types of debt instruments, usance letters can be settled in advance if the recipient is able to do so, often with no types of penalties involved. - http://www.wisegeek.com/what-is-a-usance-letter-of-credit.htm</ref> | ||
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|'''Acceptance''' | |'''Acceptance''' |
Revision as of 22:28, 25 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[2]. 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)[3] two-dimensional (forms[4] and types[5]) 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 |
|
Standby L/C |
|
Revolving L/C |
|
Red Clause L/C |
|
Green Clause L/C |
|
References
- ↑ http://chestofbooks.com/finance/banking/Banking-And-Business/V-Classification-Of-Letters-Of-Credit.html#.U7wqDZR_t8E#ixzz36to1G8xb
- ↑ Notifying Bank - A bank in a foreign country to which another bank in the domestic country sends a letter of credit on behalf of a client. The notifying bank honors the letter of credit and transfers requested funds to the client. A notifying bank is also called an advising bank. - http://financial-dictionary.thefreedictionary.com/Notifying+Bank
- ↑ 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
- ↑ A collection of risks associated with investing in a foreign country. These risks include political risk, exchange rate risk, economic risk, sovereign risk and transfer risk, which is the risk of capital being locked up or frozen by government action. Country risk varies from one country to the next. Some countries have high enough risk to discourage much foreign investment. - http://www.investopedia.com/terms/c/countryrisk.asp
- ↑ A usance letter of credit is a financial instrument that sets the terms and conditions for the payment of a debt at a specific date in the future. Typically, the terms and conditions found within the letter of credit will cover details such as the mode of payment used to settle the debt, the total amount owed at the time of settlement, and the name of the beneficiary. It is not unusual for the letter of credit to be accompanied by supporting documents, such as an invoice for the total amount due for payment, and even a time draft that can be processed on the agreed-upon date. While a usance letter of credit may carry a due date of any duration agreeable to the parties concerned, documents of this type usually include a date that is no more than six months from the date that the letter of credit is issued. This makes the letter of credit a useful financial tool for meeting short-term needs, allowing the recipient of the letter to obtain the credit needed to finance a specific project and hopefully generate enough return from that project to settle the total amount due within the time frame allotted. As with most types of debt instruments, usance letters can be settled in advance if the recipient is able to do so, often with no types of penalties involved. - http://www.wisegeek.com/what-is-a-usance-letter-of-credit.htm