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What are the different types of letters of credit?

C. What are the different types of letters of credit?
A letter of credit is a written undertaking by a bank, the issuing bank, to the seller, the beneficiary in accordance with the instructions of the buyer, the applicant, to effect payment upto a prescribed amount, within a prescribed time period against
prescribed documents, provided these are correct and in order i.e. they conform with the instructions of the applicant. Letters of credit are one of the most used methods of payment in international transactions. Letters of credit are usually issued subject to
the provisions of the "Uniform Customs and Practices for Documentary Credits" issued by the International Chamber of Commerce. It contains the rules governing the letter of credit transactions and the interpretation of various terms relating thereto and
has been subscribed by almost all the major trading countries of the world.
There are usually two banks involved in a documentary credit operation. The issuing bank is the bank of the buyer. The second bank, the advising bank, is usually a bank in the seller's country.
The second bank can, be simply an advising batik, or it can
also assume the more important role of a confirming bank. In either case, it undertakes the transmission of the credit, and by doing so, implies the authenticity of the signature of the issuing bank. If the second bank is simply "advising the credit" it
will mention this fact when it forwards the credit to the seller. Such a bank is under no commitment to pay the seller. If the advising bank is also 'confirming the credit' it
will so state. This means that the confirming bank, regardless of any other consideration, must pay, accept, or negotiate without recourse to the seller, provided all the documents are in order & the credit requirements are met. Figure below
summarizes the relationships between the partners to the letter of credit. A letter of
credit contains essential details like seller's name, buyer's name, value, usance documents required, description of goods, shipment & negotiation dates, port of shipment & destination etc
Letters of credit used in international trade are of various types:
a) Revocable and Irrevocable Letter of Credit: A revocable letter of credit is rather rare now-a-days because it means that the terms of the credit can be cancelled or amended by an overseas buyer without prior notice to the exporter. Most letters of credit are
irrevocable which means that once buyer's conditions in the letter have been agreed by an exporter, they constitute a definite under taking by the buyer's bank and cannot be revoked without the exporter's agreement.
Confirmed and Unconfirmed Letter of Credit: A confirmed letter of credit carries the confirmation of another bank, generally, in the country of the exporter. Such confirmation, added at the request of the issuing bank, binds the confirming banker to negotiate the drafts drawn under the credit provided the terms and conditions thereof are fulfilled.
Without Resource and with Resource: A `without recourse to drawer' letter of credit is one under which the negotiating bank cannot have a recourse against the exporter if the draft is subsequently not taken up or reimbursed by the issuing bank provided, of course, the negotiation is without recourse.
Sight and Usance: Documentary credit may provide for payment at sight or for acceptance of a usance bill of exchange by either issuing bank in a buyer's ountry or the correspondent bank in exporter's country.
e) Transferable: A transferable letter of credit is one which can be transferred by the beneficiary named therein in favour of another party. A credit can be transferred
only if it is expressly designated as transferable by the issuing bank.
f) Straight and Negotiation Credit: A negotiation credit enables either a specifically nominated bank (or any bank, if the words "Freely negotiable by any bank" are used in the credit) to check the documents and, if they are in order, to pay them
less the interest for the time it will take to obtain reimbursement from the issuing bank. Sellers would require negotiation credits where the currency of the credit is not their own currency, or where the seller's local bank offers preferential rates or service.
Generally, a negotiating bank pays with recourse to the beneficiary if any thing goes wrong, but the legal position is by no means settled. This is a very important point for beneficiary, as under every other kind of Letter of Credit there is no recourse to him. All beneficiaries under negotiation credits should settle with the
negotiating bank at payment, whether recourse to the beneficiary is reserved or not.
g) Revolving Letter of Credit: A revolving letter of credit is one which revolves to its face value as soon as the bill negotiated under the credit is paid. Letters of credit can be made revolving on certain other conditions, e.g. negotiation of draft
without waiting for the bill to be paid, at fixed periods-say monthly or every quarter, etc. Revolving Letters of Credit are used when regular and continuous payments are required to be made to the exporter.

Red Clause Credits: Red clause credits contain an authorization by the issuing bank to the advising or confirming bank to make advances to the beneficiary before presentation of documents. The description red clause arises from the colour of the ink that is used to draw attention to the credit's special condition.

The purpose of these credits is to provide pre-shipment finance to the seller who might not otherwise be capable of raising the finance to produce the merchandise desired by the buyer.

Green Clause Credit: Green clause credit is similar to red clause but advance is given only against a warehouse receipt given by the beneficiary.

