Saturday, June 11, 2011

Special Purpose Letters Of Credit

Special Purpose Letters Of Credit

There are three types of special purpose letters of credit. They are Standby Letters of Credit, Transferable Letters of Credit and Revolving Letters of Credit.

Standby Letters of Credit

A standby letter of credit represents an obligation to the beneficiary on the part of the issuing bank to:
Repay money borrowed by the applicant (or advanced to or for the account of the applicant)
Make payment on account of any indebtedness undertaken by the applicant
Make payment on account of any default by the applicant in the performance of an obligation

Although it is recognized as a primary obligation of the issuing bank, it serves as a back-up or secondary means of payment. A commercial documentary credit is activated by the performance of the beneficiary, or seller, to ship the specified goods and meet the terms and conditions of the credit. The standby letter of credit, by contrast, supports the beneficiary in the event of a default.

Transferable Letters of Credit

A transferable letter of credit is a credit under which the beneficiary (first beneficiary) may request the transferring bank to make the documentary credit available in whole or in part to one or more other beneficiaries (second beneficiary).

Revolving Letters of Credit

Importers who maintain an ongoing relationship with a supplier occasionally open revolving letters of credit.
May be revocable or irrevocable
Provide for renewal of contract by reinstating either a time limitation or an availability of a set dollar amount
Allow a fixed limit to be set for the amount that may be shipped, and for which drafts can be drawn in specified periods of time

For example, when an exporter receives a revolving letter of credit, he will make shipments within the time allowed and up to the amount of the credit to be in compliance with the conditions of the credit. When the amount of the credit is exhausted, the credit is automatically reinstated. If the credit is cumulative, the unused balance accrues to the new period. If non-cumulative, the unused portion is canceled.

Regards G.Srinivas


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