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Many thanks for your overwhelming response on last
week's article - Security in Letter of Credit (L/c) payment. As
many of you have requested, we take a closer look at some key terminology
and their implication this week:
Irrevocable Letter of Credit
An irrevocable letter of credit cannot be amended
or cancelled without the consent of the issuing bank, the confirming
bank (if any), and the beneficiary. The payment is guaranteed by
the bank if the credit terms and conditions are fully met by the
beneficiary. The words "irrevocable documentary credit" or "irrevocable
credit" may be indicated in the L/c.
Irrevocable and Without Recourse Letter of
Credit
The irrevocable letter of credit received from an
advising bank may be indicated as "irrevocable and without recourse
documentary credit". The words "without recourse" mean that the
advising bank will not be able to recover the money paid to the
beneficiary in case the issuing bank does not pay the advising bank.
Revocable Letter of Credit
A revocable letter of credit can be amended or cancelled
by the issuing bank at any time without the consent of the beneficiary,
often at the request and on the instructions of the applicant (buyer).
There is no security of payment in a revocable letter of credit.
The words "this credit is subject to cancellation without notice",
"revocable documentary credit" or "revocable credit" usually are
indicated in the L/c. Obviously, this type of L/c is highly risky
from the beneficiary point of view.
Confirmed Irrevocable Letter of Credit
An irrevocable letter of credit opened by an issuing
bank whose authenticity has been confirmed by an advising bank (usually
a prime world bank) and where the advising bank has added its confirmation
to the credit is known as confirmed irrevocable letter of credit.
The words "we confirm the credit and hereby undertake ..." or "we
add our confirmation to this credit and hereby undertake ..." normally
are included in the L/c. An exporter whose method of payment is
a confirmed irrevocable L/c is assured of payment even if the importer
or the issuing bank defaults. The confirmed irrevocable L/c is particularly
important from buyers in a country which is economically or politically
unstable. In a confirmed letter of credit, the exporter or the importer
pays an extra charge called the confirmation fee, which may vary
from bank to bank within a country. The fee usually is added to
the exporter's account. The exporter may indicate in the sales contract
that the confirmation fee and other charges outside the seller's
country are on the buyer's account.
Unconfirmed Irrevocable Letter of Credit
An irrevocable letter of credit opened by an issuing
bank but not confirmed by an advising bank (usually a prime world
bank) is known as an unconfirmed irrevocable letter of credit. The
promise to pay comes from the issuing bank only, unlike in a confirmed
irrevocable L/c where both the issuing bank and the advising bank
promise to pay the beneficiary.
Restricted Negotiable Letter of Credit
In a restricted negotiable letter of credit, the
authorization from the issuing bank to pay the beneficiary is restricted
to a specific nominated bank.
Freely Negotiable Letter of Credit
In a freely negotiable letter of credit, the authorization
from the issuing bank to pay the beneficiary is not restricted to
a specific bank, any bank can be a nominated bank as long as the
bank is willing to pay, to accept draft(s), to incur a deferred
payment undertaking, or to negotiate the L/c. The words "this credit
is not restricted to any bank for negotiation" or "this credit may
be negotiated at any bank", or similar words, may be indicated on
the L/c.
Revolving Letter of Credit
When a letter of credit is specifically designated
"revolving letter of credit", the amount involved when utilized
is reinstated or replenished. In other words, once supply has been
made and beneficiary receives payment for the shipment, the L/c
amount becomes available again without issuing another L/c and usually
under the same terms and conditions. The revolving L/c is used for
regular shipment of a large quantity over a period of time (several
months).
Latest Negotiation Date
The latest negotiation date is the last day of the
period of time allowed by the letter of credit for the presentation
of documents to the bank. The latest negotiation date may not necessarily
be the L/c expiry date. For example, the latest negotiation date
can be July 31, 2001 or 15 days after the date of shipment, whichever
comes first. In case the L/c does not stipulate the latest negotiation
date, it is within 21 days after the date of issuance of the transport
documents, but on or before the L/c expiry date.
Expiry Date and Place
The expiry date and place is the last day of validity
of the credit and the place allowed by the letter of credit for
the presentation of documents for payment, acceptance or negotiation.
In case the validity of an L/c is stated in a period of time, for
example "this credit is valid for three months" or "this credit
is available for two months" or "this credit is good for one month",
but does not specify the date from which the time is to run, its
validity starts from the issuance date of L/c by the issuing bank.
The bank normally discourages stating the L/c validity in a period
of time. In case the expiry date and/or the latest negotiation date
falls on a day on which the bank is closed for reasons not including
the acts of God, strikes, riots, civil commotions, lockouts, insurrections,
wars or any other causes beyond the bank's control, the expiry date
and/or the latest negotiation date is extended to the succeeding
first day on which the bank is opened. Such extension, however,
does not extend the latest date of shipment.
Latest Shipment
The latest shipment---latest date of shipment or
last date for shipment---is the last day of the period of time allowed
by the letter of credit for shipment, dispatch or taking in charge.
Transferable Letters of Credit
A letter of credit can be transferable or non-transferable.
The L/c usually indicates "transferable" in the case of a transferable
credit. In the absence of such indication, the L/c is deemed to
be non-transferable. In a transferable letter of credit, the first
beneficiary (the exporter) may request the paying, accepting or
negotiating bank to make the credit available in whole or in part
to one or more second beneficiary or beneficiaries. The second beneficiary
can be another exporter, trader or manufacturer. The L/c is expressly
designated "transferable" by the issuing bank on instructions of
the applicant. The letter of credit that was transferred or made
available to the second beneficiary is known as the transferred
credit. The bank that makes the transfer is known as the transferring
bank.
Non-transferable Letter of Credit
In a non-transferable letter of credit, the beneficiary
cannot transfer the credit to other beneficiary. The L/c usually
indicates "non-transferable" or "not transferable. " Even if such
indication in not there, the L/c is deemed to be non-transferable.
Related Links:
Source: FAIDA
- Newsletter on Business Opportunties from India and Abroad
Vol II, Issue 8; July 18' 2001
Author :
Dr. Amit K. Chatterjee
(Amit worked in blue-chip Indian and MNCs for 15 years in various
capacities like Research and Information Analysis, Market Development,
MIS, R&D Information Systems etc. before starting his e-commerce
venture in 1997. The views expressed in this columns are of
his own. He may be reached at amit@infobanc.com
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