Letter of Credit

1. LETTER OF CREDIT
&
ITS TYPES
Compiled by :-
SHAHADAT HOSEN CHOWDHURY
QUALITEX INDUSTRIES (BD) LTD.

2. What is letter of credit ?
A letter of credit (L/C) is a signed
instrument embodying an undertaking by
the banker of a buyer to pay a certain sum
of money to his seller on presentation of
documents evidencing shipment of
specified goods subject to compliance with
the stipulated terms and conditions.

3. Parties involved in letter of credit
Seller or a beneficiary who is to receive
money
Buyer
Issuing Bank, whom the buyer is a
client, and
Advising bank, whom the seller is a
client.

4. How letter of credit
works?

5. Types of Letter of credit
Irrevocable versus Revocable L/C
Confirmed Irrevocable versus
Unconfirmed Irrevocable L/C
Transferable versus Non-transferable L/C
Restricted Negotiable versus Freely
Negotiable L/C
Revolving L/C
Back to back L/C
Red Clause L/C
Green Clause L/C
Deferred Payment L/C
Usance L/C

6. Irrevocable versus Revocable L/C
Revocable L/C may be cancelled or
modified without prior notice by the
issuing bank to the beneficiary.
An Irrevocable L/C does not suffer from
such disadvantage and it is ,therefore ,
widely accepted.

8. Confirmed Irrevocable versus
Unconfirmed Irrevocable L/C
An irrevocable letter of credit (L/C) opened by an
issuing bank whose authenticity has been confirmed
by the advising bank and where the advising bank
has added its confirmation to the credit is known as
confirmed irrevocable letter of credit.
An irrevocable letter of credit (L/C) opened by
an issuing bank in which the advising bank
does not add its confirmation to the credit is
known as an unconfirmed irrevocable
letter of credit.

9. Transferable Vs non-transferable
Letters of Credit
Credit specifically states it is ‘transferable’.
‘Transferable’ , ‘transmissible’ and ‘assignable’
convey the same meaning
Used generally when the business is transacted
through middleman
Original credit is in favour of middleman , who asks for
the transfer of credit to the manufacturer or the actual
supplier
It may be available in whole or in part to another
beneficiary
The letter of credit that was transferred to second
beneficiary is called TRANSFERRED CREDIT

10. Restricted Negotiable Vs Freely
Negotiable Letters of Credit
Credits which do not specify any particular
bank who is authorized to negotiate, etc.
are unrestricted or open or general credit
L/c will indicate “this credit is not restricted
to any bank for payment” or such similar
words
When any specific bank is authorized to
pay, accept or negotiate the credit it is
called restricted or special

11. Revolving Letter of Credit
When a letter of credit (L/C) is specifically
designated "revolving letter of credit", the
amount involved when utilized is reinstated,
that is, the amount becomes available again
without issuing another L/C and usually under
the same terms and conditions.
The revolving L/C may be used in shipments
of a wide range of goods to a buyer within a
period of time (several months to one year
usually).

12. Back-to-back L/C
Back-to-back L/C is a type of L/C issued in case of
intermediary trade. Intermediate companies such as
trading houses are sometimes required to open
L/Cs by supplier and receive Export L/Cs from
buyer.

13. Back-to-back L/C
Back-to-back credits are usually requested by middle
persons who do not have sufficient credit available at
their banks to open their own L/Cs to the ultimate
suppliers. Under a back-to-back L/C the middle
person will ask a bank to issue a second L/C in favor
of the ultimate supplier, while using the L/C issued by
the buyer as collateral.
When one L/C is used as security to obtain the
issuance of a second L/C covering the same
transaction, and when all terms and conditions of
both credits are identical, except for amounts and
dates in the second L/C which must be smaller and
earlier, the arrangement is defined as a back-to-back
L/C.

14. Red Clause Letter of Credit
A beneficiary may require financing in order to
complete the manufacture or purchase of
merchandise to be sold. A red clause L/C (use of the
term "red" is derived from the traditional practice of
writing the clause identifying this option in red ink)
helps the beneficiary achieve this.
Upon instruction from the buyer, the issuing bank
authorizes the confirming bank to make a cash
advance to the beneficiary against the beneficiary's
written guarantee that the documents evidencing
shipment will be presented in compliance with the
credit terms.

15. Red Clause Letter of Credit
Should the beneficiary fail to ship the goods or meet
the credit requirements, the paying bank looks to the
issuing bank to obtain reimbursement of the amount
of the advance plus the interest charges on the
advance. The issuing bank then charges the account
of the buyer--who may or may not have received the
goods.

16. Green Clause L/C
A clause in a letter of credit enabling
the seller to receive pre-shipment
advances against a collateral
represented by, for example,
warehouse receipts/warrants.
It is commonly used in the export of
agricultural commodities, where the
company may raise funds to harvest
new crops for export by pledging
available stocks as collateral.

17. Standby Payment L/C
Standby L/Cs differ from commercial L/Cs;
they do not usually cover shipments of
goods, but more often services or
performance. The standby L/C is not secured
by underlying merchandise as is usually the
case with conventional L/Cs. In this respect,
the standby L/C is much like an unsecured
loan and requires careful advance scrutiny
by the issuing bank.
If the seller performs his or her obligation,
there will be no need for the buyer to draw
against the standby letter of credit which
supports the obligation.

18. Cont..
Standby letters of credit are commonly used
to--
* assure the refund of advance payments;
* support the obligation of a successful-bidder
to accept a contract and to perform under
the terms of the contract (i.e., in lieu of bid
or performance bond);
* back up bonds issued by insurance
companies; and
* stand behind a monetary obligation under a
promissory note or another like commitment
(rental payments, etc.).

19. Usance L/C
Under a Usance L/C, the payment's)
will be due some time in the future, and
such payment's) will be evidenced by
Bills of Exchange drawn by the exporter
on the Opening Bank. These Bills of
Exchange will become negotiable
instruments, and may well be
discounted to provide the exporter with
immediate payment.

20. Thank you