Different types of Letter Of Credit. Payment, Acceptance and Negotiation

Brief description of different types of Letter Of Credit. Payment, Acceptance and Negotiation Credit


Ø Payment, Acceptance and Negotiation Credit: Article 10 (a) of UCP stipulates, “All Credits must clearly indicate whether they are available by sight payment, by deferred payment by Negotiation.” Thus a letter of Credit may be


a)    Payment Credit:  A Payment Credit provides that payment will be made to the beneficiary against the documents to be submitted by him. In a payment Credit the issuing Bank nominates a bank in the exporters country as the paying Bank. If the paying Bank accepts its nomination, it pays the beneficiary as soon as the documents under the Credit are presented to it. It gets reimbursement from the issuing Bank for the amount it Paid.



b) Negotiation Credit: In the Negotiation Credit the documents are accompanied by a sight draft (Bill of Exchange). The bill of exchange may be drawn on the Issuing Bank or any other bank stipulated in the Credit . the bank which negotiated documents under the credit Purchases the bill of exchange and pays the amount to the beneficiary by the Issuing Bank.



Article 10 (b) of UCP provides that unless the Credit stipulates that it available only with the issuing Bank, all Credit must nominate the bank which is authorized to negotiated Bank. Thus the Credit may be either restricted or open..



                         i) Restricted Letter of Credit: When negotiation of documents under the letter of Credits is restricted to a specified bank , it is called the Restricted Credit. The Letter of Credit  contains a provision : " Negotiation under this Credit restricted to ------------Bank" (Name of the Bank). Restriction of Credit may be resorted to by the Opening Bank under instructions from the applicant of the Credit, or it may be dome to confine business to a favoured bank.


                        ii) Open Credit: Negotiation of Documents is not so restricted to a particular bank and the beneficiary may present the documents for negotiation to any bank. The commitment of the issuing bank may read as follows: " We hear by engage with the drawers and or bonafide holders that drafts drawn and negotiated in conformity with the terms of this credit will be dully honoured of presentation.


C) Acceptance Credit:  An Acceptance Credit calls for a usance bill of exchange of a specified period to be drawn under the Credit. For instance, the Letter of Credit may require the exporter to draw '90 days' bill. The advantage under an Acceptance Credit is that the buyer need no pay immediately. He pays only on the due date of the bill. The seller gets the bill accepted by the bank, and in case he is in need of funds, documents it with his bank. Thus duty of the issuing Bank under this Credit is not only to see that the bill is accepted but also to ensure payment on maturity.



if the bill is drawn on the Accepting Bank in the exporters country the Accepting Bank will accept the bill and return it to the beneficiary. The Documents are forwarded to the issuing bank, If the beneficiary is in need of funds he may discount the bill with any other bank or finance house. Since it is a bankers acceptance, the bill will be discounted readily by other bank and at favourable rate.


On receipt of documents, the issuing Bank will deliver them against 'Trust Receipt' or 'Clean' basis. It may also hold them until the steamer arrives, arranges clearance and then stores the goods under its control. A loan against pledge of goods may be given for the importer to pay for the goods on maturity of the bill to be repaid by the sale proceeds of the goods.


D) Deferred Payment Credit: A Deferred payment Credit carries an undertaking of the Issuing Bank to pay or to arrange for payment on the dates determinable in accordance with the stipulations of the Credit. it is like an acceptance Credit with the exception that no drafts are drawn. it is thus considered inferior to Acceptance Credit from the beneficiary's point of view because he does not get a bankers acceptance which he could discount and raise finance. Deferres Payment Credit may be used where the beneficiary wishes to allow the importer time to pay for the documents. The documents will be delivered to the importer immediately. This type of Credit is also used to finance importer of plant and machinery and capital goods on deferred payments basis..

Types of Documentary Credit

It is Stated before that the letter of Credit is an undertaking by the importer's Bank that if the exporter exports the goods and produces documents as stipulated in the Credit, the bank would make payment to the exporter.

It is undeniable that a letter of credit offers advantages both to the exporter and the importer. the advantages accruing to either of the parties differ depending upon the nature of the Credit opened. However , those who deal in international trade and transactions should be well acquainted with the different types of Letter of Credit.

A Letter of Credit may be Clean Credit or Documentary Credit. A Documentary Credit requires the documents of little to goods and other documents to accompany the bill drawn under the Credit. But in case of Clean Letter of Credit no such documents are necessary.

Under a Clean Letter of Credit, the documents of little to goods, for instance, bill of lading, are sent by the exporter to the importer directly. Only the bill exchange drawn on the importer is offered to the bank for purchase. neither the exporter nor the bank retains control over the goods covered by the transaction. For the bank it remains an in secured advance. For this reason, Clean Letter of Credit is normally not found in commercial transaction.

