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There are many types of commercial letters of credit drawn to suit the individual requirements of the transactions: Documentary letter of credit and clean letter of credit: A documentary or a secured letter of credit is one where the banker opening the letter of credit incorporates a clause or condition that the bill drawn under the letter of credit will be accepted or paid only when it is accompanied by the relevant shipping documents such as the bill of lading, marine insurance policy etc., Such a clause is very important to safeguard the interests of the banker who opens the letter of credit. He acquires the property on goods exported when the shipping documents are duly endorsed and handed over to him. On the other hand, a clean or open letter of credit does not contain any such condition for payment to the beneficiary(exporter). This type of letter of credit is given to only parties of very high and sound financial standing. Revocable and irrevocable letters of credit: Letters of credit may be either (i) revocable or (ii) irrevocable. The letters of credit should indicate whether it is revocable or irrevocable. In case nothing has been mentioned in the letter of credit, it is deemed to be revocable according to Article I of Uniform Customs and Practice. In the case of revocable letter of credit, the opening banker reserves himself the right to cancel or modify the credit at any moment without prior notice to the beneficiary. Hence, this type of revocable credit note is not a legally binding undertaking between the banker and the beneficiary. It becomes mere an intimating or advice to the beneficiary to draw the bills under the credit. Such credit proides no real security to the exporter who should accept it only from buyers of long standing and known integrity. According to articles prescribed in the relevant Uniform Customs and Practices, the negotiating bank has the right to be reimbursed for any payment, acceptance, or negotiation made by it prior to receipt of notice of the modification or cancellation under a revocable credit. An irrevocable letter of credit is one which cannot be revoked, amended or modified by the issuing bank without the concurrence of the beneficiary or any other interested party including the confirming bank. According to article 3 of Uniform Customs and Practices, an irrevocable letter of credit is a definite undertaking on the part of issuing bank and constitutes the engagement of that bank to the beneficiary or any bonafide holders of the drafts under the credit, provided the terms and conditions of credit are complied with. For assistance with your international economics homework solution you can visit classof1.com.
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