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Characteristics of different types of documentary credits

01/06/2016

Commercial documentary credits - A means of payment for the delivery of goods or the provision of services. Used as the primary means of payment when delivery or provision of services has occurred.

Revocable Credits - A revocable documentary credit can be amended or cancelled at any time without the prior consent of the beneficiary. If a revocable documentary credit is issued, in addition to stating in field 40A the revocable nature of the documentary credit, the issuing bank must incorporate into its terms and conditions the rules that will relate to the revocability.

Revocable credits are very rarely used these days, owing to the fact that a revocable documentary credit can be amended or cancelled without the agreement of the beneficiary. For this reason, it is advisable for a bank not to add its confirmation if authorised or requested to do so. It is also not advisable to issue them on a transferable basis or to act as a transferring bank.

Irrevocable Credits - The default position in UCP 600 is that all documentary credits are considered to be irrevocable, unless otherwise stated. Field 40A of the MT700 is a mandatory field and will indicate the type of irrevocable documentary credit that is being issued. The issuance of an irrevocable documentary credit means that it cannot be amended or cancelled without the approval of the issuing bank, the confirming bank (if any) and the beneficiary.

Advance Payment (commonly referred to as a red clause credit) - A documentary credit containing a clause authorising a payment to the beneficiary in advance of shipment and presentation of documents. This clause specifies the amount or percentage that is to be advanced and was originally written in red ink when documentary credits were issued in letter form; thus the common name, which is still widely used today.

Revolving - A documentary credit that contains a condition that the amount is to revolve one or more times subject to certain criteria indicated in the documentary credit. A revolving documentary credit can be used to reduce administrative workload for repetitive purchases of the same kind of goods that are provided by the same supplier, at regular intervals. A revolving documentary credit must indicate whether it will revolve on an automatic or non-automatic basis, and whether any undrawn balance is cumulative (carrier forward) or non-cumulative (not carried forward). For more information, also see our Blog 25.

Transferable - A transferable documentary credit, as defined in UCP 600 sub-article 38 (b), is a credit that specifically states it is transferable, thereby allowing for it to be made available in whole or in part to one or more other beneficiaries (each to be known as a second beneficiary), at the request of the beneficiary (who will become known as the first beneficiary). No bank is under any obligation to transfer a transferable credit except to the extent and in the manner expressly consented to by it. For more information, also see our Blog 17.

Back-to-back (counter) - A documentary credit used by an agent or trader, when acting as a middleman between the supplier and the final buyer, with the documentary credit issued in its favour serving as part or full security for the issuance of a documentary credit issued in favour of the supplier. Used where it is not possible to obtain a transferable credit or a transferable credit is not appropriate, given the number of changes that may be required in the terms and conditions of the back-to-back credit.

Standby Credits - Whereas a commercial documentary credit represents the primary means by which payment for goods or the provision of services is to be made, a standby letter of credit represents a secondary obligation covering the default of the applicant. Standby credits may be issued subject to UCP 600 or ISP98.

 

 

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