Letters Of Credit
A Letter of Credit (LC) or Documentary Credit is an irrevocable undertaking of the issuer to honour draft and/or shipping documents presented in compliance with the terms and conditions of the LC, UCP 600 and international standard banking practice.
All LCs issued by Affin Bank are irrevocable, thus gives the beneficiary (exporter) greater assurance of payment. Irrevocable LCs cannot be cancelled or amended without the consent of the Issuing Bank and the beneficiary.
LCs can be issued by payment at sight, deferred payment, acceptance (usance) or negotiation, depending on the arrangement between the trading parties and terms of the sale.
Types Of LCs
- Ordinary LC
- Red Clause LC
- Transferable LC
- Back to Back LC
- Revolving LC
- Standby LC
Ordinary LC
These are the common LCs issued with payment available at sight, deferred payment, acceptance or negotiation.
Red Clause LC
The Issuing Bank authorises a Nominated Bank (bank authorised to pay, incur a deferred payment undertaking, accept or negotiate) to make advances to the beneficiary prior to shipment of the goods. The advance is to enable the beneficiary to purchase goods for which the LC was issued and ship them. It is called red clause as the instructions used to be typed in red ink on the face of the LC. Otherwise it is an ordinary LC.
Transferable LC
The beneficiary (1st beneficiary) may request the nominated bank to make the LC available in whole or part to one or more other beneficiaries (2nd beneficiary(ies). This is an ordinary LC but with the added benefit of being transferable. Other types of LCs are not transferable.
Back to Back LC
The benefit of an ordinary LC may be made available to another party (actual supplier) using the LC as security/collateral to issue another LC in favour of the actual supplier.
Revolving LC
The amount of the LC is renewed or reinstated without specific amendments to the LC. It is an ordinary LC used for the purchase of goods, services or performance but one LC is used for several shipments. The LC may be issued to revolve in relation to time or value.
Standby LC
Standby LC functions similar to guarantee. It is issued to cover non-performance by one party to a contract. Payment under a standby LC is triggered by a default of the applicant. Standby LCs may also be used as collateral for loans and advances.
