12 Types of letter of credit

Types of Letter of Credit

A Letter of credit is issued on different terms and hence a letter of credit is also of different types as explained below.

1. Documentary letter of credit: A documentary letter of credit specifies the various documents which are required to be produced by the exporter to the importer. Normally, the documents specified in the 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.

The payment is made by the negotiating bank to exporter against this letter of credit when a full set of documents specified in the letter of credit is handed over by the exporter.

2. Revocable and irrevocable letter of credit: The revocable letter of credit can be withdrawn by the opener (importer) or opening bank (importer’s bank) at any time. Withdrawal can be effected without notice to the exporter. Revocable letter of credit, therefore, does not sufficiently protect the interest of the exporter in getting his payment.

The irrevocable letter of credit is just the opposite of revocable letter of credit. The irrevocable letter of credit cannot be withdrawn without prior permission and intimation of the exporter. Through irrevocable letter of credit, the opening bank gives definite guarantee to exporter ensuring payment of exports. However, conditions specified in the letter of credit should be satisfied by the exporter. Generally, exporter prefers irrevocable letter of credit as it protects the exporter.

3. Clean letter of credit: A clean letter of cred!t does not lay down any condition as regards making the payment. Further, it does not contain any condition for acceptance of bill of exchange drawn by exporter upon the importer. Ii is clean in the sense that there is no condition for payment to be made.

4. Assignable and non-assignable letter of credit: An assignable letter of credit is transferable while a non-assignable letter of credit is not transferable. Assignable letter of credit means a letter of credit which can be easily transferred by the exporter with its rights in favor of any person. Therefore, exporter can assign this letter of credit to any person.

A non-assignable letter of credit cannot be transferred in favor of any person. Only the beneficiary who is named in the letter alone can get the payment.

5. 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.

6. Confirmed letter of credit: The opening bank appoints a banker in the exporter’s country which is known to the exporter. Through such bank, the confirmation of credit is made by the opening bank. Exporter can draw the bill of exchange on such confirming bank. So, any letter of credit which confirms credit is known as confirmed letter of credit.

7. Back to back letter of credit: Merchant exporter purchases goods from the manufacturer for the purpose of export. Such exporter requests opening bank to open the letter of credit in favor of such manufacturer or supplier. The manufacturer or supplier gets the money directly from the importer. This letter of credit helps the exporter to get goods for export on credit basis.

8. With or Without recourse letter of credit: In with recourse letter of credit, the paying bank can hold the exporter responsible for recovery of payment if the importer fails to reimburse it to the paying bank. Exporter, then will have to refund all the money he has received along with interest to paying bank in such an eventuality.

In case of without recourse letter of credit, the exporter cannot be held responsible if the importer does not reimburse the paying bank. In such an eventuality, the paying bank has the recourse to the importer only.

9. Red clause and green clause letter of credit: Under the red clause letter of credit, the exporter can get advance money from the negotiating bank. This gives an authority to the negotiating bank to extend credit and lend advance money to exporter. A red clause letter of credit is printed in red.

Green clause letter of credit provides an arrangement for the storage of goods at the port. Pre-shipment finance and storage facility are available to the exporter.

10. Restricted letter of credit: The importer may insist that shipping documents be negotiated (transferred) through a specified bank only. Any letter of credit with such a restriction is known as restricted letter of credit.

11. Traveling letter of credit: A traveling letter of credit enables the exporter to travel abroad and draw the money specified from the bank. All banks honor all the cheques or bill drawn upon.

12. Omnibus letter of credit: Reputed exporters can get omnibus letter of credit. This letter of credit allows the exporter to draw the money from bank in lump sum against the security of general lien on goods.

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