Business

Difference Between Revocable and Irrevocable Letter of Credit

The most acceptable method of financing trade is by confirmed irrevocable  letter of credit from the viewpoint of both the seller and the buyer.

(i) Revocable Letter of Credits. A revocable credit is one which can be cancelled or amended by the issuing bank at any time without prior notice to the beneficiary. The cancellation or amendment, however, takes effect against the bank which has negotiated bills under the credit only on receipt of notice of such cancellation or amendment. The issuing bank is liable for bills negotiated conforming to the terms and conditions of the credit before the notice of revocation  is received by the negotiating bank (Article 8).

Since there is no definite undertaking by the issuing bank in a revocable credit, there is not much of a benefit under the credit to the exporter. If the credit is advised to him by the opening bank direct, the credit may be cancelled by the issuing bank at any time without prior notice. Therefore, till he receives payment from the issuing bank he is not sure whether the credit is current. He would find it difficult to negotiate the bill with any bank in his country. The bank in the exporter’s country is not aware if the credit is cancelled and hence runs the risk of payment being refused by the issuing bank and hence would be reluctant to negotiate the bill.

If the credit is advised through a bank, generally there would be a clause under which the issuing bank binds itself liable to reimburse the negotiating bank on any bills negotiated before the notice of cancellation is received by it. Therefore , such bills have better reception from the negotiating banks. Still, the exporter has the risk that the credit may be cancelled at any time after he procures the goods but before he presents the bill for negotiation.

(i) Irrevocable Letter of Credits.: An irrevocable credit constitutes a definite undertaking of the issuing bank to accept and/or pay bills drawn on it or make payment (without a bill), provided that the terms and conditions of credit are complied with. An irrevocable credit can neither be amended nor cancelled without the agreement of all parties concerned. Partial acceptance of amendment is not effective without the agreement of all parties  thereto (Article 9).

The exporter can be safe with the knowledge that the bills drawn under the credit will be honoured by the issuing bank provided the conditions of letter of credit are fulfilled. Any amendment or cancellation of credit is not effective unless the exporter also consents to such an amendment or cancellation. Bills drawn under an irrevocable credit are readily negotiated by banks and at a better rate to the exporter.

The UCP requires that all credits should indicate whether they are revocable or irrevocable. In the absence of such an indication, the credit shall be deemed to be irrevocable (Article 6).

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