Methods of Payment in International Trade

What is a Letter of Credit?

Definition

 A conditional undertaking

 Given by a bank (issuing bank)

 At the request of a customer (applicant)

 To pay a seller (beneficiary)

 Against stipulated documents

 Provided all terms of conditions are complied

Types of LC

 All LCs will be irrevocable

 Payable at sight or at a specified time in the future

i.e. usance

 There are several types of LCs designed to suit

various circumstances
The Golden Rules

 Issuing bank is obligated to pay / accept on

presentation of compliant documents

 Confirming bank is obligated to pay / accept

on presentation of compliant documents

 Advising / Nominated banks are not

obligated to pay / accept (unless the Issuing
bank has nominated itself to pay/accept
Legal Principles

 Autonomy of documentary credits

• Contracts are independent of one another

• The L/C is independent from the sales contract

 Importance of documents checking

• Doctrine of strict compliance

• Ambiguous terms
• Non workable LC terms
• Non documentary conditions
Key Points to Remember
 Banks deal in documents, not in
goods or performance
 LC substitutes the credit of the issuing
bank for that of the buyer
 LC assures the seller of payment when
the terms of the LC are met
 The exporter is not obliged to
perform if the terms of the LC are not
acceptable to him
 The importer is assured that “goods are
shipped” before paying under the LC
 Trade patterns change
 We need to be aware of
change and opportunities for
banks, us and bank’s clients
 We should advise change and of
opportunities
 Our banks and their clients
businesses will change
including their choice of
methods of payment
 We need to continually adapt
and embrace new methods
Red Clause Letter of Credit

 A form of pre-shipment finance arranged for the

Exporter by the Importer

 LC permits “clean” drawing by beneficiary as a

percentage of value prior to shipment

 Beneficiary claims balance of money on presentation

of shipping documents

 Origins

 Australian wool trade / Chinese fur trade

Green Clause Letter of Credit

 Provides same type of finance to exporter as Red Clause

 Allows beneficiary to claim against production of

warehouse receipt, pending shipment of goods

 A use of this type of LC would be where shipping space

is limited or restricted and exporter requires finance
before goods shipped i.e.. shipment space only available
say every four to six weeks or so
Financing the Middleman

• Transferable letter of credit

• Back-to-back letter of credit

• Assignment of proceeds
Revolving LC

• Used for regular shipment of identical goods over

a given period

• Revolves
• Time basis

• Value basis

• Revolves on notice from issuing bank or automatically

• Cumulative or Non-cumulative
Risks Involving Revolving LC

• Liability for automatic revolvers

• Calculated to expiry

• Shipments will continue irrespective of whether

applicant pays issuing bank

• Otherwise risks similar to those encountered for

‘ordinary’ LC
Thank You

Chintan Khanna
+91 9820096616
chintankhanna14@gmail.com