Classification of Letters of Credit

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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.


Forms and Types of Letters of Credit

FORMS of L/C DESCRIPTION
Unconfirmed
  • In the case of an unconfirmed letter of credit, the correspondent bank merely notifies the seller that a letter of credit has been opened. In this case, it makes no promise to pay and is therefore not required to honor documents presented by the seller. As a result, the seller may rely exclusively on the issuing bank (letter of credit bank) and therefore bears the collection risk of the issuing bank and the country risk – according to their domicile – as well as the transfer risk.
Confirmed
  • If the correspondent bank confirms the letter credit (on behalf of the issuing bank), then it is committing itself towards the seller to honor documents that are in compliance with the documentary credit terms and presented on time. In this case, the seller receives not only an obligation by the issuing bank but also a legally equivalent and independent promise of payment on the part of the correspondent bank. The seller then bears the collection risk of the confirming bank and, if this bank is not domiciled in his country, the corresponding country risk – according to its domicile – as well as the transfer risk.
Revocable
  • All letters of credit subject to the current "Uniform Customs and Practice for Documentary Credits" (UCP 600), which is effectively the norm nowadays, are regarded as irrevocable. It is possible in theory to open a revocable letter of credit, but this is no longer done in practice for various reasons (difficult wording/insufficient security [revocation]).
Irrevocable
  • An irrevocable letter of credit is a firm commitment by the issuing bank to make payment if the documentary credit conditions are fulfilled. It may not be amended or canceled without the consent of the seller and all obligated banks.
  • If the seller wishes to amend or cancel individual conditions of the letter of credit, then he must ask the buyer to issue an instruction to the issuing bank in this respect.
TYPES of L/C DESCRIPTION
Ячейка 1*2 Ячейка 2*2
Ячейка 1*3 Ячейка 2*3
Ячейка 1*2 Ячейка 2*2
Ячейка 1*3 Ячейка 2*3
Ячейка 1*3 Ячейка 2*3
Ячейка 1*2 Ячейка 2*2
Ячейка 1*3 Ячейка 2*3
Ячейка 1*2 Ячейка 2*2
Ячейка 1*3 Ячейка 2*3

References

  1. http://chestofbooks.com/finance/banking/Banking-And-Business/V-Classification-Of-Letters-Of-Credit.html#.U7wqDZR_t8E#ixzz36to1G8xb
  2. ICC Uniform Customs and Practice for Documentary Credits (UCP 600) - http://shippingandfreightresource.com/wp-content/uploads/2013/05/ucp-600.pdf
  3. Forms of Letters of Credit - https://www.credit-suisse.com/ch/en/unternehmen/kmugrossunternehmen/import_export/newindex/akkreditiv/akk_formen.html
  4. Types of Letters of Credit - https://www.credit-suisse.com/ch/en/unternehmen/kmugrossunternehmen/import_export/newindex/akkreditiv/akk_arten.html
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