Back to Back Letter of Credit: A letter of credit issued on the strength of another letter of credit. It is in effect, an extension of the terms and conditions of the backing credit. Usually, the beneficiary, under such credit is a supplier to the beneficiary of the backing credit.
Some of the important points laid down in Uniform Customs and Practices for Documentary Credits issued by ICC, are as follows:
1. All credits should clearly indicate whether they are revocable or irrevocable. In the absence of such indicators the credit shall be deemed to be revocable.
Policy Framework and Procedural Aspects
2. A revocable credit may be amended or cancelled by the issuing bank at any moment and without notice to the beneficiary.
An irrevocable credit constitutes a definite undertaking of the issuing bank, provided that the stipulated documents are presented & that the terms & conditions of the credit are complied with.
When an issuing bank authorizes or requests another bank to confirm its
irrevocable credit & the latter has added its confirmation, such confirmation constitutes a definite undertaking of such bank (the confirming bank), in addition to that of the issuing bank, provided that the stipulated documents are presented and that the terms and conditions of the credit are complied with.

All credits must clearly indicate whether they are available by sight payment, by deferred payment, by acceptance or by negotiation.
Banks assume no liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification or legal effect of any document, or for the general and/or particular conditions stipulated in the documents or super imposed thereon, nor do they assume any liability or responsibility for the description,
quantity, weight quality, condition, packing, delivery, value or existence of the goods represented by any documents or for the good faith or acts and/or omissions, solvency, performance or standing of the consignor, the carriers, or the insurers of the goods, or any other person whomsoever.
All credits must stipulate an expiry date for presentation of documents for payment, acceptance or negotiation.
The description of the goods in the commercial invoice must correspond with the description in the credit. In all other documents, the goods may be described in general terms not inconsistent with the description of the goods in the credit.
Credits should stipulate the type of insurance cover required and, if any, the additional risks which are to be covered. Failing specific stipulation in the credit, banks will accept insurance documents as presented, without responsibility for any risk not being covered.

General Points
Does the documentary credit correspond with the contract, especially in connection with the following points?
- Amount/unit price
- Period of validity/time limit for shipment
- Terms of delivery
- Description-and origin of the merchandise
Is the documentary credit revocable, irrevocable/unconfirmed or confirmed?
Is it transferable, if necessary?
If confirmed or confirmed by a bank abroad, how do you assess the
Credit risk
Conditions in the buying country (political and transfer risks)
Mailing risk (if credit is available abroad)?
Are the names and addresses of the applicant and the beneficiary correct?
Is the documentary credit subject to the ICC's currently valid Uniform Customs and Practices for Documentary Credits
Is there sufficient time available to complete attestation and authentication procedures?
Are there declarations request in the documents which cannot be made?
Are documents stipulated which are contradictory to the terms of delivery?
Does the credit stipulate documents which need to be drawn up or countersigned
by the buyer or his bank? In such a case, the utilization of the credit depends to a large extent on the goodwill of the buyer.
Can the required number of specified documents be furnished?
Deadlines and shipment of goods
Can the shipment deadline be met?
Are the terms regarding the place where the goods are to be taken into possession and the points of departure and arrival feasible?
Are partshipments and transhipments prohibited contrary to the terms of contract?
Can the prescribed marks and modes of transport be provided?
Can the. documents be presented in the desired form by the dates specified in the credit? (If the credit stipulates a transport document, the documents have to be presented at the bank not later than 21 days after the issue date of the transport document unless the credit stipulates another time limit.)
Are you absolutely certain about the way the draft should be made out?
Can the description of the goods in the invoice be taken word for word from the documentary credit?
Transport documents in general
If the transport document is not described precisely, banks do not accept any document that
is subject to a charter party (only in the case of seaborne transport)
designates, loading on deck (only in the case of seaborne transport)
stipulates carriage by sailing ship is issued by a forwarding agent (regardless of mode of transport) except in
the case of the FIATA Combined Transport Bill of Lading which is
recognised by the ICC or where the forwarding agent is also carrier or
agent of an expressly named carrier.
If goods are exported through the intermediary of company domiciled abroad (a subsidiary), in some countries the value of the merchandise has to be stated in the transport documents. Does this value correspond to the amount and the currency
in your invoice?
Marine bill of lading
The restrictions a), b) and c) listed under "Transport documents in general" are
also valid for the marine bill of lading.
The marine; bill of lading should not be issued by-a forwarding agent, unless the
latter is also a carrier or acts as agent for an expressly named carrier.
If the bill of lading is to be issued to order of the buyer or is to be made out in his
name, it will be extremely difficult to arrange any return of the goods. This point  should be taken into full account.
Do the prescribed freight notations conform to the terms of delivery?

Air waybill
Air waybills issued by forwarding agents are not accepted by banks unless the
forwarders act as carrier or as agents for an expressly named carrier.

Insurance documents
Can the terms of insurance be fulfilled?
Are the risks to be covered accurately described in the credit?
Is the insurance coverage also sufficient to meet your requirements?
Clarify whether a policy or a certificate is required. (Broker's cover notes will not
be accepted by the bank unless expressly permitted in the credit.)

Certificate of Origin
Are the Chamber of Commerce and a consulate willing to attest or authenticate
the statements required to appear on the certificate of origin?
If legalization is necessary, does the respective. country maintain a consulate where needed?
Can a certificate of origin issued in the country of origin be furnished in time?
Can the legalization be effected in time?

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