All Most all commercial Letters of Credit are Documentary Credits. Documentary Credits may be classified under the following types depending upon the particular provisions contains:

1. Payment, Acceptance and Negotiation Credits.

2. Revocable and Irrevocavle Credits.

3. Confirmed and Unconfirmed Credits.

4. With Recourse and without recourse Credits.

5. Fixed and Revolving Credits.

6. Transferable Credits.

7. Back to Back Credits.

8. Red Clause and Green Clause Credits.

9. Standby Credits.

10. Anticipatory Credit.

Froms Of Credit

Documentary Credit may be either

1. Revocable

2. Irrevocable.

Revocable Credit: A revocable Credit is a credit which can be amended or cancelled by the issuing Bank at any time without prior notice to the seller. The cancellation or amendment, however, takes effect against the bank which has negotiated bills under the credit only on receipt of such notice of cancellation or amendment. The issuing Bank is liable for bills negotiated conforming to the terms and conditions of the Credit before the Negotiating Bank receives the notice of revocation.


Irrevocable Credit: An irrevocable Credit Constitutes a definite undertaking of the Issuing Bank, provided that the stipulated documents are presented and the seller fulfills the terms and condition. Obviously it can not be amended or cancelled without the agreement of all parties concerned. An irrevocable Credit may be either confirmed or unconfirmed depending on the desire of the seller..


Irrevocable Credit is always preferred to the Revocable Credit.. 

In accordance with Article 6 of UCPDC , 1993 Revision ICC publication no 500, the Credit should clearly indicate whether it is revocable or irrevocable. In the absence of such indication the Credit shall be deemed to be irrevocable.. 

Letter Of Credit : Meaning Of L/C

Letter of credit is a very populer means if international trade. It plays vital role in execution of trading goods from one country to another. It helps the importer and exporter to mitigate their risks and responsibilities. It also ensures the receive and payment of the concerned bill in international trade. It requires various procedures to be observed by the concerned parties especially for the bank..


Definition of Letter of Credit:

Letter of Credit (L/C) can be find as a "Credit Contract" whereby the buyers bank is committed (on behalf of the purchaser) to place certain amount of money at the sellers disposal under certain terms and conditions. The Letter of Credit is also called the Documentary Letter of Credit, Because the terms ans conditions include, amongst other things the presentation of some specified documents.

The Uniform Customer and practice for Documentary Credits, 1993 Revision, ICC Publication No 500 applies to all Documentary Credits (Including to the extent to which they may be applicable, stand by Letters of Credit) where they are incorporated into the text of the credit. They are binding on all parties thereto, unless otherwise expressly stipulated in the credit. The UCPDC 1993 Revision, Publication no 500 defines Documentary Credit any arrangement, however named or described, whereby a bank (the Issuing Bank) acting at the request and on the instructions of a customer ( the applicant) or on ots own behalf.

-- Is it to make a payment to or to the order of a third party ( the beneficiary) or is to accept and pay bills of exchange ("Draft") drawn by the beneficiary, or

- authorizes another bank to effect such payment or to accept and pay such bills of exchange (Draft)

-- authorizes another bank to negotiate, against stipulated documents provided that the terms and conditions are complied with..

While Lodgment of the Import Documents

Immediately Upon receipt of import documents the L/C Opening Bank examines all the documents thoroughly to ensure that the terms and conditions as laid down in the Credit have been complied with. On Security if it is found that the documents drawn are in conformity with the terms of the credit, the bank lodges the documents in PAD/Bill of exchange and the following vouchers are passed-

Debit- PAD/BE A/C ......................................................... tk
(Converted the bill amount at B.C Rate prevailing on the day of lodgement)

Credit - H.O. A/C ............................................................. tk
(Converted the bill amount at T.T rate prevailing on that date & Dr. TRV is sent along with a atatement of the transaction)

Credit: - Exchange A/C .................................................... tk



Reversal of contra Liability Voucher

Debit- Bankers Liability for Acceptance on L/C ................................. Tk

Credit- Customers Liability for Acceptances on L/C ........................... Tk




While Retirement of the Import Documentss:

Immediately after the lodgement of the import documents the bank request the importer for retirement of the documents against payment of bill amount and other charges payable. The Importer places fund in his account and the bank passes following vouchers in retiring documents:


Debit - Margins on L/C account ................................................... Tk

Debit - Importers authorized account ........................................... Tk

Credit - PAD/BE account .........................................................................Tk

Credit - Income account interest on PAD/BE........................................... Tk

Credit - Admissible commission account................................................. Tk

Credit - Miscellaneous earning (if any) ................................................... Tk




Note: The issuance commission of the bank is charges quarterly for Credits from date of issuance date until date payment, Credit expiry or maturity of a deferred payment undertaking..