Letter of credit and types of LC

Letter of credit

A commercial letter of credit or documentary credit maybe defined as an instrument,usually issued by a bank at the request and for the account of its client which indicates that the bank agrees to pay to the named beneficiary a sum of money upon the presentation of certain documents.

The use of letter credit for financing export shipments has long been popular with exporters.A letter of credit is only as good as the bank that issues it and if confirmed the bank that confirms it.

Types of Letter of credit 

1.Revocable and irrevocable

A revocable letter of credit can be changed or cancelled by the bank that issued it at any time and for any reason.

An irrevocable letter of credit cannot be changed or cancelled unless everyone involved agrees.

Irrevocable letters of credit provide more security than revocable ones.

2.Confirmed and unconfirmed 

When the Letter of credit is guaranteed by adding payment confirmation by the advising bank or any third bank ( Confirming Bank ) on behalf of the opening bank, it is termed as a confirmed LC otherwise it is an unconfirmed LC.

The confirming bank also becomes a party to the contract of LC after confirming it.

3.Clean and documentary

A clean letter of credit does not lay down any condition as regards making the payment.It is clean in the sense that there is no condition for payment to be made.

A documentary letter of credit specifies the various documents which are required to be produced by the exporter to the importer.Documentary letter of credit are commercial invoice, bill of lading, insurance policy, consular invoice, certificate of origin, certificate of quality analysis, packing list, document of title to goods, bill of exchange, etc.

4.Transferable and nontransferable

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.

In a non-transferable letter of credit, the beneficiary cannot transfer the credit to other beneficiary. 

5.Assignment of proceeds 

To receive an assignment of proceeds, the beneficiary of a letter of credit is required to submit, in writing, a request to the bank to assign the funds to a different person or company.

6.Revolving letter of credit

Revolving letter of credit is used when the export transaction between the same parties is regular and continuous. Credit can be availed against one and the same letter of credit for all subsequent export transactions. There is no need to open a separate letter of credit for every export transaction again and again.

7. Deferred payment credit 

A deferred payment letter of credit is a guarantee from an importer's bank to an exporter; it assures the seller of payment at a later date after the goods are dispatched to the buyer.

8. The standby letter of credit 

The standby letter of credit (SBLC) is a bank guarantee in the form of a documentary credit. SBLCs are used to guarantee any failure to pay on the part of the purchaser/importer; guarantee any failure to perform the agreement on the part of the supplier/exporter.

Written By
Gazi Sanaul Hasan