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..