Letters of Credit and Amendment Issuance

What is the definition of a Letter of Credit?

“Credit means any arrangement, however named or described, that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honour a complying presentation”.

Flowchart of Letter of Credit Transaction

 Different types of Letter of Credit

1) Standby Letter of Credit:

An SLC possesses all the elements of a commercial Documentary Credit . Basically, it is a Documentary Credit issued to cover a ‘Non-Performance’ by one party to the contract. An SLC issued in favour of the beneficiary upon demand in the event the beneficiary submits a signed statement setting forth that there has been default or non-performance.

  • Difference between Standby Letter of Credit and a Payment Guarantee?
  • Who are the parties involved?
  • Any Risk?
  • What are the advantages?

2) Transferable Letter of Credit

Transferable Credit means a credit that specifically states it is ‘transferable’. A transferable credit may be made available in whole or in part to another beneficiary (“second beneficiary”) at the request of the beneficiary (“first beneficiary’).

  • When would a Transferable Documentary Credit normally be issued?
  • Transferable Credits – Cycle?
  • Issuance of Transferable Credits
  • Advising of Transferable Credits
  • Procedure of Transferring Credits and Advising the Second Beneficiary
  • What is a Part Transfer?
  • Full Transfer without Substitution of Documents
  • Part Transfer without Substitution of Documents
  • The Protection offered by a Transferable Credits to a bank
  • Amendments.
  • What are the expected/unexpected risks for a transferring bank?

3) Back-to-Back Credits

A Back-to-back letters of credit is sometimes referred to as a counter credit. This is opened at the request of an exporter who is the beneficiary of an export Documentary Credit (Master Documentary Credit), and should only be opened for undoubted customers. When the beneficiary of an export Documentary Credit applies for a back-to-back Documentary Credit he assumes the role of a middleman between the actual supplier of the goods and the ultimate buyer.

  • What are the similarities between Transferable Credits and Back-to-Back Credits?
  • What are the difference between Transferable Credits and Back-to-Back Credits?
  • What are the Advantages of Back-to-Back Credits?
  • Cycle of Back-to-Back Credits?
  • What are the Bank & Country Risk?
  • What are the Corporate Credit Risk?
  • What are the Operational Risks?
  • How to Mitigate Risks?
  • Payment obligation.

4) Revolving Credits:

When the terms and conditions of a credit state that the amount is renewed or automatically reinstated without specific amendments being required the credit is said to be a revolving credit. A revolving credit allows for flexibility in commercial dealings between importers and exporters, particularly when there are likely to be regular future shipments of the same type of goods.

  • What are the difference between Time and Value revolution?
  • What is Cumulative and Non-cumulative basis?
  • What are the Risks involved?
  • How can we control shipments and drawings under a Revolving Credit opened on cumulative basis?

5) Red Clause Credits

Red Clause Credit allow the beneficiary to obtain a pre-shipment advance from the advising or confirming bank. Originally this clause in credits was written in red ink to draw attention to the unique nature of the credit. Thus the term Red Clause Credit.

  • What are the Risks involved ?
  • How the advance is paid?
  • How the Repayment of advance is adjusted?
  • What will happen if the beneficiary unable to ship the goods?
  • Have all documents been properly signed?
  • Are the necessary documents presented in the prescribed form and number (originals and copies) UCP Art. 17.
  • Do all the documents relate to the same delivery and to the same documentary credit?
  • Are the details given in the documents consistent with each other (e.g. dimensions, weights, number of packages, markings etc)?