Business

The Various Types of Documentary Letters of Credit

A letter of credit may be a clean credit or a documentary credit. A documentary  credit requires the documents of title to goods and other documents to accompany the bill drawn under the letter of credit. No such documents are necessary for a clean letter of credit. Under a clean letter of credit the documents of title to goods (bill of lading, for example) are sent by the exporter to the importer direct. Only the bill of 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 unsecured advance. For this reason, clean letter of credit is normally not found in commercial transactions. They are used for transfer of funds between banks. In exceptional cases they may be accepted from first class customers. Almost all commercial letters of credit (issued for financing foreign trade) are documentary credits. Therefore, the UCP deals only with documentary credits.

A documentary credit may be classified under the following types depending upon the particular provisions it contains:

1. Negotiation, payment and acceptance credits,

2. Revocable and irrevocable credits,

3. Confirmed and unconfirmed credits,

4. Fixed and revolving credits,

5. Transferable credits,

6. Back-to-back credits,

7. Red clause or anticipatory credits, and

8. Standby or guarantee credits. Detailed discussion about each of the above types of credits follows in subsequent  questions.

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