The Mechanism of a Revolving Letter of Credit in Foreign Trade

Revolving Letter of Credit. A fixed or non-revolving letter of credit is one in which the limit is reduced permanently to the extent of bills drawn under the credit. If the limit is for Rs. 10 lakhs only, bills up to this value can be drawn under the credit. Under a revolving letter of credit the limit under the credit is renewed as and when the bills drawn under it are paid to the extent of such bill.

For example, if the credit is for a limit of Rs. 10 lakhs and if already bills for Rs. 4 lakhs have been drawn under it, the limit available for further negotiation is Rs. 6 lakhs. If, among the bills already drawn, one for Rs. 2 lakhs is paid, the limit is reinstated to this extent and now the limit available for negotiation is Rs. 8 lakhs. A credit, as in the above example, is termed non-automatic revolving letter of credit because the renewal of limit depends upon the receipt by the negotiating bank of the payment advice from the issuing bank.

A credit is an automatic revolving letter of credit where the limits are renewed at fixed intervals irrespective of the fact whether the advice of payment has been received by the negotiating bank or not. For example, the credit may stipulate that the limit is Rs. 1 lakh, renewed by negotiation of bills for this account every week. The total drawing in such cases is controlled by specifying an expiry period. As a variant the letter of credit may not specify the period, but may stipulate that the total outstanding at any time should not exceed a specified limit. A revolving letter of credit is useful where continuous transactions between the exporter and importer are expected and the amount of each drawing is sought to be limited.

For an exporter with a large contract spreading over a period of years, a revolving credit offers the following advantages:

(a) He need no await receipt of letter of credit every time he exports.

(b) Since the same credit covers all the transactions the terms and conditions do not change. It makes it easy for him to prepare documents as required by the credit.

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